The Insider Trading Epidemic – Has Congress Finally Gone Too Far?

Beneath the Cannon House Office Building’s basement is a tiny, nearly insignificant detail. It’s a space. A room where financial disclosures from members of Congress are physically stored following a 2013 amendment that most Americans were unaware of, forcing journalists and watchdogs to travel to Washington and sift through paper. More can be learned about the current state of insider trading reform from that one architectural fact than from any speech made on the House floor in the previous ten years.

All of this was meant to be resolved by the STOCK Act. The law was designed to make it more difficult for lawmakers to enrich themselves by using nonpublic information. It was passed in 2012 with bipartisan support and signed by President Obama following years of public outcry. One thing it did well was to require disclosures within thirty days rather than once a year. However, given the magnitude of the trades involved, the $200 penalty for breaking the act seems almost absurd. In certain Manhattan garages, a senator can move nearly two million dollars’ worth of stock with a fine less than a parking ticket.

Then February 2020 arrived. Days before the market crashed, Senator Richard Burr sold off between $628,000 and $1.7 million in personal stocks after being briefed behind closed doors about the impending pandemic. The optics were awful. The investigations were fruitless. Observing the accumulation of these incidents gives the impression that the system isn’t so much broken as it was created in this manner by the very individuals it is intended to restrain.

The bipartisan nature of the issue is difficult to ignore. Of all the members of Congress who own stock, 41% are Democrats and 59% are Republicans. On financial Twitter, Nancy Pelosi’s husband was frequently made fun of. In 2020, former Republican congressman Chris Collins was sentenced to 26 months in prison for insider trading; however, the case involved a biotech company rather than COVID briefings. The names change. The pattern doesn’t.

There are reform initiatives. The ETHICS Act would allow blind trusts and diversified mutual funds but forbid lawmakers and their close relatives from trading individual stocks. Going further is the Ban Stock Trading for Government Officials Act. The bipartisan Restore Trust in Congress Act appears, disappears, and then reappears. Regardless of party, polls indicate that the majority of Americans support a strict ban. However, Congress continues to find ways to put it off, sometimes by assigning members to committees and other times by using subtle procedural tricks that never quite result in a floor vote.

Lawmakers shouldn’t be denied the opportunity to engage in markets simply because they were elected, according to some supporters. On its face, it’s a valid point. However, corporate compliance officers at Pfizer and Goldman Sachs frequently prohibit employees from trading specific stocks due to their access to confidential information. It’s odd that the U.S. Senate doesn’t seem to be able to handle that for analysts and mid-level executives if private companies can.

The deeper emotion that lies beneath the problem is what makes it stick. As they watch their 401(k)s falter due to inflation, recession fears, and rate increases, voters notice that legislators appear to be outpacing the market. It could be a coincidence. It could be a skill. Perhaps it’s something else. However, the mere appearance, which is crucial in public ethics, continues to undermine confidence in organizations that are already struggling. It remains to be seen if the next Congress will correct this or just rewrite the STOCK Act with a different quiet basement.