Danielle McNamara
Associate Editor
Loyola University Chicago School of Law, JD 2023
Although lawmakers must disclose their trades to the public, some members of Congress believe more stringent regulations are necessary to limit members’ trading activity. Specifically, Senator Jon Ossoff (D., Georgia) has become a leading voice, planning to introduce legislation that would compel members of Congress to put their assets in a blind trust. Moreover, Federal Reserve Chairman Jerome Powell has been pushing for stricter ethics rules for Federal officers amidst several resignations of Fed bank officers.
Ethical concerns
Many members of Congress own individual stocks, and some of their trading activity has raised red flags. Capital Trades, a website that tracks lawmakers’ disclosures, reveals that members of Congress and their immediate family bought and sold $515 million in stocks and other assets within the past year.
The Federal Bureau of Investigation (“FBI”) began looking into reports in March of 2020 claiming several lawmakers and their spouses sold stock after attending closed-door briefings on the status of the COVID-19 pandemic. Some of the trades saved the lawmakers from losses when many stocks initially sank in response to the uncertainty.
The FBI conducted investigations into then-Senator Kelly Loeffler, a Republican from Georgia, Senator James Inhofe (R., Oklahoma), and Dianne Feinstein (D., California). However, the FBI closed these cases without taking any further action.
The drive for new regulations
Earlier this month, Democratic Senators Mark Kelly and Jon Ossoff introduced new legislation that would prohibit members of Congress, their spouses, and dependents from trading individual stocks and would require them to put their stock portfolios in a blind trust. Both Kelly and Ossoff have already put their holdings in blind trusts to be controlled by a trustee.
Other lawmakers have called for rules that would still allow members of Congress to own stock. Senator Jeff Merkley (D., Oregon) is leading the Ban Conflicted Trading Act, which would prohibit buying and selling stock while in office while still allowing lawmakers to hold on to their assets. This proposal would also allow members to choose to divest up to six months after their election.
Implementation of new ethics rules
In October of 2021, Federal Reserve Chairman Jerome Powell announced new investment restrictions. The announcement was prompted by reports that regional Federal bank presidents, Eric Rosengren in Boston, and Robert Kaplan in Dallas, had been trading actively in markets while simultaneously helping set the nation’s monetary policy. Both men have since resigned, and the Boston and Dallas Fed banks have defended their former leaders’ trading as consistent with voluntary Fed rules.
According to Mr. Powell, the new ethics code would require Federal officials and senior staff to provide forty-five days advance notice for purchases and sales of diversified investment vehicles. Furthermore, officials would also be required to gain prior approval for investment purchases and would be required to hold these investments for at least a year.
Earlier this month, Mr. Powell confirmed that the central bank is expecting this broad revamp of its ethics rules following continued criticism of officials’ financial transactions during the COVID-19 pandemic and the resignation of yet another Fed Chairman, Richard Clarida. Powell announced that the Fed was creating a new group to further oversee the implementation of the new ethics rules.
Conflicting opinions by members of Congress
Those in favor of more stringent laws contend that policymakers and Federal officials have privileged insight into the economy and potential actions by the central bank’s interest-rate-setting Federal Open Market Committee. This knowledge allows them to benefit personally from their policy decisions.
Furthermore, despite current law banning lawmakers from engaging in insider trading, government watchdog groupscontend that the burden of proof is high and financial holdings can still present conflicts of interest even if they are legal. Although members in favor of new regulations acknowledge that most members of Congress will be impacted, Abigail Spanberger (D., Virginia) notes that these regulations are an important step in gaining the trust of the already weary American public.
On the other hand, critics of these new proposals worry that placing assets in blind trusts is expensive and puts an unnecessary financial burden on lawmakers. These critics emphasize that current law already requires regular disclosures of trades and prohibits trading inside information through the implementation of the Stop Trading on Congressional Knowledge Act (“STOCK Act”), which became law in 2012. This Act only implements a $200 fee for violations.
In response to the Business Insider series finding that forty-nine members of Congress and 182 senior-level staffers have violated the STOCK Act, House Speaker Nancy Pelosi (D., California) has plainly dismissed any idea of stricter regulations, stating that transactions are “part of a free market economy.”
What’s to come
While members of Congress and Fed officers alike appear to be at odds over discussion of more stringent rules and regulations surrounding stock trades of those with more insight into the economy, it appears that there is a strong push toward restriction. This push most logically comes from those trades made at the start of the COVID-19 pandemic and have revealed just how much power Federal officials and members of Congress possess. Given that current regulations like the STOCK Act have relatively low consequences for violations, we are likely to see more legislation being introduced to rein in stock trades made by members within these sectors.