Bloomberg Law
Jan. 25, 2022, 9:01 AM

Why Members of Congress Should Not Trade Stocks

Richard W. Painter
Richard W. Painter
University of Minnesota Law School

House Speaker Nancy Pelosi (D-Calif.) just handed Republicans an enormous political opportunity. Despite overwhelming evidence that allowing members of Congress and their spouses to trade individual stocks is a very bad idea, the speaker insists that they should be permitted to do so.

Pelosi’s husband is a very active trader in the stock market, and within weeks of her announcing her position on this issue, he resumed trading.

Republicans, without acknowledging their own stock trading scandals in both the House and Senate, are now rushing to fill the ethics void. Several, including Sen. Josh Hawley (R-Mo.), have proposed bills to ban congressional stock trading that they promise will become law if the GOP wins control of Congress in November.

By now it should be clear why it’s wrong for members of Congress to trade stocks while in office.

Conflict of Interest With Official Duties

First, the conflict of interest with official duties is untenable. It is a crime, potentially a felony, for a federal officer who is not an elected official to participate in any government matter that has a direct and predictable effect of a financial interest of the official or a spouse of the official.

But Congress, when it passed this law, exempted itself, the president, and vice president. Hypocrisy to say the least.

Second, members of Congress have enormous amounts of inside nonpublic information that can be used to buy or sell stocks. Insider trading is a felony, but it is also difficult to prove. In 2012 Congress passed the Stop Trading on Congressional Knowledge Act (STOCK Act) which confirmed that insider trading laws apply to members of Congress and their spouses; using nonpublic information learned in Congress to trade securities is illegal. But in the nearly 10 years since the STOCK Act’s passage, nobody in Congress has been prosecuted for insider trading based on congressional information.

One problem is the Speech and Debate clause of the Constitution which specifically provides that ““for any Speech or Debate in either House, they [members] shall not be questioned in any other Place.” The reach of this prohibition is not entirely clear, but it is an impediment to federal investigators asking members about what they said to each other about pending legislation, investigations, and other matters before Congress.

Third, even if members of Congress did not allow stock holdings to influence their votes on legislation and did not use nonpublic information to trade stocks, the appearance of corruption undermines public confidence in government. They should invest in broadly diversified mutual funds, not individual stocks.

The fact that they don’t leads the public to believe they are utilizing an inside advantage. This also makes it very hard for Congress to stand up to conflicts of interest in the executive branch.

Personal Efforts for Reform

In December 2020, Donna M. Nagy, an Indiana University Maurer School of Law professor and one of the nation’s foremost experts on insider trading law, and I wrote a letter to congressional leaders of both parties in the House and Senate and explained why they should put a ban on stock trading while in office.

We received no answer.

We then published an Insight with Bloomberg Law essentially saying the same thing.

Until now, financial conflict of interest has been the Republicans’ weak point. The congressional GOP ignored four years of Trump’s conflicts of interest. Trump’s businesses allegedly received patronage and probably debt and equity capital from entities controlled by foreign governments in violation of the Constitution’s Emoluments Clause.

Former Ambassador, Obama White House chief ethics lawyer and now Brookings Institution Fellow Norman Eisen, Harvard Law Professor Laurence Tribe, and I raised this issue in a paper published by the Brookings Institution shortly after Trump won the 2016 election.

Then, as vice chairman of Citizens for Responsibility and Ethics in Washington, I sued Trump on his first day in office for his violation of the Emoluments Clause, a case which the Second Circuit Court of Appeals allowed to proceed after lengthy hearings in federal courts. But Trump ran the clock in the courts and never divested from his financial conflicts of interest until he lost the presidency in 2020 and the U.S. Supreme Court dismissed the case as moot.

Congress did not do a thing to investigate Trump’s finances when Republicans controlled both chambers. Even after losing control of Congress in 2018, Republicans did everything possible to frustrate investigations and supported him in refusing to comply with congressional subpoenas.

Political Setbacks Involving Stock Trading

Both Democrats and Republicans in the House and Senate do plenty of stock trading, but until now the Republicans suffered the most political setbacks because of this issue.

In 2017, Health and Human Services Secretary Tom Price resigned after stories broke that when in Congress as chairman of a powerful committee overseeing health care, he had been trading health care stocks. And Rep. Chris Collins (R-N.Y.) was indicted, convicted, and sentenced to 26 months in prison for insider trading on nonpublic information, only to be pardoned by President Trump.

In a January 2021 run-off election, Republicans lost both of Georgia’s U.S. Senate seats amid allegations that both Republican senators has been trading stocks during the volatile stock markets at the beginning of the Covid-19 pandemic.

Hypocrisy on Both Sides of the Aisle

Financial conflicts of interest for elected officials is not the Republicans strong suit. Until now.

Hypocrisy is pervasive in politics and voters often focus on what politicians say about the present and not what they did in the past. Right now, Pelosi opposes constraints on congressional stock trading.

High-profile Democrats with large stock portfolios have been caught up in stock trading allegations, including Sen. Dianne Feinstein (D-Calif.), whose husband is an active trader of stocks, particularly high-tech stocks.

Others, such as Sen. Tina Smith (D-Minn.) and her husband have not traded stocks while in office but have held large portfolios in industries—in Smith’s case medical device companies—that overlap with official duties.

In 2018 I raised these financial conflicts of interest when I ran unsuccessfully against Smith as a political independent in a Democratic primary; the GOP then went further and used the issue to run misleading ads in their unsuccessful bid to unseat Smith.

Despite Pelosi’s recalcitrance, influential Democrats support a ban on congressional stock trading. On Jan. 14, the White House said President Biden would support a law banning congressional stock trading. And several years ago, Sen. Elizabeth Warren (D-Mass.) introduced a bill in the Senate that would do the same. Senator Jon Ossoff (D-Ga.) has introduced a similar bill in the current Congress. Reps. Abigail Spanberger (D-Va.) Virginia and Chip Roy of (R-Texas) have a companion bill in the House.

Rep. Angie Craig (D MN) plans to introduce a bill that would ban members from owning any stocks. Craig is in a very tight race in a swing district where her Republican opponent, and potentially an independent candidate, could still use Pelosi’s stance on stock trading against her in November. Never mind that Craig disagrees with the speaker on this issue. The Republicans will emphasize that who controls Congress determines what laws get passed. Whatever promises Republicans make on congressional stock trading could easily be broken if they gain control.

This should not be a partisan issue. Neither party should be allowed to use it to gain control of the House or Senate in November. Both are to blame, and we now have bills proposed from both sides of the aisle to ban congressional stock trading.

All Congress needs to do is pass them.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School and was the chief White House ethics lawyer for President George W. Bush.

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