Insider Trading Laws: Exempt Congress?

Insider trading by members of Congress has been a cause for concern for many years. The Stop Trading on Congressional Knowledge STOCK Act was passed in 2012 to prevent insider trading and conflicts of interest among members of Congress. The Act mandates that lawmakers publicly and quickly disclose any stock trades made by themselves, a spouse, or a dependent child. However, many members of Congress have not complied with the law, and there have been numerous violations. This has led to calls for stricter penalties and even a ban on federal lawmakers from trading individual stocks. The effectiveness of the STOCK Act in curbing insider trading is debated, and it is clear that Congress must address this issue to maintain public trust.

The STOCK Act

The Stop Trading on Congressional Knowledge (STOCK) Act is a law that prohibits members and employees of Congress from using non-public or private information derived from their positions for personal benefit or private profit, including insider trading. It was signed into law by President Barack Obama on April 4, 2012, and applies to all employees in the Executive and Judicial branches of the federal government.

Members of Congress violating insider trading laws

Insider trading by members of Congress is prohibited by statutory law. In addition, each chamber of Congress has the constitutional right to discipline its members, officers, and staff. The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 was signed into law by President Barack Obama on April 4, 2012, to combat insider trading.

The STOCK Act prohibits members of Congress and other government employees from using non-public information for private profit, including insider trading. It also specifies reporting intervals for financial transactions and requires the retention and public availability of financial disclosure reports of a Member of Congress until six years after the individual leaves office. The Act was modified on April 15, 2013, by S. 716, which amended the online disclosure portion of the Act.

Despite the STOCK Act, there have been numerous instances of members of Congress violating insider trading laws. For example, Rep. Dan Crenshaw, a Republican from Texas, was months late in disclosing several stock trades he made in the early days of the COVID-19 pandemic. Similarly, Rep. Debbie Wasserman Schultz, a Democrat from Florida, was months late in reporting four stock trades made either for herself or her child. In another case, Rep. Alan Lowenthal, a Democrat from California, was late in disclosing his wife's purchase of a corporate bond in a cloud computing and technology company.

The real-world effectiveness of the STOCK Act in curbing insider trading has been questioned. A 2021 analysis by Business Insider identified 54 members of Congress, executive officials, and numerous staffers who had violated the Act. In the nine-month period up to September 2021, Senate and House members disclosed 4,000 trades worth at least $315 million in stocks and bonds. The COVID-19 pandemic also highlighted the shortcomings of the STOCK Act, as dozens of members of Congress from both parties made stock transactions totaling over $150 million.

Penalties for violating insider trading laws

Insider trading is an offence only if the material information used is private and nonpublic. The penalties for violating insider trading laws can be severe and vary depending on the jurisdiction and specific facts of the case. In the United States, individuals found guilty of insider trading may face criminal penalties, including fines of up to $5,000,000 and imprisonment of up to 20 years. They may also be barred from serving as an officer or director of a public company. Additionally, the violator may be subject to civil sanctions, such as injunctions, disgorgement of profits, and treble damages. The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) play a significant role in investigating and prosecuting insider trading cases.

In the United Kingdom, a person convicted of insider dealing under the Criminal Justice Act 1993 may face a fine, imprisonment of up to six months, or both. The Financial Conduct Authority (FCA) is responsible for investigating and taking action against insider trading violations in the UK.

In other countries, such as France, the penalties for insider trading can include significant fines and imprisonment. The specific laws and penalties vary across jurisdictions, and it is essential to seek legal guidance when facing insider trading charges.

Congress' power to discipline its members

Congress has the power to discipline its members and has done so on several occasions. The most common forms of discipline include expulsion from the House, censure, and reprimand.

The Ethics Committee plays a crucial role in recommending disciplinary actions. It can issue a formal "Letter of Reproval" or register its disapproval through more informal means. The Committee's rules and those of the individual party caucuses provide a framework for discipline. The Committee may also recommend a fine, denial or limitation of rights, powers, privileges, or immunities of a Member, depending on the nature and severity of the violation.

The House has broad discretionary power to discipline its Members, as outlined in Article 1, Section 5, Clause 2 of the Constitution, which states: "Each House may determine the Rules of its Proceedings, punish its Members for disorderly Behaviour, and, with the Concurrence of two-thirds, expel a Member." This power extends to violations of statutory law, internal congressional rules, or any conduct that reflects discredit upon the institution.

The STOCK Act, passed in 2012, further clarified the prohibition of insider trading by Members of Congress. While there was some debate over the applicability of insider trading laws to Congress before the STOCK Act, the Act explicitly stated that Members are subject to insider trading prohibitions under securities laws.

In conclusion, Congress has the constitutional authority and established procedures to discipline its Members for a range of infractions, with the Ethics Committee playing a central role in recommending and implementing disciplinary actions.

Public opinion on members of Congress violating insider trading laws

Despite the STOCK Act, there have been numerous instances of members of Congress violating insider trading laws. A 2021 analysis by Business Insider identified 54 members of Congress, executive officials, and numerous staffers who had violated the STOCK Act. A separate report by Insider in 2023 identified 78 members of Congress who had violated the law. These violations have fuelled public discontent and led to calls for reform. A poll conducted in March 2020 showed bipartisan support for a ban on members of Congress from holding individual stocks.

The STOCK Act's failure to effectively curb insider trading among members of Congress has been attributed to its lack of stringent penalties. Violators of the STOCK Act typically face a small fine of $200, which is sometimes waived by House or Senate ethics officials. This has led to criticism and calls for stricter penalties by ethics watchdogs and members of Congress themselves.

The resistance to imposing restrictions on themselves has been noted, with both Democrat and Republican officials acknowledging that any passed reform would be to the detriment of each elected congressman. Despite holding a majority in both the House and Senate from 2020 to 2022, Democrats chose not to push through legislation to overhaul the STOCK Act. This decision has been attributed to tactical considerations by Democrat leaders, while some Republican and Democratic officials claim it was based on their personal interests.

Overall, public opinion appears to be in favour of stricter enforcement and penalties for members of Congress who engage in insider trading. The STOCK Act, while a step in the right direction, has not sufficiently addressed the issue, and there is widespread support for additional reforms to uphold the integrity of Congress and maintain public trust.

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