Members of Congress Shouldn’t Trade Stocks
(Bloomberg Opinion) -- All too often, Congress seems to confirm voters’ suspicions that the rules don’t apply to their elected leaders. That goes double when it comes to financial matters. With trust in government at a low ebb, nothing is more important than to hold the country’s politicians to the highest standards of financial propriety. Up to now, the efforts of Congress to police itself to the necessary standard have failed.
In 2012, following a series of stock-related scandals, Congress passed a law designed to prevent lawmakers from using their privileged positions to gain an extra edge on the stock market. In theory, the STOCK Act would block them from trading based on nonpublic information acquired from their official duties and require them to report their trades within 45 days.
Nearly 10 years later, it’s clear that the law hasn’t worked. As a matter of urgency, Congress should scrap it and replace it with one that would be simpler and more effective: Legislators shouldn’t trade stocks, period.
In May, Representative Tom Malinowski admitted that he had failed to disclose up to $1 million worth of trades in the stocks of medical and tech companies involved in the pandemic response. Even that sizable admission was minimizing things: His total undisclosed trades were valued closer to $3.2 million. (“This is not the time for anybody to be profiting off of selling ventilators, vaccines, drugs, treatments, PPE, anywhere in the world,” the congressman had declared last year, shamelessly.)
Yet Malinowski is hardly alone. In fact, 2020 was a banner year for questionable stock activity. In the most serious case, former Representative Chris Collins was sentenced to prison for insider trading after being caught calling his son, an investor in an Australian biotech firm on whose board the elder Collins served. The congressman’s call — from the White House grounds — came moments after Collins learned that a drug developed by the company to combat multiple sclerosis had failed an important regulatory trial. Prosecutors said Collins urged his son to sell the stock.
Separately, the Department of Justice investigated four senators in connection with stock sales made after they received nonpublic national-security briefings in the early days of the pandemic. Although the probes were closed without charges, the perception that lawmakers were protecting their stock portfolios while the public was still largely in the dark about the looming crisis couldn’t help but erode trust.
Not a single lawmaker has been prosecuted under the STOCK Act. It’s reasonable to ask whether it was toothless by design. For one thing, it still allows legislators to trade stocks in industries they oversee (numerous senators responsible for supervising defense spending own stock in defense contractors, for instance). And its standard for wrongdoing — using “nonpublic information” for private profit — is nearly impossible to enforce.
This is unacceptable. A bipartisan bill in the House, called the TRUST in Congress Act, would be big step forward, requiring legislators and their spouses and dependent children to place their stock holdings into a blind trust that only a third party could access during the lawmaker’s time in office. The executive branch already has a similar standard in place (as Malinowski himselfknew full well after having run afoul of it as an assistant secretary of state).
Simply requiring legislators to divest all their holdings of equities would be a stronger defense. Blind trusts don’t solve every conflict-of-interest problem. Too much depends on what “blind” turns out to mean in practice, and the rules need to be carefully framed. Lawmakers with access to inside information would be aware of which assets were in the blind trust at the outset, and might also be aware of investments held by friends and more distant family members.
Granted, even the strictest measures would leave opportunities for the unscrupulous to exploit. The danger of conflict of interest can be mitigated, but never entirely removed. Nonetheless, passing the TRUST in Congress Act — extending to legislators rules like those that bind the executive — is the minimum that’s required and that any lawmaker fit for public office should support.
Editorials are written by the Bloomberg Opinion editorial board.
©2021 Bloomberg L.P.