Does Congress Have an Insider Trading Problem?

Insider trading, or the act of buying or selling investments based on nonpublic information, is against the law. At its core, insider trading unfairly enriches privileged parties at the expense of the investing public. It’s stealing, and it has been illegal since 1934 — at least for corporate insiders.

It would be another 78 years before more stringent regulation of Congress’ own ability to trade on proprietary information was signed into law, as evidence emerged that politicians themselves might not be trading stocks on a level playing field.

But despite the 2012 passage of the Stop Trading on Congressional Knowledge (STOCK) Act, which prohibits members of Congress from using nonpublic information acquired while performing their duties for personal gain — several suspiciously well-timed sales from a handful of senators in February ignited a scandal.

In the year 2020, is insider trading in Congress still a problem?

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The History of the Problem

Congress’ investment returns showed that trading on insider information on Capitol Hill has likely been a problem for decades. Cited in a 2010 University of California, Los Angeles report, “Insider Trading Inside the Beltway,” U.S. senators outperformed the broader market by about 12% per year between 1993 and 1998.

The report emphasizes an alarming fact: These were “abnormal returns,” yes, but even if they were earned by monetizing proprietary knowledge that they came across in performing their jobs, that wasn’t illegal.

In 2011, a “60 Minutes” report highlighted that bizarre loophole again, while also covering some suspicious congressional trading activity. People were outraged. Americans were reeling from the financial crisis, and Occupy Wall Street was in full swing. The Securities Exchange Act of 1934 wasn’t cutting it.

“There’s a messy history of insider trading laws in our country — a lot of it is case law-driven,” says Derek Cohen, a former deputy chief of the fraud section of the U.S. Department of Defense and a partner at international law firm Goodwin’s white collar defense group.

“Over the years, there have been a lot of questions on what qualifies as insider trading. One of the gaps in it, from the perspective of Congress, was there needed to be some insider or fiduciary status that was breached,” he says.

The STOCK Act amended the 1934 law to make illegal in Congress what was already outlawed in the corporate world, explicitly forbidding members from using nonpublic information for personal gain. This duty was derived from their position as government servants.

It wasn’t until after the Great Depression was underway in the 1930s that any meaningful regulation of Wall Street shenanigans came along, and it took another eight decades for Capitol Hill to regulate its improprieties (after intense public pressure).

“For many, many years there was kind of a full embracing of the idea that insider trading was OK for people at the pinnacles of politics,” says Jim Trusty, a former U.S. Department of Justice prosecutor and partner at Ifrah Law.

He calls 2012’s STOCK Act “seemingly a very common-sense measure.”

Once lawmakers got around to policing their own graft, it seemed to make sense to them, too. It passed in the U.S. Senate and the U.S. House of Representatives nearly unanimously.

[Read: What to Know About Investing in European Stocks.]

More Conflicts in 2020

One of the three senators to vote against the STOCK Act was Sen. Richard Burr, a Republican from North Carolina.

Eight years later, Burr was one of four senators publicly lambasted for suspicious trading activity posing an appearance of possible insider trading.

Sens. Kelly Loeffler, James Inhofe and Dianne Feinstein were also scrutinized for stock sales either they, their spouses or both parties engaged in after receiving confidential briefings on the threat of the emerging new virus that has come to define 2020.

The February sales came before the precipitous stock market crash that unceremoniously ended an 11-year bull market.

Loeffler’s husband, Jeffrey Sprecher, is chairman of the New York Stock Exchange and CEO of its parent company, Intercontinental Exchange (ticker: ICE).

All four senators have denied wrongdoing, and the DOJ, which began a probe into the matter in March, closed its investigations on all but Burr in May.

Burr, along with his wife, sold between $628,033 and $1.72 million in stock on Feb. 13 alone. The senator’s brother-in-law also sold holdings of six stocks worth between $97,000 and $280,000 on the same day. In May, the FBI seized Burr’s phone as part of its investigation, and the senator stepped down as chairman of the Senate Intelligence Committee for the duration of the investigation.

Insider Trading in Congress Is Preventable

Since 2012, the STOCK Act has not been brought down upon any member of Congress. It’s important to remember that not only that Burr denies wrongdoing and has the presumption of innocence, but the suspicious 2020 pandemic-related trades are merely an example of what appears to still be a much larger problem.

In short, the problem is that the temptation and potential to act on nonpublic information as a member of Congress still exists. For Trusty, there’s an easy — and politically savvy — solution to the issue.

“A blind trust seems like not only a smart requirement in terms of preventing insider trading, but a smart political result for people who don’t want to be bogged down with accusations every time they report,” Trusty says.

One meaningful feature of the STOCK Act was increased transparency, including the obligation to report all transactions more than $1,000 publicly within 45 days, instead of the previous disclosure period of one year.

[READ: Fractional-Share Investing — Where to Invest.]

For honest members of Congress with nothing to hide, beefing up the STOCK Act with a blind trust requirement doesn’t just root out a level of potential corruption, but it eliminates the political risk of clean trades being taken out of context by the public.

“What’s triggering the public scrutiny is the STOCK Act reporting requirements. The report itself may look worse than the actual conduct,” Trusty says. “I just don’t think it’s a particularly difficult fix — to beef up the STOCK Act with a blind trust requirement and essentially largely end this issue.”

Although the public outcry surrounding the senators accused of insider trading has petered out since March, there is some awareness in that body of Congress that further regulations may be necessary.

Sen. Kirsten Gillibrand, who helped to write and pass the STOCK Act in 2012, now says the legislation may not go far enough and that members of Congress and other “powers that be” in government should perhaps be banned outright from owning stocks. Whether going that far will be a popular solution, or any solution at all will be revisited by Congress itself, is another question.

“There are certainly more strenuous restrictions that one could put on,” Cohen says. “The question is: Would there be any appetite at all from Congress? Generally speaking, I don’t think elected officials are often looking to pass legislation that impacts them, which provides more oversight for them.”

Unsurprisingly, there’s a Latin phrase that speaks to this conundrum: “Quis custodiet ipsos custodes?” It’s sometimes translated loosely as “Who watches the watchers?”

For Trusty, it wouldn’t be the worst idea in the world for the people’s representatives to watch themselves a bit more carefully. It may even be in their own best interests.

“To see a little bit of initiative from Congress on actual self-policing. I’m not saying they’ll get to a 50% approval rating,” but it can’t hurt their popularity, Trusty says. In fact, a recent Gallup poll put Congressional job approval at about 18%. Taking concrete steps to show the American people they won’t monetize their positions of power seems like a clear-cut way for lawmakers to improve their public standing.

And it’s the right thing to do in a year where the gulf between the haves and the have-nots has only become more stark.

“It’s a time when people on both sides of the aisle realize that rules apply to some people and not others,” Trusty says.

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Does Congress Have an Insider Trading Problem? originally appeared on usnews.com

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