Insider trading—the practice of trading stock in a public company using non-public information—has been illegal in the United States since the 1930s. Nevertheless, some argue that a form of insider trading has long been taking place within a demographic that is arguably privy to more sensitive information than any other group in the country. Members of Congress are tasked with protecting and advancing the interests of the public, but according to a new bill introduced by Senators Jon Ossoff (D-GA) and Mark Kelly (D-AZ) in January, many members are putting profit over the public in their dealings with the stock market.
“Elected leaders have access to valuable information that impacts policy, the economy, and entire industries,” Senator Kelly said in a January 12th statement. “This legislation I am introducing with Senator Ossoff will put an end to corrupt insider trading and ensure that leaders in Congress focus on delivering results for their constituents, not their stock portfolios.”
While currently a hot news item, the senators’ bill, which aims to require all members of Congress and their family members to refrain from stock trading while in office, is hardly the first time that legislators have faced scrutiny for engaging in insider trading. In fact, awareness of the issue has been building for the better part of three decades. In a 2004 study, a group of scholars analyzed whether members of the U.S. Senate enjoy better-than-average returns from their investments. Prior to that study, the only research into congressional stock returns concerned the portion of legislators who invest in companies that could be affected by ongoing legislative activity.
The 2004 study revealed that between 1993 and 1998, senators’ portfolios outperformed the market by an average of 12.3%. In comparison, corporate insiders outperformed the market by an average of 7.5%. As Adam Warr pointed out in 2012 for the University of Idaho’s Critical Legal Studies Journal, “This means that senators were outperforming the who’s who of the market by nearly 5%.”
Could senators merely be better at trading stocks than the average person? Maybe, but it’s difficult to attribute returns of that magnitude to sheer skill. Nevertheless, no laws currently exist that specifically ban members of Congress from trading stocks using nonpublic information, meaning such actions are within the realm of legality.
The 2008 financial crisis renewed scrutiny of Capitol Hill’s relationship with Wall Street. A Wall Street Journal (WSJ) analysis of congressional staffers’ trading activity throughout 2008 and 2009 found that even aides bought and sold stocks with suspiciously opportune timing. One aide to a member of the Senate Banking Committee bought stock in Bank of America before the public received proof that the banking industry was back on its feet, and at least 72 aides bought and sold stock in companies their bosses regulate.
According to a 2010 WSJ article summarizing the major findings, “Much of the trading was in industries dependent on government help, such as the financial-services and renewable-energy industries.”
The article also noted that a bill aiming to restrict members of Congress’ from insider trading—the "Stop Trading on Congressional Knowledge Act," or STOCK Act—had floundered in the House since 2006. But Senator Joe Lieberman (I-CT) saved the act from legislative death in 2012, when he introduced it to the Senate on January 26th and it passed by an overwhelming 96-3 bipartisan vote. After clearing the House 417-2, President Obama signed the STOCK Act into law on April 4th.
Among its provisions, the STOCK Act states that “a Member of Congress and an employee of Congress may not use nonpublic information derived from such person’s position as a Member of Congress or employee of Congress or gained from the performance of such person’s official responsibilities as a means for making a private profit.” Violations of the act are punishable by a fine.
While the STOCK Act, with its swell of bipartisan support, seemed to represent a commitment by both parties to honesty and transparency in regards to personal finances, the economic turmoil brought on by the COVID-19 pandemic in early 2020 presented an opportunity some members found too enticing to pass up. According to the Daily Beast, the Senate Health Committee held a private briefing on January 24th to discuss how the virus might affect the US. In the weeks that followed, Senator Kelly Loeffler (R-GA) proceeded to sell 27 stocks in companies whose prices soon plummeted as the pandemic swept across the country.
Loeffler was far from the only senator who partook in a series of auspicious trades in the nascent stage of the pandemic. Her counterpart in the Senate, David Perdue (R-GA)—who was unseated by Ossoff in the 2020 Georgia Senate runoffs—made 76 stock purchases worth nearly $2 million in early 2020. Perdue even went so far as to buy stock in a company that manufactures personal protective equipment (PPE) on the very same day as the January 24 briefing. In February, then-Chair of the Senate Intelligence Committee Richard Burr (R-NC) dumped between $628,000 and $1.7 million in stocks that soon lost value.
Business Insider helped shed further light on the issue in December 2021 when it published a months-long investigation into members’ personal finances, titled “Conflicted Congress.” Among the major findings were the revelations that 55 members of Congress and 182 senior-level congressional staffers have violated the STOCK Act’s provisions about disclosing stock trades, and penalties for violating the STOCK Act are “minimal and inconsistently applied.”
Inappropriate stock trading by members of Congress seems to be a chronic problem. Is there a solution? Senators Ossoff and Kelly seem to think so. In their January 12th announcement of the Ban Congressional Stock Trading Act, they cite data that 76% of voters from across the political spectrum believe members of Congress and their spouses should be barred from trading stocks while in office. The proposed act, which builds on a similar bill introduced in the House in 2021, would require all members of Congress, their spouses, and dependent children to place their stock portfolios into a blind trust for the duration of their term in office and would also impose fines equivalent to members’ entire salaries in cases of violations.
As the push to regulate members’ stock trading began to attract media attention late 2021 into January 2022, House Speaker Nancy Pelosi (D-CA)—who owns a significant number of stocks—initially stated her opposition. “We're a free-market economy. [Members] should be able to participate in that,” Pelosi told reporters in December 2021.
However, as the weeks passed, she softened her position. In January, she reiterated her opposition to passing new legislation but indicated that she had no problem with individual members choosing to refrain from trading. Late that month, 27 House members released a letter to Speaker Pelosi and House Minority Leader Kevin McCarthy (R-CA) asking them “to swiftly bring legislation to prohibit members of Congress from owning or trading stocks, such as the Ban Conflicted Trading Act or the TRUST in Congress Act, to the House floor.” On February 9th, Pelosi stated, “if that’s what the members want to do, then that’s what we will do … But it’s complicated, and members will figure it out, and then we’ll go forward with what the consensus is.”
While far from a resounding endorsement, Pelosi’s recent statements seem to acknowledge the widespread support a ban on stock trading has with both the public and members themselves. With multiple versions of a bill floating around the House and Senate, there’s not a set date for a vote. Still, with congressional leadership signaling their openness to change, 2022 could very well be the year that the legislature makes significant progress towards putting people over profit.