The concern that our leaders would give into the temptation to put themselves above the public is older than our government. Alexander Hamilton warned that we must “take the most effectual precautions for keeping them virtuous whilst they continue to hold their public trust.”
In light of recent reports, questions have been raised about the possibility that some elected officials may have used their access to non-public information to enrich themselves while the rest of us watched in fear as a deadly and mysterious pandemic unfolded before our eyes. Suspiciously timed stock sales by multiple members of Congress across both chambers and both parties illustrate the weaknesses in the current legal framework regulating how high-ranking government officials manage their finances while privy to information most Americans don’t have. Those rules should be strengthened so the public has faith that our leaders are using their positions to help us, not themselves.
The most glaring example is a stock sale by Senator Richard Burr (R-NC). It has been widely reported that Burr dumped up to $1.7 million in stocks after receiving classified briefings on the extent and severity of the coronavirus pandemic. Burr has since requested that the Senate Ethics Committee investigate these allegations.
Other members have also made questionable transactions. The circumstances surrounding Senator Kelly Loeffler’s (R-GA) suspicious stock dumps, valued at up to $3.1 million, are similar to Burr’s. According to her own financial disclosure records, Loeffler began selling off stocks on January 24, the same day she attended a private coronavirus briefing with other senators. In an interesting twist, Loeffler is married to the current Chairman and CEO of the New York Stock Exchange, which begs the question as to whether insider information could have been derived from multiple sources and could have been delivered from either spouse. Loeffler has since claimed that a third-party financial advisor made those transactions without her knowledge. “I had no involvement in the decisions,” Loeffler told CNBC. Questions still remain as to exactly what kind of vehicle her assets are held in, but her current defense rings hollow.
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Representative Peter Welch (D-VT), meanwhile, appears to have invested in one of the few companies to be manufacturing coronavirus testing equipment approximately a month ago, and that company has seen its stock rise in the face of the pandemic. He has also claimed that this transaction was made by a financial advisor without his knowledge, and that the profits derived from the subsequent sale of that stock would be donated to a Vermont-based charity. Burr, on the other hand, has made no such claim but has instead argued that he made those transactions on the basis of reporting he had seen on CNBC, among other news outlets.
None of these defenses are particularly persuasive. For one, the timing of both sets of transactions is far too coincidental. Secondly, if all it took to beat the impending market crash was a casual viewing of CNBC, it stands to reason that far more people, many of whom dedicate their lives to watching the markets, would have done what Burr did and avoided losses. Thirdly, despite their arguments about third-party advisors, it is unclear if Loeffler or Welch have their assets in a blind trust, which means that even though it was a financial advisor who pulled the trigger on their transactions, there may have been no legal firewall between them and their advisors. To the extent that either the Senate or House Ethics Committee investigates these transactions, it will be essential that they delve into the level of communication (or lack thereof) between these members of Congress, their family members, and their financial advisors.
It seems clear that these transactions were self-serving rather than public-minded. Indeed, public officials, including Burr, continued to play down the threat of the impacts of coronavirus for weeks after the sales. But there are also potential legal questions.
If members made transactions on the basis of non-public information they had access to as members of Congress, they would certainly be in violation of insider trading laws as well as the Stop Trading on Congressional Knowledge Act, or the STOCK Act.
It was concern over this exact kind of public corruption that led to the passage of the act in 2012, supported by healthy bipartisan margins in both the House and Senate. (As an interesting side note, Burr was one of just three senators who voted against it.) The STOCK Act was and is a solid attempt at enhancing accountability by explicitly extending the legal prohibition on insider trading to members of Congress and requiring members to disclose any securities transactions within 30 to 45 days, which are to be posted publicly on the websites of the House or Senate. High-level executive branch officials are also required to make similar disclosures, which are managed by the Office of Government Ethics. We know all this because we worked closely with Members of Congress and other advocates to pass the law in 2012, and attended the White House Rose Garden ceremony for its signing.
Reports have also surfaced about transactions made by Senator Dianne Feinstein (D-CA) and Senator James Inhofe (R-OK). In the case of Feinstein, her assets appear to be in a blind trust, which insulates her from the decisions made regarding those assets. Inhofe has asserted that in 2018 he instructed his financial advisor to transfer all of his stock holdings into mutual funds, which would similarly insulate him from allegations of insider trading. Mutual funds contain holdings spread out over entire sectors and industries, often tied to certain indices (like the S&P 500). Because their aggregated nature makes it harder to abuse insider information, they are not covered by the STOCK Act. While these facts make Feinstein’s and Inhofe’s transactions far less suspicious, the lingering doubts about them shows that the current rules do not promote full public confidence.
Indeed, what we should take away from these recent scandals around stock dumping and the coronavirus, as well as recent instances of similar conduct by former Representative Christopher Collins (R-NY), is that the STOCK Act and preexisting insider trading statutes, while necessary and relatively effective, are not sufficient to the task of guarding against financial conflicts of interest and corruption. If it weren’t for the STOCK Act’s disclosure requirements, it is unlikely that we would have learned about many of these dubious transactions. That said, it is exceedingly difficult to prove the causal connection between non-public information that a member of Congress has acquired in their official duties and their decisions around financial transactions, even if all of the available evidence seems to point to illegality. This fact calls for tighter guidelines around what assets public officials are allowed to own and trade while they hold their public positions.
This is why POGO has called for strengthening House and Senate rules around stock ownership for members of Congress as recently as December of 2018. We are now calling for additional reforms that we believe will further safeguard the public from financial corruption and exploitation at the hands of those we have elected to represent us. Since we’ve seen that enforcement of the STOCK Act can be difficult, we believe the most effective way to avoid problematic financial transactions is to implement tighter restrictions on asset ownership and decision-making with regard to those assets.
One place to start would be amending the STOCK Act to explicitly ban the ownership of individual stocks by all covered individuals, including members of Congress. However, since that dramatic reform might prove hard to pass, a good alternative would be to require that all financial assets of covered individuals be placed in a blind trust for the duration of that individual’s service in office.
While these enhancements would not necessarily prevent all kinds of financial corruption by public officials, they would certainly be an improvement on the status quo. A blind trust requirement may be the most straightforward way to guard against situations like the current one, as such a requirement would not prevent the ownership of any particular category of asset. It would simply remove the temptation for public officials to act on relevant non-public information in order to advance their own financial position by eliminating the option altogether. Blind trusts are a legal vehicle designed specifically to build a firewall between the asset holder and the decisions made with regard to those assets. The fiduciary responsibility of the trust manager would still require the efficient management of those assets, with the goal of maximizing returns. In this way, public officials would not be barred from planning for their financial futures but would also not be permitted to illicitly and unfairly enrich themselves at the expense of the public. It could also be an easier lift in terms of building consensus for reform.
Beyond restricting asset ownership, it’s also important to improve the transparency provisions in the act. The databases that contain financial disclosure reports should be modernized so that those reports are more accessible to the public, in accordance with modern digital standards. And the reporting window for transactions should be reduced from the current 30 to 45 days to a more strict 15 to 30 day timeframe. Reports on transactions should contain specific information about the dollar amounts of covered transactions as opposed to the current imprecise dollar ranges.
Separate from the STOCK Act, the House and Senate should amend their internal rules and codes of conduct to explicitly prohibit members from owning stocks in companies that are overseen by the committees and subcommittees on which members sit. Additionally, the Senate should create its own Office of Congressional Ethics (OCE), mirroring the OCE created by the House in 2008. Doing so would enhance the ability of the public and of the Senate to hold senators accountable for instances of potential misconduct by providing an independent means through which to report misconduct and catalyze investigations.
Finally, folding the judiciary wholly into the STOCK Act framework is also a vital reform. At present, three of the nine Supreme Court Justices still own individual stocks, and this fact routinely raises questions around recusals and conflicts of interest. Under the current STOCK Act regime, judicial branch officials are not required to disclose securities transactions as their counterparts in the legislative branch and executive branch are. This persistent cloud impedes judges and justices from executing their duties in a transparent and consistent manner. Recusals can change the dynamic of a given case and the lack of recusal can raise questions about the impartiality of a judge’s or justice’s decision in a particular case. Since the Supreme Court is home to nine of the most powerful public officials in the country, it seems only logical that they should be held to the same standards of financial transparency and accountability as everyone else.
Whatever Congress decides to do in this space, it must be done soon. Scandals such as this one damage the already-dismal reputation of Congress which, in turn, further erodes public trust and the ultimate efficacy of our democratic system.