In what’s become something of a ritual, members of Congress have lately been holding news conferences calling for stricter limits on their own stock trading. Americans love this idea, yet the bills have so far gone nowhere. Here’s hoping common sense may soon prevail.
Time and again, in recent years, members of both parties have executed trades that seemed to be awfully well timed. In early 2020, after some legislators had received classified briefings about the likely severity of COVID-19, a flurry of stock-buying ensued in industries that stood to profit from the pandemic. One congressman placed millions of dollars in undisclosed trades, including in medical and tech companies that had a stake in the virus response. More recently, at least one lawmaker seemed to have an uncanny sense that the president’s tariffs were about to be paused.
There’s also more overt corruption, such as when former Rep. Chris Collins tipped off his son that a drug made by a biotech company he was invested in had failed a crucial clinical trial. (Collins pleaded guilty to securities fraud in 2019.) The perception that lawmakers have an inside edge has even led to the creation of two exchange-traded funds that track their trading: NANC, named after Rep. Nancy Pelosi, and KRUZ, after Sen. Ted Cruz.
Even if their investing is unconnected to any privileged insights, as they all claim, it’s a poor look for legislators to be buying and selling stock in companies over which they hold sway. In recent years, analyses have found that 97 lawmakers had bought or sold stock in companies that intersected with their committee work, including more than a dozen members who oversaw the Pentagon and had financial ties to defense contractors. It’s little wonder that 80% of Americans see congressional corruption as a significant problem.
Efforts by lawmakers to regulate themselves have not been notably successful. In 2012, they passed the Stock Act to require that trades worth more than $1,000 be disclosed within 45 days. Yet members have routinely failed to comply with the requirement, which carries a whopping penalty of $200, and no legislator has ever been prosecuted for insider trading under the law.
Although more than 60 measures to limit or ban stock trading have been proposed since 2017, the problem has only gotten worse: 61% of the current Congress’ freshman class owns individual stocks, compared to 46% of the total class in the last session.
There’s no reasonable defense for this. After all, owning low-cost index funds should under normal circumstances be far preferable to dabbling in individual stocks (88% of professional fund managers underperformed the S&P 500 index over the past 15 years). And restrictions on personal trading are hardly unusual in industries — such as finance and the news media — that are keen to prevent conflicts of interest and preserve customers’ trust.
With almost two dozen bills proposed this year alone, a clear risk is that lawmakers can’t agree on one approach. They could do worse than to endorse a bipartisan House proposal called the Restore Trust in Congress Act. It imposes a simple ban on individual stock trading by legislators and their immediate families, without loopholes for blind trusts or other complicated exceptions. It also sets penalties — all profits plus 10% of the investment value — that should provide a reasonable deterrent. It’s a sensible way to restore some public trust in the institution.
A seat in Congress comes with many privileges. Day trading shouldn’t be one of them.
— The Bloomberg Opinion Editorial Board
