Members of Congress do more than make laws. Congresspeople and other elected officials help decideto an extentthe fate of U.S. society and economics. In an ideal world, those politicians act on what their constituents want rather than satisfying their own interests.
Sometimes, money can get in the way. That’s why individual stock trading is such a hot-button issue. Can elected officials own and trade stocks, and what are the pros and cons of allowing them to do so?
TL;DR
- Members of Congress can own and trade stocks, but there are limitations.
- The STOCK (Stop Trading on Congressional Knowledge) Act requires lawmakers to report trades and prohibits using non-public information for private profit.
- The biggest criticisms of elected officials being allowed to trade individual stocks are disaster profiteering, bias in lawmaking, and insider trading.
- Some lawmakers say they have a right to control their retirement funds and other savings. They also defend the system for its existing ethics reviews and divestment requirements.
- Trading stocks while actively serving in office is not new, but public scrutiny is a modern phenomenon. Increasing pressure on lawmakers could force changes in the future.
Can a member of Congress own and trade stocks?
Members of Congress can trade individual stocks, and they often do. However, there are limitations. In 2012, former President Barack Obama signed into law the Stop Trading on Congressional Knowledge (STOCK) Act.
The STOCK Act prohibits using material non-public information for private profit (this is commonly known as insider trading). It also requires congresspeople to report trades within a certain time frame. Even with the STOCK Act in place, an insider trading case against a congressperson would be difficult to prove in court. Most issues around the STOCK Act have to do with failure to report trades.
If members of Congress make questionable trades or fail to report trades, they can face an investigation with the Committee on House Ethics. Lawmakers can be fined about $200 for failing to report trades.
What lawmakers trading stocks looks like
In the private sector, insider trading is illegal. In August 2021, the SEC charged former Netflix employees with insider trading that generated $3+ million in capital gains.
In the public sector, members of Congress trade individual stocks as part of their personal portfolios. They’re not supposed to use information gathered on the job, but it’s plausible some do so anyway. As of October 2021, 40+ members of Congress failed to properly report their trades as mandated by the STOCK Act.
For example, Sen. Tommy Tuberville (R-Alabama) was weeks or months late in disclosing about 130 stock trades in the first five months of the year. Meanwhile, Rep. Tom Malinowski (D-New Jersey) made dozens of undisclosed stock trades from 2020 to early 2021. Malinowski released the information after reporters approached him.
Former Sen. Kelly Loeffler (R-Georgia) was in the spotlight for her trading activities during her time in office. Loeffler’s husband, Jeffrey Sprecher, founder of Intercontinental Exchange, Inc. Before the general public realized the severity of COVID-19, Loeffler invested in personal protective equipment and other pandemic-related stocks.
Sen. Richard Burr (R-North Carolina) cashed out on millions of dollars in stocks one week before the February 2020 market crash.
Federal Reserve officials are appointed (not elected), but some are involved in individual stock trading as well. Two regional Fed presidents, Eric Rosengren of Boston and Robert Kaplan of Dallas, abruptly retired after questions arose about the ethics of their portfolios.
Lawmakers have historically invested, but the scrutiny of individual stock trading is a modern phenomenon.
Criticisms against congressional stock trading
There are three main criticisms of lawmakers being able to trade stocks:
- Disaster profiteering: Insider trading or not, lawmakers could be profiting off of disaster. In order to protect their investments, members of Congress could be painting a positive picture to the public while working to protect their assets. For example, trades made before the COVID-19 pandemic are sometimes labeled disaster profiteering.
- Bias in lawmaking: Lawmakers could make decisions about spending and other laws based on what increases the share value of the companies they invest in. For example, a congressperson invested in the oil sector may be hesitant to pass climate legislation that hinders oil production.
- A fine line for insider trading: Congresspeople come across a lot of information during their time in office. According to the STOCK Act, they can’t use that knowledge to inform stock trades unless it’s publicly available. It’s difficult to prove that a member of Congress used insider information to inform a trade.
Defenses for congressional stock trading
Just as there are criticisms, there are defenses. Here are two main reasons why lawmakers want to continue trading stocks:
- Right to control assets: Lawmakers say they have a right to control their own retirement accounts and other savings through all types of investing, including individual stock trading. This opinion is based on monetary fairness.
- Existing ethics reviews and divestments: Thousands of government officials go through ethics reviews annually. Often, these reviews require them to divest certain investments depending on their current or upcoming work.
Are the rules and ethics changing?
Senate Minority Leader Mitch McConnell (R-Kentucky) doesn’t invest in any individual stocks but believes his peers have the right to do so.
Meanwhile, Sen. Elizabeth Warren (D-Massachusetts) proposed an Anti-Corruption and Public Integrity Act that would impose more critical ethics rules about trading. It’s not an outright ban, mostly because a ban is unlikely to gain congressional approval while many lawmakers retain a financial interest in the matter.
Even appointed positions are facing fresh ethical scrutiny. Federal Reserve Chair Jay Powell is currently reassessing what the book of ethics requires for individual stock trading in the organization.
Active stock trading tends to be subject to more scrutiny than long-term investing. If the rules and ethics were to change, it would likely only impact active investments.
For elected officials who divest their individual stock holdings, the alternative is usually diversified funds or blind trusts. In a blind trust, an elected official can transfer their positions into the care of a trusted family member during their time in office.
Bottom line
Congressional stock trading is a complex issue, and Americans don’t take it lightly. Lawmakers have the responsibility to do right by their constituents.
Trading individual stocks may be a right for every American, but it can also get in the way of ethical decision-making and leadership. In the end, it’s up to each one of us to decide: Who do we want making our laws, and what’s the best environment for them to do so?