By Nicholas Gervasi
Mar 21, 2023, 12:00 PM
When members of Congress trade stocks on nonpublic information, Americans lose faith in their elected representatives, and democracy suffers. Overall trust in the federal government remains low as Americans have expressed that the United States’ most significant problem is its own government. Among those surveyed in a 2022 Gallup poll, Americans are least trusting of Congress compared to the federal executive and judiciary branches.1Whereas trust in the federal judiciary sits at 47 percent, and the federal executive branch at 43 percent, Congress is at 38 percent—though trust in Congress has been as low as 28 percent in the past. Congressional insider trading exacerbates this distrust and creates yet another obstacle. But bipartisan interest and support for strengthening congressional ethics are on the rise. In fact, a majority of voters from across the political spectrum support a ban on congressional stock trading.
Congressional insider trading decouples a politician’s values from their actions. In a well-functioning democracy, the people elect members of Congress based on their policy views, not their portfolio interests. A candidate’s transparency and accountability are critical in determining which candidate to support. Congress should act on those advertised or publicized values to solidify voters’ trust. Otherwise, voters may be misled to think that a member of Congress supports a policy on principle when in fact, the member supports the policy in their personal financial interest.
The Current Statutory Scheme is Not Working
Congress has grappled with insider trading several times, but the current statutory solution has yielded disappointing results. As the primary disclosure and enforcement mechanism, the Stop Trading on Congressional Knowledge Act of 2012 (“STOCK Act”) was designed to curtail congressional insider trading.2Pub. L. 112-115, 126 Stat. 291 (2012) (codified as amended at 15 U.S.C. § 78u-1(g)–(g)). But the Act’s efficacy is questionable: the number of violators has risen to seventy-eight members of Congress. Violators face little consequences, with a fine of $200 for a late disclosure filing.3Sometimes these fines are waived entirely by the U.S. Senate Select Committee on Ethics or the U.S. House Committee on Ethics. In the ten years since the STOCK Act’s passage, not one member of Congress has been prosecuted for insider trading based on private congressional information.
Common law doctrine has contended with insider trading by establishing a fiduciary duty. Still, the common law does not adequately cover members of Congress and their subordinates. To be successful, insider trading cases have two paths for prosecution: the classical and the misappropriation theories. Whereas the classical theory is rooted in the fiduciary relationship between the corporate insider and the securities issuer,4See generally Chiarella v. United States, 445 U.S. 222 (1980). the misappropriation theory relies on a duty between the trader and the source of the information.5See United States v. O’Hagan, 521 U.S. 642, 652 (1997). Both theories are complementary, as each focuses on different actors: corporate insiders and outsiders.6See id. However, both theories are ill-fitting for Congress because both are premised on the nature of the relationship and the duty associated with that relationship, creating complex questions of obligations owed to amorphous groups like the entire Congress or the general public.7See Nicholas Gervasi, Note, Blacking Out Congressional Insider Trading: Overlaying a Corporate Mechanism Upon Members of Congress and Their Staff to Curtail Illegal Profiting, 28 Fordham J. Corp. & Fin. L. 223, 267 (2023).
The Congressional Response: Broad Strokes to a Nuanced Issue
Amid these common law shortcomings, legislators gave the public hope for action after promising to vote on a ban from individual stock trading in September 2022. But the 117th Congress ended without the vote. In response, in January 2023, U.S. Representatives Abigail Spanberger (D-VA) and Adam Schiff (D-CA) reintroduced the Transparent Representation Upholding Service and Trust in Congress Act to ban members of Congress, their spouses, and their dependents from trading stocks.8H.R. 345, 118th Cong. (2023). Moreover, Senator Josh Hawley (R-MO) reintroduced his bill to ban members of Congress and their spouses from trading stocks, renamed the Preventing Elected Leaders from Owning Securities and Investments Act.9S. 58, 118th Cong. (2023).
A bevy of proposed bills has circulated through both chambers of Congress with stricter rules and expansions of application to persons who are merely related to members of Congress.10See Gervasi, supra note 7, at 243–45 tbl.2 (providing a table of proposed bills and their attributes in the 117th Congress). Some legal scholars, however, contend that these bills overreach by advocating for complete bans on trading individual stocks. Furthermore, the proposed bills do not adequately consider the extant systems used to monitor insider trading. Thus, these bans apply a broad stroke approach to a nuanced issue.
One Proposed Method: Applying Blackout Periods
Instead, adopting corporate blackout periods to surround closed-session hearings and other significant nonpublic legislative events would provide a feasible and trackable mechanism to curtail congressional insider trading. Indeed, establishing congressional blackout periods provides an alternative to the applications of the classical theory or misappropriation theory and focuses on the “timing of trades rather than conducting a legal analysis of duty.” These congressional blackout periods and any subsequent trading violations would be monitored by the U.S. Securities and Exchange Commission. This process would remove the affirmative obligation of members and employees of Congress to self-regulate by filing reports and substitutes reliable financial industry regulators into the role of enforcement.
Congressional insider trading and the lack of enforcement of disclosure violations weaken the public trust in Congress. When a member of Congress trades stocks of a company they regulate, a conflict of interest arises. In an opinion relating to executive branch conflicts of interest, the United States Supreme Court stated the ancient maxim: “[N]o man may serve two masters . . . especially . . . if one of the masters happens to be economic self-interest.”11United States v. Mississippi Valley Generating Co., 364 U.S. 520, 549 (1961). The maxim “holds equally true for Congress.”
The use of nonpublic information by lawmakers for private profit casts serious doubt on the impartiality of legislation.12Gervasi, supra note 7, at 270. Congressional blackout periods can be universally applied to all staff members and members of Congress.13Id. at 267. Committees can tailor the length of their blackout periods depending on the subject matter they confront much like publicly traded companies use blackout periods to circumscribe major financial disclosure events.14Id. This relatively straightforward trading restriction could be an important first step to remedy the loss of trust caused by congressional insider trading.
- 1Whereas trust in the federal judiciary sits at 47 percent, and the federal executive branch at 43 percent, Congress is at 38 percent—though trust in Congress has been as low as 28 percent in the past.
- 2Pub. L. 112-115, 126 Stat. 291 (2012) (codified as amended at 15 U.S.C. § 78u-1(g)–(g)).
- 3Sometimes these fines are waived entirely by the U.S. Senate Select Committee on Ethics or the U.S. House Committee on Ethics.
- 4See generally Chiarella v. United States, 445 U.S. 222 (1980).
- 5See United States v. O’Hagan, 521 U.S. 642, 652 (1997).
- 6See id.
- 7See Nicholas Gervasi, Note, Blacking Out Congressional Insider Trading: Overlaying a Corporate Mechanism Upon Members of Congress and Their Staff to Curtail Illegal Profiting, 28 Fordham J. Corp. & Fin. L. 223, 267 (2023).
- 8H.R. 345, 118th Cong. (2023).
- 9S. 58, 118th Cong. (2023).
- 10See Gervasi, supra note 7, at 243–45 tbl.2 (providing a table of proposed bills and their attributes in the 117th Congress).
- 11United States v. Mississippi Valley Generating Co., 364 U.S. 520, 549 (1961).
- 12Gervasi, supra note 7, at 270.
- 13Id. at 267.