Congressional leaders indifferent to bolstering stock transaction rules for lawmakers
Proposals to change ethics rules have come from rank and file
Reports of the stock trading of Sens. David Perdue and Kelly Loeffler amid the COVID-19 pandemic are haunting the two Georgia Republicans as they head into their separate contentious runoff races in January.
While the Department of Justice ultimately decided not to pursue charges against the two senators, the trades are raised constantly by their Democratic opponents and allied groups spending hundreds of millions of dollars in advertising. The Democrats are hoping voters view their opponents’ stock moves as the kind of maneuvers that erode the public trust in lawmakers.
Under current rules, however, lawmakers have wide latitude to invest as they please. Now cases of alleged insider trading — and the conviction and imprisonment of one House member for that crime — have prompted new calls from government ethics watchdog for tougher rules.
But top leaders in Congress have shown little enthusiasm about changing the law. Most didn’t even respond when asked.
Criminal insider trading is difficult to prove unless there is a cooperating witness, according to John C. Coffee, a law professor at Columbia University who is an expert on securities law.
In the House and Senate ethics rules, there is no prohibition on members holding any stock, regardless of the industries or issues a lawmaker can affect through committee assignments.
“The rules are the same between the House and Senate — there is no restriction on which stocks a senator may invest,” said Craig Holman, an ethics lobbyist for Public Citizen.
That means the House Energy and Commerce Committee chair, for example, can hold energy, health care and telecommunications company stocks, trusts that include companies in those industries, as well as sector specific exchange-traded funds (ETFs) that track the same markets he or she oversees.
Rep. Frank Pallone Jr. , the current chair, has financial interests in several companies over which his committee has oversight. As part of a trust owned by his spouse, those holdings include Chevron Corp., Dominion Energy Inc. and Verizon Communications Inc., according to the New Jersey Democrat’s 2019 annual financial disclosure report.
Representatives for Pallone did not respond to a request for comment.
Meanwhile, rank and file employees at the Food and Drug Administration, an agency that is overseen by the Energy and Commerce Committee, are held to a higher standard. They are barred from investing in health care sector funds, medical device sector funds and companies such as pharmaceutical giant Pfizer, just to name a few.
“FDA employees as well as their spouse and minor children are prohibited from holding financial interests, like stock, in certain businesses regulated by FDA,” the agency’s website notes. “This includes many companies working in the drug, biologic, medical device, food, and tobacco industries, among others.”
In the Senate, Chairman Roger Wicker leads the Committee on Commerce, Science, and Transportation where his panel has oversight of online markets, including business done by tech companies such as Amazon. The Mississippi Republican owns between $15,000 and $50,000 in Amazon stock and his spouse owns between $15,000 and $50,000 in Walmart securities, another company under the jurisdiction of Wicker’s panel.
Rick VanMeter, a spokesperson for Wicker, had no comment.
That’s not to say there haven’t been changes in this area over the past decade. In 2012, the Stop Trading on Congressional Knowledge Act (STOCK) was passed by a Republican-led House and Democratic-led Senate and signed into law by President Barack Obama.
It expanded disclosure and filled a gap in insider trading laws by mandating that Congress members refrain from trading on material nonpublic information they obtain through their congressional duties. Before the law was passed, members were able to trade on information they got from company CEOs in the course of a congressional briefing without legal repercussions.
“The STOCK Act mandates ‘periodic transaction reports’ within 45 days of a stock transaction for both chambers, and under the STOCK Act members of Congress may not make official actions designed for personal enrichment (though this clause is difficult to monitor and prove),” Holman, the ethics lobbyist who advocated for the law, said in an email.
However, the most recent criminal prosecution of a member of Congress for insider trading was not brought under the STOCK Act.
Former New York Republican Rep. Chris Collins is currently in federal prison for tipping off those close to him with insider information he received as a director of an Australian biotechnology company, Innate Immunotherapeutics.
As a corporate director with a duty to Innate’s shareholders, Collins used material, nonpublic information he received from the CEO to alert his son and others close to the family of a failed drug test that would decimate Innate’s stock price. Although Collins himself did not trade, those he tipped off avoided $768,000 in losses when the news became public. Other investors in the company lost their money as the share price dropped 92 percent.
Because of Collins’ position at Innate, the case was prosecuted as a classic insider trading case and not under the STOCK Act, Coffee, the Columbia Law professor, said.
“They used old-fashioned insider trading because he is a fiduciary to his shareholders,” Coffee said in a phone interview.
There has yet to be a prosecution under the STOCK Act.
The Collins case spurred some change in the House. A rule change, implemented at the start of 2020, prohibits members from serving as an officer or director of any public company.
Akin to Congress, there is no broad ban on stock ownership in the executive branch. Even so, Neil Eggleston, a former White House Counsel for Obama and partner at Kirkland & Ellis, said he limited his holdings to mutual funds that were not sector specific.
“I think it’s a good government move that Congress should really think about,” Eggleston said in a phone interview about limiting ownership to truly passive index funds.
“The executive branch requirement is disclosure and recusal,” Eggleston said. When it comes to Congress, “The problem with recusal is the chairman of the Energy Committee cannot recuse from matters involving the energy industry,” he said.
Academics and government watchdog groups say there are fixes to eliminate the appearance of a conflict of interest (at best) and criminal wrongdoing (at worst) when lawmakers trade in the stock market.
“Better disclosure is one remedy and a restriction that you could only trade collective baskets of stocks: mutual funds and similar kinds of entities,” said Coffee. “That could be thoroughly justified. It’s partly a matter of protecting the public respect for Congress.”
It is difficult to search and sort stock trades among members of Congress. You cannot search by stock or industry. Lawmakers are allowed to fill in their disclosures by hand, leading to opaque filings.
Citizens for Responsibility and Ethics in Washington (CREW), a nonpartisan government ethics watchdog, recently released a report with recommendations on overhauling congressional ethics rules. The group calls for a prohibition on individual stock trading by members and their spouses, suggesting they place those assets into a blind trust managed by an outside investment firm. CREW also wants more detailed financial disclosures and a uniform, online reporting system for those filings.
Edwin Hu, a former Securities and Exchange Commission official and fellow at New York University’s Institute for Corporate Governance and Finance, said changes are needed.
“Members of Congress should be focused on representing American voters, not trading stocks. Federal law should ban members from trading in individual stocks altogether as well [as] sector-specific ETFs,” Hu said in an email. “There’s no reason for members, or the people they represent, to have to wonder about the ethics concerns raised by revelations of recent trading. The arguments for allowing members to trade are just too weak to justify the gaps in the STOCK Act, and the public is right to demand that this trading be prohibited."
CQ Roll Call asked representatives for Speaker Nancy Pelosi, D-Calif., House Minority Leader Kevin McCarthy, R-Calif., Senate Majority Leader Mitch McConnell, R-Ky., and Minority Leader Charles E. Schumer, D-N.Y., if they think federal law should ban members of Congress from owning and trading individual stocks and sector-specific exchange-traded funds (ETFs). None of them answered the question.
The same question was posed to Perdue’s office and Loeffler’s office, and neither responded. Asked at a Dec. 6 debate if members should be barred from trading stocks, Loeffler did not answer the question directly.
“Look, what’s at stake here in this election is the American dream,” Loeffler said, calling allegations she traded on knowledge received in a briefing on the virus “a left-wing media lie conspired with the Democrats.”
Justin Goodman, a spokesperson for Schumer, cited an MSNBC interview Schumer did in March when the senator said: “I don’t own any stocks. I think it’s a very bad idea for Senators to own stocks. There’s either a conflict or an appearance of conflict, and one of the things we need with the public is some degree of trust.”
Members of Congress are usually hesitant to apply any additional ethical standards on themselves. Many have considerable wealth invested in stocks.
After the Office of Congressional Ethics was established in 2008 to police misdeeds by House lawmakers, members of both parties have consistently tried to curtail its investigative power and public disclosure. That’s because the Office of Congressional Ethics — unlike the House Ethics Committee, which is made up of members who discipline their colleagues — is independent and pursues its own probes before forwarding its reports to the House Ethics panel.
There is no OCE analog in the Senate. In 2019, the Senate Ethics Committee had zero matters that resulted in a disciplinary sanction.
Some members of Congress have made attempts to curb possible corruption.
In 2018, Sen. Elizabeth Warren, a Massachusetts Democrat, proposed legislation aiming to ban individual stock ownership among lawmakers along with a wide range of other changes like expanding the OCE jurisdiction to the Senate, but the bill never became law.
In the House, a bipartisan measure by Reps. Abigail Spanberger, a Virginia Democrat, and Chip Roy, a Texas Republican, seeks to address the situation.
Spanberger teamed up with Roy to introduce the bill last summer.
“Some members of Congress have validated this perception that people are really focused on what’s self-serving,” Spanberger said in a phone interview.
Their bill wouldn’t outlaw individual company stock ownership, but instead would require members, spouses and dependent children to put those investments into a qualified blind trust. Mutual funds and other widely held funds would be exempt. Spanberger plans to reintroduce the bill in the 117th Congress.
Spanberger said the bill is a way of “taking the demonstrable step of saying ,‘I am working for you. I am not paying attention to my own stock portfolio.’”
Dean DeChiaro, Katherine Tully-McManus and Jessica Wehrman contributed to this report.