Insider Trading Laws: Exempting Congress?

Insider trading laws and their application to members of Congress have been a topic of debate and concern for the public. While statutory law forbids members of Congress from engaging in insider trading, there have been allegations and instances of members using insider information for personal financial gain. The STOCK Act, passed in 2012, clarified that insider trading laws apply to members of Congress and specified their duty regarding material, nonpublic information. Despite this, members of Congress have continued to engage in substantial stock trading, with some cases of potential insider trading, highlighting the need for stronger rules and increased public trust in Congress.

The STOCK Act

The Stop Trading on Congressional Knowledge Act (STOCK Act) was passed by Congress in 2012. It followed more than a decade of allegations of insider trading against members of Congress and their staff. The STOCK Act was introduced in response to insider trading allegations against Tony Rudy, a top aide to the onetime House Majority Leader Rep. Tom DeLay, as well as an insider trading scandal faced by Senate Majority Leader Bill Frist in 2005.

However, compliance with the STOCK Act has been inconsistent. In 2023, news organizations identified 78 members of Congress who violated the law. No public information was available on whether they had been fined or had paid any fines. While the STOCK Act affirmed that insider trading on material non-public information is a crime, no charges have been brought against a member of Congress under that provision.

In the wake of the COVID-19 pandemic, several members of Congress from both parties made stock transactions totaling over $150 million. This led to renewed interest in regulating members' ability to buy and trade stocks. Several new proposals are now on the table, ranging from increasing oversight of stock transactions to an outright ban on stock trading by members of Congress.

Insider trading by Congress members is a crime

Despite the STOCK Act, there have been no prosecutions of members of Congress under this legislation. However, federal authorities have prosecuted members of Congress for insider trading on information acquired outside of their congressional duties, such as former Representative Chris Collins. The challenge in prosecuting members of Congress for insider trading lies in two main obstacles: the Speech and Debate Clause and proving "materiality" in novel circumstances.

The Speech and Debate Clause in the Constitution provides that members of Congress "shall not be questioned" for their legislative activities. While this clause grants immunity to members of Congress for their legislative actions, it does not protect criminal acts that are only tangentially related to legislative activity. For example, in United States v. Brewster, the Supreme Court ruled that the Speech and Debate Clause did not shield a senator accused of bribery, as the essence of the offence was the promise to vote, not the act of voting itself.

Proving "materiality" in the context of insider trading by members of Congress is another challenge. To establish materiality, it must be shown that the non-public information is likely to influence a reasonable investor's trading decisions. While federal authorities have successfully prosecuted cases involving particular companies or industries, there has never been a prosecution based on information about the entire economy.

Despite the challenges, it is clear that insider trading by members of Congress is illegal and unethical. The STOCK Act explicitly states that members of Congress and their employees are subject to insider trading prohibitions. Additionally, each chamber of Congress has the constitutional right to discipline its members, officers, and staff for violating ethics rules, which include prohibitions against using confidential information for private profit.

To further address the issue, Senator Elizabeth Warren has introduced bipartisan legislation, the Ban on Congressional Stock Ownership Act, which would ban members of Congress and their spouses from owning or trading individual stocks. This legislation aims to prevent conflicts of interest and restore public trust in Congress.

The Speech and Debate Clause

However, the Supreme Court has also ruled that the Clause does not protect criminal acts that are only tangentially related to legislative activity. For example, in United States v. Brewster, the Court held that the Clause did not shield a senator accused of bribery because the essence of the offence was the promise of an official act in exchange for a bribe, rather than the vote itself.

In the context of insider trading, the Speech and Debate Clause has been invoked by members of Congress to avoid prosecution. For instance, in 2020, Senators Kelly Loeffler, James Inhofe, and Dianne Feinstein were investigated for selling large amounts of stock following a confidential senatorial briefing on the coronavirus. The investigation was discontinued, possibly due to the challenges posed by the Speech and Debate Clause.

Similarly, Senator Richard Burr was investigated for selling up to $1.7 million in stock while receiving daily private briefings on the coronavirus as the Intelligence Committee chair. The investigation into Senator Burr also included a warrant for his cell phone, which may have been used for Congressional business and thus be protected by the Speech and Debate Clause.

In summary, while the Speech and Debate Clause provides immunity to members of Congress for their legislative activities, it does not protect criminal acts that are only tangentially related. However, the Clause has presented challenges in prosecuting members of Congress for insider trading, as evident in the cases of Senators Loeffler, Inhofe, Feinstein, and Burr.

The Ban Conflicted Trading Act

Prohibited Activities

The Act would make it unlawful for members of Congress and designated congressional personnel to:

• Purchase or sell specified investments.
• Enter into transactions that create a net short position in a security.
• Serve as an officer or member of any board of any for-profit entity.

Investment Options

While the Act restricts certain trading activities, members of Congress are still permitted to invest in widely held investments, such as diversified mutual funds and exchange-traded funds. Additionally, the Act provides flexibility for new and sitting members to manage their existing investments. New members have the option to sell individual holdings within six months of taking office, while sitting members have a similar six-month period after the bill's enactment. Alternatively, members can choose to hold their existing investments while in office without engaging in any trading until they leave office or transfer their investments to a blind trust.

Addressing Conflicts of Interest

A central objective of the Ban Conflicted Trading Act is to eliminate the potential for conflicts of interest that arise when members of Congress and their senior staff trade in stocks while having access to non-public information and the ability to influence policy. By prohibiting the buying and selling of individual stocks, the Act ensures that members of Congress make decisions in the best interest of their constituents rather than their personal financial interests.

Public Support

Public opinion and trust

Public trust in Congress has been damaged by insider trading, with the public outraged by the idea that members of Congress are using insider information to benefit from stock trades. This led to the STOCK Act, which was signed into law by President Obama in 2012. The Act was intended to increase transparency and prevent corruption, but it has been criticised for not going far enough and failing to prevent the appearance of corruption.

The public's negative perception of Congress's insider trading is reflected in James Garfield's admonition, reminding citizens of their power to hold their elected officials accountable. This idea is supported by the fact that members of Congress are always responsible to their constituents, who have the right to vote them out of office.

The STOCK Act has been criticised for its lack of effectiveness in curbing insider trading. The laws already in place to stop such practices are difficult to enforce due to their lack of specific definitions, and critics argue that the STOCK Act does not sufficiently address this issue. The enforcement of the Act is left to the executive branch, which may be reluctant to pursue cases against the legislature due to concerns about the separation of powers. This could result in only the most egregious cases being pursued, while milder cases are not prosecuted.

The COVID-19 pandemic highlighted the shortcomings of the STOCK Act, as dozens of members of Congress from both parties made stock transactions totalling over $150 million. This led to investigations by the Department of Justice into several members for insider trading. The public's response to these trades and the subsequent investigations indicates a continued negative perception of insider trading by members of Congress.

The STOCK Act has also been criticised for not providing enough transparency. While it requires members of Congress to publicly disclose their financial transactions, amendments to the Act in 2013 removed the requirement for certain officials to file their financial information online, making their records less accessible to the public. This has been seen as a step back in terms of transparency and accountability.

Despite the STOCK Act and other laws in place, there is still a perception that members of Congress may be engaging in insider trading. This perception has been fuelled by reports of members of Congress making strategic stock trades during the COVID-19 pandemic and the lack of prosecutions under the STOCK Act. The public's negative perception of insider trading by members of Congress has led to calls for further reform and a ban on stock trading by members of Congress.

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