Over the past few days, United States Senators have moved forward on legislation that would ban stock trading by Congress. A bipartisan coalition, it is sponsored by Senators Jeff Merkley (D-OR), Gary Peters (D-MI), Jon Ossoff (D-GA) and Josh Hawley (R-MO). The Ending Trading and Holdings in Congressional Stocks (ETHICS) Act applies not just to sitting House and Senate members but to their families as well.
This isn’t the first bill of its kind that elected officials have proposed. In 2012, Congress passed the Stop Trading on Congressional Knowledge (STOCK) Act. As the nonpartisan Campaign Legal Center (CLC) has found, that bill hasn’t proven too effective at curbing congressional trading habits. But if the ETHICS Act passes, it will mean much harsher penalties for members who violate it — and this is a good thing. Stripping legislators of their current trading advantages could help spur economic growth by helping restore damaged trust in markets.
Inside the Bill to Ban Stock Trading by Congress
Certain high profile politicians, such as former House Speaker Nancy Pelosi (D-CA), have garnered a reputation for their stock trading habits. But the truth is that many elected officials make frequent trades behind the scenes. Data from Quiver Quantitative shows that last year, Rep. Josh Gottheimer (D-NJ) made 557 trades and Senator Tommy Tuberville (R-AL) made 407. Members on both sides of the aisle will be impacted if the Senate moves to ban stock trading by Congress. Per NPR:
“The new bill, if passed, would direct lawmakers to stop buying any new individual stocks immediately and at the beginning of the next session of congress in 2027 lawmakers will be required to divest from any individual assets. Previous reform proposals directed lawmakers to shift assets into blind trusts, but this measure specifies mutual funds. Congressional staffers are not covered by the proposal.”
Currently, House and Senate members are banned from using confidential congressional briefing information to enrich themselves through stock trading. But if they are caught, the fine is only $200. When someone’s trades are generating consistent, high returns, that’s a hardly slap on the wrist. But as NPR also notes, under the ETHICS Act, failing to comply and divest from investments will lead to “fines of either the value of lawmaker’s monthly salary or 10% of the values of each asset that’s in violation of the law — whichever is greater.”
This may seem harsh but as the CLC noted, the STOCK Act hasn’t done much to address this problem. Earlier this year, I investigated STOCK Act violations and found a long history of politicians disregarding it. This new bill might actually result in some real change, which could have real benefit for investors.
Why It is Necessary
Throughout my years reporting on financial markets, one thing has become undeniably clear: many investors feel the system is unfair. A 2021 study by Bankrate found that 56% of individual investors see the stock market as being rigged against them. To this day, many social media investing forums are brimming with posts about that exact topic. When people don’t trust public markets, they are less likely to invest, which doesn’t help themselves or the economy.
In that, we see why these developments aren’t good for financial markets as a whole. Our elected officials are able to profit off the stocks they have bought with confidential congressional knowledge. That trend has gradually eroded trust in public markets, likely compelling people to stop investing.
“Lawmakers have the opportunity to do insider trading and flaunt conflicts of interest right in our faces,” wrote Bloomberg columnist Mark Gongloff in 2022. Since then, things don’t seem to have improved. Other reports show that insider trading is a pervasive problem. Yet the U.S. government has done little to stop it.
How can we expect people to invest in markets that consistently appear rigged in favor of business leaders and politicians? The short answer is we can’t. But passing a bill that actually bars members of Congress from trading stocks would likely help restore trust in our financial institutions. I’ve already made the case for why this type of legislation is necessary. But at long last, the U.S. Senate seems to be taking steps to make it happen. If successful, this bill will prove highly beneficial to the U.S. economy as trust in financial markets improves.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
