Time for a Broad Prophylactic against Congressional Insider Trading

Abstract

In 2011, Peter Schweizer published a book, Throw Them All Out, in which he exposed some questionable means by which politicians manage to increase their personal wealth 50 percent faster than the average American. Schweizer suggested that trading on material nonpublic information is one method by which congresspersons achieve outsized returns on their investments. He cited one study finding that while the average American investor underperforms the market when trading in individual stocks, “[t]he average senator beats the market by 12 percent a year.” This statistic is concerning on its own, but it is downright disturbing when considered alongside the same study’s finding that corporate insiders and hedge funds (the usual targets of most insider trading complaints) beat the market on average by only 7 percent.

Schweitzer’s book was followed by a feature story on the CBS News show, 60 Minutes, highlighting some dubious stock trades by leaders of both political parties. These stories got the public’s attention and spurred Congress to act, adopting the Stop Trading on Congressional Knowledge (STOCK) Act in April of 2012.

The STOCK Act made explicit what many already regarded as implicit—that congressional trading based on material nonpublic information acquired by virtue of their position as a public servant was a breach of their fiduciary duties and would therefore violate Section 10b of the Securities Exchange Act of 1934. It also expanded disclosure requirements for members of the executive branch and their staff members.

No sooner had the STOCK Act passed, however, than it was quietly overhauled to weaken certain of its key provisions, and in any event the Act has not been enforced consistently since its adoption. As a result, public cynicism concerning congressional insider trading has once again snowballed. A recent poll found that 76 percent of American voters think members of Congress have an “unfair advantage” in trading stocks. In fact, many market participants build their trading strategies upon the assumption that congresspersons are trading on material nonpublic information. For example, Speaker Nancy Pelosi's stock trades have a regular online following on Twitter, TikTok, and Reddit, with popular accounts such as "@NancyTracker". Moreover, the search “Pelosi stock trades” hit a record high on Google in January 2022.

Of course, Speaker Pelosi is not the only congressperson suspected of insider trading. A number of U.S. Senators were scrutinized recently over suspicious trades as the threat of the COVID-19 pandemic emerged in 2020. So what, if anything, is to be done? Just as they did in 2011, members of congress on both sides of the aisle are rushing to get out in front of the issue. And a number of bills have garnered bipartisan support. Many of these bills propose the broad prophylactic of proscribing members of congress from trading in individual stocks while in office. Some bills would go so far as proscribing trades by spouses and dependent children as well.

Some representatives have openly resisted calls for an outright ban on trading in individual stocks by members of Congress, arguing, for example, that “[w]e’re a free-market economy” and members of Congress “should be able to participate in that.” This Article counters such arguments and defends a broad prophylactic against congressional insider trading in individual stocks as a means of preserving market integrity and restoring the public’s trust in the legislative branch. Part I offers a brief summary of the current state of insider trading laws, with a special focus on their application to Congress. Part II surveys some of the proposed insider trading reform bills under consideration. Part III argues that, given congresspersons’ unique role vis-à-vis securities markets, a broad prophylactic against congressional trading is both justified and needed.

Keywords: Insider Trading, STOCK Act, Securities Regulation, Congressional Ethics