Insider Trading in Congress: Ethically Questionable, or Acceptable?

When it comes to insider trading, corporate executives are often the first offenders that come to mind. Recently, however, public attention has shifted toward the investing activity of members of Congress as potential instances of illegal insider trading.

Members of Congress are inherently privy to more information about in-process legislation, forthcoming policy shifts, and potential economic impacts than the average market participant. [1] Such “insider” knowledge is a direct result of the duties entailed in a lawmaker’s job, and some argue this insider position presents an unmistakable conflict of interest. [1]

Congress previously sought to address this conflict of interest with its passage of the Stop Trading On Congressional Knowledge (“STOCK”) in April 2012. [2] At its most distilled, the STOCK Act explicitly made congressional insider trading illegal, and put in place disclosure requirements for each individual stock trade made by a member of Congress. [2] Prior to the passage of this law, insider trading – that is, trading by members of Congress based on material, nonpublic information – had been perfectly legal. [2]

Unfortunately, the STOCK Act has not seemed to adequately deter insider trading by members of Congress as planned. [1] Namely, noncompliance by Congress members with STOCK Act trading disclosure requirements is rampant. In 2021 alone, 54 members of Congress violated the STOCK Act by failing to meet the stipulated requirements for disclosing financial information about individual stocks they traded. [3]

This noncompliance may well be driven by the insignificant penalty imposed on offenders – typically a simple $200 fine. However, it is also worth noting that no prosecutor has ever brought charges stemming from the STOCK Act. This likely stems from the difficulty involved in adequately proving that a member of Congress’ trade was in truthy made as a result of particular insider information they possessed. [1]

So, how can the issue of congressional insider trading be remedied? One bipartisan coalition of congress members is actively proposing bills to limit the potential for unlawful insider trading within Congress. [1] One such bill aims to require members of Congress to place their individual stocks in a trust fully operated by another person, while a second bill aims higher by proposing an outright ban on members of Congress trading individual stocks. [1]

While bipartisan support does exist for these potential steps forward, there are also plenty of dissenters on both side of the aisle. Democratic leader Nancy Pelosi has voiced her distaste for new legislation proposing additional limits on stock trades by Congress members, arguing that members of Congress “should be able to participate in” the free market economy of the United State’s just as other citizens may. [1]

To the contrary, critics of the current state of congressional stock trading note that members of Congress are in a vastly more informed, and thus advantageous, position when compared with the average U.S. citizen. Others argue that Congress members are elected to their positions, and run for election by their own free will. Should they wish to freely make trades on the market, they are free to solicit employment within the private sector instead. [1]

Research shows that Congress member’s insider knowledge has resulted in “higher than average returns on their stock investments.” With this information becoming public knowledge, lawmakers are likely considering the importance of public perception and trust amongst their electorate. [1]

While the future of new legislation in this space remains unclear, main street investors can be encouraged that the conversation surrounding this ethically-questionable congressional stock trading is gaining attention once again.

Sources:

[1] https://nyti.ms/3KV33oQ

[2] https://www.investopedia.com/terms/s/stop-trading-on-congressional-knowledge-act.asp

[3] https://www.businessinsider.com/congress-stock-act-violations-senate-house-tradin