It’s well-known that members of Congress trade stocks on non-public information that they acquire while performing their duties. Before the public becomes aware of a crisis, they receive classified briefings on things like upcoming pandemics.
“So, you know, think back to the beginning of COVID. Members of Congress got a few weeks heads-up on how bad all this was going to be … You had members of both parties that called their brokers and said, go buy Pfizer and short cruise lines,” said Rep. Levin, referring to the many members of Congress who appeared to make COVID-sensitive trades early in the pandemic.
This behavior is exceptionally common in Congress, undeterred by the 2012 Stop Trading on Congressional Knowledge Act (or, STOCK Act). That law, signed by President Barack Obama, created reporting requirements on securities trades and banned members of Congress from using non-public information to personally profit.
However, it does not forbid congressmembers from owning and trading stock, and has not stopped questionable trading behavior from members of Congress.
With growing public distrust in government, several bills have been introduced to ban members of Congress, and even their spouses and dependents, from owning and trading individual stocks – the Stop Insider Trading Act, the Restore Trust in Congress Act, the Restore Trust in Government Act, and the STOCK Act 2.0. The first, the Stop Insider Trading Act, was passed by the House in July.
If any of these bills make it into law, it would represent significant progress and a much needed update to the original STOCK Act. Still, no bill is perfect and they all currently suffer from important flaws.
None Are Outright Bans
To start, all of these bills as written would allow members of Congress to invest in diversified funds (a fund that invests across the market instead of in one particular company or sector). I asked Rep. Levin if this would still allow members of Congress to act on non-public information.
“Yeah, it’s harder though,” he said. “So if you have a mutual fund that holds one hundred or one thousand stocks it’s a lot more difficult if you have knowledge about one company [or] one event.”
Four senators were investigated for trades they made in 2020, allegedly based on non-public information about the upcoming pandemic. They were investigated precisely because they appeared to sell stock based on an expected market crash – a move that would be available for members of Congress who invest in diversified funds.
This is precisely part of the criticism of the House-passed Stop Insider Trading Act; it bans stock purchases but it allows members of Congress to retain their portfolio and sell as they see fit. It perhaps accounts for business-specific knowledge, but not broader market matters. The problem remains that members of Congress can profit thanks to their access to sensitive information.
The proposals have other notable blind spots.
Congressional staffers also have access to non-public information and have also been known to violate the STOCK Act and they aren’t mentioned in any of these bills. With the exception of the STOCK Act 2.0, they would also create a blind or family trust loophole where the only thing stopping congressmembers from relaying non-public information would be their own consciences.
A Questionable Enforcement Mechanism
But perhaps the most confounding feature is that all of these bills rely on the same enforcement mechanism that has allowed members of Congress to routinely violate the STOCK Act: internal ethics offices.
The STOCK Act already makes it mandatory for members of Congress to report their trading activity and bans insider trading but the ethics offices that investigate possible violations routinely waive penalties and end investigations with no consequences.
According to Rep. Norma Torres, D-Pomona, it’s partly a funding and staffing problem. “I spoke during one of our committee hearings about this,” she told me. “Fifteen-hundred interviews had been done by a limited number of people. It was in the thousands, the number of pages that they had written and reports that they had to read through. The system has been built to fail.”
Even if congressional ethics offices are underfunded, the investigations that have been carried out have rarely resulted in any consequences, which makes sense given that they are policing themselves.
Will that same enforcement mechanism work any better for trading bans? Well, it’s hard to say. If we learned that Nancy Pelosi bought stock in Lockheed Martin the day after she learned of a new fighter jet program, how certain should we be that her trade was based on that knowledge? I suppose an ethics committee would find intent harder to prove than proving whether Pelosi owns stock at all.
We may hope that the pressure felt by the ethics offices to dole out punishment is directly proportional to the obviousness of the infraction. This would be more reassuring if it wasn’t for the fact that failures to report trading activity have been equally provable yet seldom punished.
Whether any of these new bills are worth the paper they’re printed on depends on whether these ethics offices will be willing to enforce these bans, though history has not taught us that members of Congress are inclined to hold each other accountable.
I asked Rep. Robert Garcia, D-Long Beach, whether enforcement should instead be left to an independent commission outside of Congress. “I think if there was an independent ethics body that looked at ethics violations, that actually could be very useful, to be honest, not just for the Congress, but for the administration. It doesn’t exist now. And so I would be very open to that.”
Other members of Congress I spoke to expressed similar openness to the idea but there’s likely insufficient political will to ratify any of these flawed bills, much less create an independent ethics office.
Unsportsmanlike Conduct
As Rep. Levin told me, “Just to be very clear, what’s happening right now is members of both parties are holding this up – mostly Republicans, but some Democrats too. And so we’re not even at the table having a good faith negotiation right now.”
These bad faith efforts were on full display last month when House Republicans decided to add voter ID requirements to the Stop Insider Trading Act, ensuring that it will not have support in the Senate. It passed on a largely party-line vote, with Republicans approving it and Democrats largely opposing it.
Rep. Thomas Massie, R-Kentucky, stated on X that adding the voter ID requirements was a ploy by Republicans to get Democrats to vote against the stock trading bill to use against them in the November elections. Congress is playing political games instead of addressing the problem – the public’s distrust of Congress couldn’t be more well-founded.
When no one in government can count on the public’s trust, even the extreme abuses of the Trump administration seem like they’re just par for the course.
As Rep. Dave Min, D-Irvine, put it, “Americans think Donald Trump is corrupt. He is corrupt. He’s the most corrupt president in history. The problem is that Americans also see Democrats in Congress as being corrupt. And so we have to clean up our own house here.”
Rafael Perez is a columnist for the Southern California News Group. You can reach him at rafaelperezocregister@gmail.com.