Image Credits: @wance0003000 on Unsplash (Unsplash License)

Thanks to Martha Stewart’s brief jail stint, most of us have heard of insider trading and feel fairly confident in asserting its moral reprehensibility. Despite this, the ins-and-outs of what makes insider trading so ethically wrong fosters confusion in the court of public opinion. In short, insider trading is making stock trades on publicly traded companies based on material information not available to the public. More specifically, the U.S. Securities and Exchange Commission (SEC) defines illegal insider trading as “the buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.” The general issue with insider trading is that specific information about the actions of a company, or the economy at large, have a substantial impact on an investor’s decision to buy or sell stock. Thus, the legality resides in the SEC’s attempts to maintain a fair marketplace. Access to insider information gives certain individuals a headstart in the free market against the general public. 

Insider trading by company officials is largely considered unethical, and the act is generally looked down upon. However, there is another, frequently forgotten, group of individuals with access to inside information: government officials. Federal law defines an ‘insider’ as a company’s officers, directors, or anyone in control of at least ten percent of a company’s equity securities. This definition provides for the likelihood of governmental and Congressional insider knowledge going unregulated; lines get blurred when insider knowledge is not tied to direct knowledge of the internal operations of a company itself. Regardless of the “why,” though, it may be surprising to many people to find out that, for a long time, insider trading among members of Congress was common. That was until the STOCK Act of 2012. 

In short, The STOCK Act of 2012, or the “Stop Trading on Congressional Knowledge Act,” is the only current curb on lawmakers buying or selling stocks while in office. The act itself was introduced to Congress in January 2012 and passed in April 2012 with overwhelming bipartisan support; the Senate passed the act with a 96-3 vote and the House with a margin of 417-2 votes. In fact, the topic was such a hot-button issue at the time that President Barack Obama stated in his 2012 State of the Union address for Congress to “send me a bill that bans insider trading by members of Congress; I will sign it tomorrow.” Although the STOCK Act was passed in 2012, it was amended by Congress in April 2013, when the Act’s financial disclosure requirements were loosened heavily. 

The STOCK Act, however, was not quite the fix it was anticipated to be, and even after the Act, instances of government officials using their positions for monetary gain have been as numerous as they are scandalous, which brings us to today’s controversy. Most notably, this controversy surrounds four members of the Federal Reserve Bank and several members of Congress who have all come under fire for making lucrative trades prior to certain market knowledge being divulged to the public. These instances, to name a few, have spurred an extensive discussion on the effectiveness of the STOCK Act, the penalties for high ranking officials, and the potential for new legislation that could ban Congressional stock trades completely. Moreover, the most fascinating aspect of this issue is the complete lack of partisan consensus. To understand how legislation has come to its current standing, and why until recently, this issue went largely unnoticed, it is necessary to examine the initial conception of the STOCK Act and the trials and tribulations that have occurred since. 

The goal of the STOCK Act was to target federal ethical and disclosure amendments in order to increase transparency in Congress members’ trading habits. First and foremost, the Act amended the Ethics in Government Act of 1978 to require a “government-wide shift to electronic reporting and online availability of public financial disclosure information,” according to the Obama White House Archives. This requires Congressional members to report certain investment transactions within 45 days after a trade. Additionally, this provision mandated that information of those trades be publicly disclosed and available within databases. The STOCK Act additionally included several new ethical requirements. Notably, an expansion of the forfeiture of federal pension if a member of Congress engages in misconduct, requirement of certain officials to disclose terms of personal mortgages, and limited participation in IPOs. 

While these new provisions seemed like a solid solution at the time, the lack of accountability for Congressional insider trading proved too robust to crumble under the new code. The first setback to the act was the aforementioned 2013 amendment, passed a year after the Act. At the time, the Senate and the House passed this 2013 amendment in near empty chambers before Obama signed it into law. Moreover, the announcement of the amendment was only one sentence long, merely summarizing the elimination of the STOCK Act to make available financial disclosure forms. Prior to this amendment, however, the supposed “database” of financial disclosure forms was not really a database at all. Rather, the forms existed in a basement office of the Cannon House Office Building in Washington D.C. Even if someone managed to get to the files, the only way to get a comprehensive look at all 3,000 staffers that filed would be to review each case one by one. That being said, these files were so out of reach to the public that it is unclear if anything was really lost with the 2013 amendment. 

While the STOCK Act is in effect, Congress is notoriously inconsistent in enforcing penalties against members who violate the act. An investigation by Business Insider found that 55 members of Congress and at least 182 high paid Hill staffers were late to filing their stock trades in 2020 and 2021. The penalty for this under the STOCK Act is supposed to be a $200 fine, but no records exist indicating payment of said fines. What truly spurred the renewed interest in the Act, however, has to do with members of the Federal Reserve Bank who were caught selling stock prior to a substantial economic announcement from the Fed. Richard H. Clarida, the former vice chair of the Federal Reserve (Fed), initially failed to disclose the extent of a transaction he made in early 2020. This was not Clarida’s first time in hot water; he was revealed to have bought shares in an investment fund on February 27, 2020, one day before the Fed announced that they were ready to aid the economy as the pandemic began. That news put Clarida in a position to benefit from his investment, as the Fed would restore market confidence thus making trade prices shoot up. Clarida’s actions drew outcry from lawmakers and interest groups, though Clarida described his prickly investments as a mere “rebalancing” of his portfolio. Clarida’s activity is only one example of a handful of suspicious trades among members of the Fed. As a result, some of these members have announced their resignation and the Fed has released revised ethical codes intended to force officials to trade less rapidly. These revised codes also ban certain types of investments altogether, but some people feel that these steps do not go far enough. 

It is without a doubt that members of Congress and other high ranking officials have the opportunity for financial gain due to their position. Thus, it is unsurprising that political figures like Senator Elizabeth Warren are calling for revised legislation seeing as the STOCK Act does not hold these officials accountable in the way that it was intended to. Now, the actions of Fed members like Richard Clarida are on display, citizens and politicians alike are pushing for new legislation in the investment actions of members of Congress. The bill on the table, introduced January 12, 2022 by John Ossoff, calls for a complete halt of stock trading among members of Congress while in office. Additionally, the penalty for violating this “Ban Congressional Stock Trading Act” will not be the measly $200 the STOCK Act asked for, but the “amount of their entire Congressional salary.” This bill has supporters and opponents on both sides of the bench. While Republican House Minority Leader Kevin McCarthy told a news source that he is considering getting behind the bill, Democrat House Speaker Nancy Pelosi has in the past criticized the bill on the grounds that it violates principles of a free-market economy. 

Pelosi’s critique is of worthy consideration, especially when considering where opposition to Ossoff’s bill may originate. Would banning Congressional stock trading violate principles of a free-market economy? Well, that depends on whether you believe that Congress and other high level government officials truly have an edge over the general public in knowledge of economic operations. Over the past ten years, since the Act’s conception, it seems that many lawmakers and members of the public believe this to be true. Despite the STOCK Act’s attempts to sanction high ranking officials for insider trading, the most recent instances of controversy prove that the Act is ineffective in its goals. With regards to future legislation, just as the STOCK Act was passed with bipartisan support, Ossoff’s bill will face support and attack from both sides of the bench.