Banning Lawmakers from Trading Stocks Won’t Fix Congress
pa href=https://www.cato.org/people/jennifer-j-schulp hreflang=undJennifer J. Schulp/a
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pAfter anbsp;collection ofnbsp;a href=https://www.forbes.com/sites/jackkelly/2020/03/20/senators-accused-of-insider-trading-dumping-stocks-after-coronavirus-briefings/?sh=569d3f084a45 target=_blankquestionable stock trades/anbsp;by members of Congress at the beginning of the pandemic, and similar trading scandals in thenbsp;a href=https://www.wsj.com/articles/federal-judges-brokers-traded-stocks-of-litigants-during-cases-walmart-pfizer-11634306192 target=_blankfederal judiciary/anbsp;and thenbsp;a href=https://www.npr.org/2021/10/21/1048090079/federal-reserve-restrictions-investments-trading-controversy-jerome-powell target=_blankFederal Reserve/a, there is growing momentum to ban members of Congress from trading or even holding individual stocks while in office.nbsp;a href=https://thehill.com/homenews/news/588630-76-percent-of-voters-support-banning-lawmakers-from-trading-stocks-poll target=_blankRecent polls/anbsp;show wide support from the American public to impose limits on holding individual stocks, and both Republicans and Democrats havenbsp;a href=https://www.wsj.com/articles/stock-trading-ban-gains-traction-in-congress-11644439246 target=_blankintroduced bills/anbsp;with different frameworks for limiting lawmakers’ financial holdings. Even House Speaker Nancy Pelosi (D–Calif.)—who hasnbsp;a href=https://www.speaker.gov/newsroom/121521-0 target=_blankhistorically opposed/anbsp;such anbsp;bill—has recently signaled hernbsp;a href=https://www.npr.org/2022/01/20/1074387320/pelosi-opens-the-door-to-stock-trading-ban target=_blankwillingness/anbsp;to advance such legislation./p
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pA leading argument in favor of banning congressional stock ownership is that such anbsp;ban is needed tonbsp;a href=https://www.wsj.com/articles/no-more-insider-trading-in-congress-stocks-prices-sasse-pelosi-mccarthy-boston-dallas-fed-scandal-11644447705 target=_blankprevent legislators from insider trading/a. This is wrong because restricting Congressional trading not only has the potential to harm markets, but anbsp;focus on insider trading obscures the broader question of how to address lawmakers who may use their positions for personal, financial gain./p
pa href=https://www.investopedia.com/terms/i/insidertrading.asp target=_blankIllegal insider trading/anbsp;is when someone trades anbsp;stock misusing non‐public information that impacts the stock’s value. Thenbsp;a href=https://www.investopedia.com/terms/s/stop-trading-on-congressional-knowledge-act.asp target=_blankSTOCK Act/a, passed in 2012, made clear that trading on non‐public information derived from anbsp;member of Congress’s official position is an insider trading violation. The Securities and Exchange Commissionnbsp;a href=https://www.investor.gov/introduction-investing/investing-basics/glossary/insider-trading target=_blankconsiders/anbsp;insider trading to “undermine investor confidence in the fairness and integrity of the securities markets.”nbsp;/p
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pBut it will make the market worse. /p
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pThose who support limits on congressional investments point tonbsp;a href=https://unusualwhales.com/i_am_the_senate/full target=_blankwell‐timed trades/anbsp;andnbsp;a href=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2712297 target=_blankresearch/anbsp;showing that members of Congress outperform normal people in the stock market. That research tends to draw on trading data from before the STOCK Act, and somenbsp;a href=https://www.nber.org/papers/w26975 target=_blankstudies/a, including thisnbsp;a href=https://www.nber.org/papers/w26975 target=_blankrecent one/anbsp;by the National Bureau of Economic Research, have found no particular outsized returns for lawmakers. Although voters look poorly on elected representatives who may be making unfair gains, it’s anbsp;leap to conclude from the body of research that unlawful insider trading is widespread on Capitol Hill.nbsp;/p
pProhibitions on insider trading already harmnbsp;a href=https://www.investopedia.com/articles/markets-economy/092216/why-insider-trading-bad-financial-markets.asp target=_blankmarket efficiency/anbsp;by preventing anbsp;stock’s price from reflecting all of the information known about the stock. Anbsp;broad‐based ban on stock trading or ownership would add to that market inefficiency by preventing lawmakers from contributing information that allows the markets to engage in price discovery. Because the type of information that members of Congress are privy to relates not just to individual companies, but to entire industries and the whole economy, such information should actually benbsp;a href=https://www.forbes.com/sites/jeffreydorfman/2015/03/22/a-modern-insider-trading-law-would-recognize-the-victims-of-current-law/?sh=d1bb5e534b3e target=_blankabsorbed quickly into the market/a—particularly when doing so does not violate existing insider trading law—rather than kept out./p
pThe fact that prosecuting insider trading violations by members of Congress isnbsp;a href=https://www.forbes.com/sites/insider/2020/05/26/how-senators-may-have-avoided-insider-trading-charges/?sh=5363d04e27ba target=_blankchallenging/a, and lawmakers from both parties have anbsp;a href=https://www.businessinsider.com/conflicted-congress-key-findings-stock-act-finances-investing-2021-12 target=_blankpoor record/anbsp;in complying with trade reporting requirements, does not mean that anbsp;prophylactic ban on holding individual stocks is anbsp;good idea or anbsp;necessary one./p
pJustifying anbsp;stock‐ownership ban based on insider trading rules also makes little sense. The issue is not with maintaining investor confidence in the market—the stated reason for insider trading rules. The issue is with maintaining voter confidence in their elected officials—two very different issues. The more apt question when considering limitations on congressional financial holdings is whether, and to what degree, members of Congress should be permitted to gain personal financial advantage from their positions./p
pThe question, properly framed, focuses on potential conflicts of interest faced by members of Congress. Uniquely positioned members of Congress have information that may impact the value of particular stocks while also having the ability to impact the value of particular stock by legislating, by calling for investigations, or by otherwise exerting their political influence.nbsp;/p
pThat means potential conflicts of interest can exist not only in anbsp;member’s individual stock ownership, but also innbsp;a href=https://www.bloomberg.com/opinion/articles/2022-01-13/congress-might-have-to-stop-trading-stocks target=_blankfund investments/a, crypto holdings, or business interests of lawmakers, their families, or their staff. Managing these potential conflicts of interest is anbsp;a href=https://www.wsj.com/articles/the-rush-to-ban-congress-stock-trades-11644417361 target=_blankcomplex/anbsp;a href=https://www.washingtonpost.com/opinions/2021/12/21/nancy-pelosi-wrong-lawmakers-trade-stocks/ target=_blanktask/a, asking lawmakers and voters alike to determine the proper balance between lawmakers’ personal financial interests, their stake in particular issues, and their ability to represent their constituents.nbsp;At best, focusing only on stock ownership and trading provides an incomplete picture.nbsp;/p
pInsider trading law has anbsp;reputation fornbsp;a href=https://corpgov.law.harvard.edu/2020/02/13/report-on-insider-trading-by-the-bharara-task-force/ target=_blanklacking clarity and generating confusion/a. It would be anbsp;mistake to add to that confusion by attempting to justify anbsp;ban on congressional stock ownership in the name of preventing illegal insider trading, particularly when the motivation for such restrictions is protecting Congress’s integrity, not the market’s. Instead, potential solutions should be evaluated against the full range of financial conflicts of interest that members of Congress face./p
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