Congress Insider Trading: Legal Loophole Or Ethical Dilemma?

Insider trading by members of Congress has been a concern for decades. In 2012, Congress passed the Stop Trading on Congressional Knowledge Act (STOCK Act) to address this issue. The STOCK Act explicitly states that members of Congress and their staff are subject to insider trading laws and prohibits them from using non-public information obtained through their positions for private profit. Despite this, there have been recent instances of members of Congress allegedly engaging in insider trading during the COVID-19 pandemic and the 2008 financial crisis, highlighting the need for stricter enforcement and additional reforms. The STOCK Act has been criticized for not doing enough to prevent the appearance of corruption and ensure that Congress prioritizes the public interest. As a result, there are now several new proposals on the table, ranging from increased oversight to a complete ban on stock trading by members of Congress.

The STOCK Act

The Stop Trading on Congressional Knowledge Act, or STOCK Act, was passed in 2012 following repeated disclosures of heavy stock trading by some members of Congress. The act significantly expanded the reporting requirements for securities transactions by members of Congress and senior federal officials.

The act addresses the perceived conflicts of interest in stock trading by members of Congress and other federal officials by requiring them to make public all securities transactions with a value above $1,000 within 30 days of receiving notice of the transaction and within 45 days of the transaction date. It also mandated the posting of the filings on the internet. In most cases, the requirements also apply to trades by spouses and dependent children.

While the STOCK Act passed by overwhelming margins, compliance with its reporting requirements has been spotty. In 2023, news organizations identified 78 members of Congress who violated the law. No public information was available on whether they had been assessed the $200 fine for a reporting violation, or whether they had paid it.

Congress's constitutional power to discipline members

Congress's constitutional power to discipline its members is broad and covers acts ranging from criminal misconduct to violations of internal House rules. The Constitution grants the House and the Senate the authority to discipline their members for "disorderly behaviour". This power is derived from Article I, Section 5 of the US Constitution, which states:

> Each House may…punish its Members for disorderly Behaviour, and, with the Concurrence of two thirds, expel a Member.

The power to discipline members is intended to protect the reputation and dignity of the institution and its proceedings. The most severe form of punishment is expulsion, which has only occurred six times in over two centuries. This requires a two-thirds majority vote in the relevant chamber.

Congress also has the power to censure and reprimand members. Censure is the second most severe punishment and involves a public rebuke of the member. Reprimand is a less severe rebuke and does not require the member to be present in the chamber. Both censure and reprimand are imposed by a simple majority vote.

In addition to these formal disciplinary measures, Congress can also take informal actions to express disapproval of a member's actions, such as denying committee assignments or funding for re-election campaigns.

It is worth noting that Congress's disciplinary power does not extend to acts committed by individuals prior to their election to Congress. In the case of Powell v. McCormack, the Supreme Court ruled that the House could only exclude a member if they did not meet the constitutional requirements for office.

The Ban Conflicted Trading Act

The Act was introduced by Senator Jeff Merkley, along with Senators Rafael Warnock, Sherrod Brown, and Representatives Raja Krishnamoorthi, Alexandria Ocasio-Cortez, Joe Neguse, Matt Gaetz, and Michael Cloud. The legislation has gained support from voters across Democratic, Independent, and Republican parties, reflecting a broader public sentiment for increased government accountability.

Provisions of the Act

• Prohibition on purchasing or selling specified investments: Members of Congress and certain congressional officers or employees would be prohibited from buying or selling individual stocks and other investments while in office. This restriction aims to prevent them from abusing their positions for personal financial gain.
• Net short position transactions: The Act would also prohibit these individuals from entering into transactions that create a net short position in a security.
• Restriction on corporate board membership: Members of Congress and senior congressional staff would be barred from serving as officers or members of any for-profit entity or corporate board.
• Widely held investments: While prohibiting individual stock trading, the Act would still allow members of Congress to invest in widely held investments, such as diversified mutual funds and exchange-traded funds.
• Timeline for selling individual holdings: New members of Congress would have to sell their individual holdings within six months of being elected, while sitting members would have the same timeframe after the enactment of the bill.
• Blind trust option: Alternatively, members of Congress could choose to hold their existing investments while in office without the option to trade until they leave office or transfer them to a blind trust.

Addressing Insider Trading

The Supreme Court's interpretation of the Speech and Debate Clause

The Speech and Debate Clause of the U.S. Constitution states that "for any Speech or Debate in either House, [Members of Congress] shall not be questioned in any other Place." The Supreme Court has interpreted the Clause broadly to give members of Congress immunity for actions within the legislative sphere and to bar "questioning" related to congressional business, including subpoenas and search warrants.

The Supreme Court has held that the Clause does not protect criminal acts to which legislative activity is only tangential. For example, in United States v. Brewster, the Court found that the Clause did not protect a senator accused of bribery because the essence of the offence was taking a bribe in exchange for a promise of an official act, rather than the senator's vote itself.

In Gravel v. United States, the Supreme Court extended the Speech and Debate Clause to protect congressional aides, described as "alter egos", for work in connection with legislative speeches, but limited the privilege to "legislative activity". The Court refused to extend the privilege to the subsequent publication of materials read in congressional debates, such as the Pentagon Papers.

In United States v. Rayburn House Office Building, the Supreme Court held that the Clause does not prohibit the compelled disclosure of documents in response to a subpoena or search warrant, as long as the disclosure is not "testimonial" in nature. The Court found that the Clause only protects against the evidentiary use of privileged documents, not their mere disclosure to the government for review as part of an investigation.

In summary, the Supreme Court's interpretation of the Speech and Debate Clause provides members of Congress with immunity from prosecution and civil suits for legislative acts, but does not protect them from criminal acts or subpoenas that are unrelated to their legislative duties.

Public opinion and responsibility to constituents

Public opinion on insider trading in Congress is largely negative, with a majority of Americans calling for reform to address the issue. Despite this, both the Republican and Democratic parties have elected officials who are likely to oppose reform, and Congress has resisted imposing restrictions on itself. This resistance is likely due to the personal detriment that any passed reform would have on each elected congressman.

The STOCK Act, passed in 2012, was an attempt to combat congressional insider trading. However, it has been widely regarded as a failure, with loopholes that members of Congress have exploited for their own financial gain. For example, during the COVID-19 pandemic, dozens of members of Congress from both parties made stock transactions totaling over $150 million, buying stocks in companies that could increase in value during the pandemic and selling stocks in companies that would struggle. This led to renewed interest in regulating members of Congress's ability to buy and trade stocks and several new proposals to move beyond the transparency provided by the STOCK Act. These proposals range from increasing oversight of stock transactions to an outright ban on stock trading by members of Congress.

The public's negative opinion of insider trading in Congress and their calls for reform align with the traditional right of constituents to instruct their elected representatives, which extends back to colonial times. While the House of Representatives rejected recognizing this right when drafting the Bill of Rights in 1789, constituents have continued to express their views and instruct their senators and representatives on how to vote. For example, in 1791, the Virginia legislature directed its two senators to vote to end the Senate's practice of meeting behind closed doors to keep senators accountable. More recently, constituents of U.S. Senator Humphrey Marshall in 1795 angrily denounced him for his vote in favor of ratifying a controversial treaty, urging the legislature to instruct him to oppose the treaty if it came before the Senate again.

Despite the public's right to instruct their representatives, the responsibility to constituents is often complicated by the representatives' own knowledge and opinions. In the case of Humphrey Marshall, he appealed directly to the people, asserting that as a senator, he was less interested in winning popularity contests than in doing his duty to the nation "according to my own judgment." This tension between the responsibility to constituents and the representative's own judgment persists today and is evident in Congress's resistance to imposing restrictions on insider trading despite public calls for reform.

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