A Simple Way to End Questionable Stock Trading by Lawmakers


After Georgia Republican Senator Kelly Loeffler and at least three of her colleagues were investigated last spring on insider trading claims, she announced that she and her husband would no longer trade individual stocks. Her family would sell her and put her money in diversified mutual funds.

Ms. Loeffler, one of the two Republican candidates in the Georgian Senate runoff election on Tuesday, was publicly pressured to do what Congress had long resisted its members: to stop trading individual company stocks.

After attending important meetings at the beginning of the pandemic, she sold some stocks just before they fell in value. Ms. Loeffler denied misconduct and the investigation ended without prosecution. With that – and in the midst of a heated presidential election – there was no momentum in passing new laws to prevent persistent questions about whether lawmakers benefited from trading individual stocks.

“Congress is obviously not doing enough to monitor its members. So what other options for restoring basic integrity are on the table?” asked Tyler Gellasch, a former employee of Senator Carl Levin who helped draft the 2012 Congressional Knowledge Trade Act. Mr. Gellasch, who is now the executive director of the Healthy Markets Association, says the STOCK Act makes it illegal to use inside information to trade, but not preventing lawmakers from buying or selling individual stocks “would never be enough”.

There may be a solution that doesn’t even require a set of new legislation.

It relies on the Securities and Exchange Commission, an agency uniquely empowered to maintain the credibility of the markets – and in which case it could also help build the credibility of our political system.

Over the past month, I’ve spent hours on the phone and made Zoom calls discussing an idea I came up with that could significantly reduce, if not completely stop, congressional members’ questionable stock trading by adding more transparency to trades. I’ve spoken to lawmakers, former prosecutors, and former SEC chairmen, commissioners, and law enforcement officers to improve an approach.

“The SEC has very far-reaching powers,” said Harvey L. Pitt, chairman of the agency during President George W. Bush’s first term. “The people who deal with Congress should have more sunlight. That’s why I like this idea. It’s smart. “

Here’s how it would work: The SEC’s next head, expected to be named in the coming weeks, could attempt to introduce a new rule for broker-dealers, the financial intermediaries who go through all deals and overseen by the agency. The rule would require the broker-dealers to set up a special compliance program for clients known as “politically exposed persons”. This term is known to financial institutions as part of anti-money laundering and bribery laws.

The SEC compliance program would require broker-dealers to personally complete a questionnaire every time a trade is executed, regardless of who could be defined as members of Congress, their spouses, and senior employees. whether it is a trade instigated by them or a financial advisor. This would remove the common excuse members of Congress give for not being involved in the trade, even if they are. (David Perdue, the other Republican in the Georgian Senate runoff election, did 2,596 deals in one term, most of his colleagues. A spokesman for Mr Perdue said the senator was not involved in the daily election of his portfolio’s daily decisions.)

The form would include questions such as: “Have you attended any meetings in the past 28 days that are considered to be related or potentially influenced by your decision to make this trade?”

Economy & Economy


Jan. 5, 2021, 1:06 p.m. ET

The broker-dealer would have to provide details of each trade and questionnaires to the SEC within 24 hours. It would be crucial that both the trade information and the questionnaire be published on the SEC’s website where they can be viewed by investors and the public.

Of course, members of Congress could still buy and sell broad mutual funds. Timely disclosure of deals, as well as a questionnaire that would create liability for officials if they did not tell the truth, should halt trading in individual stocks.

The compliance program suggested in this column is a variation on the way the SEC itself oversees the agency’s employees. SEC employees must authorize their broker to disclose all agency dealings. Also, employees cannot trade in stocks of companies that are being investigated by the agency, and they must do all deals upfront and certify that they have no inside information about a company.

An attempt by the SEC to introduce such a plan for members of Congress would require a vote of its five commissioners. Three will be Democrats, two Republicans. Such an effort is likely to be challenged by a member of Congress or a broker-dealer, but the SEC has extensive powers on behalf of investors. For example, the SEC requires hedge funds to disclose their largest positions on a quarterly basis.

And Congressmen don’t expect any privacy when it comes to trading, as the STOCK Act already requires them to publish their trades within 45 days. This dampened their stock trading, but was viewed as largely toothless. No member of Congress has been prosecuted under the law.

If you’re wondering why the SEC hasn’t tried a stricter approach, there is an answer: Congress approves the SEC’s budget. It’s a bit like biting the hand that is feeding you.

Because of this, a brave SEC leader needs to create new rules and a task force to enforce them. However, unlike law enforcement, the SEC can only bring actions to enforce the law. But that has power: a criminal case requires the guilt to be “unequivocal”, but the threshold for a civil case is lower, which simply requires a “preponderance of evidence” which should allow the SEC to aggressively prosecute cases.

Of course, if the idea works, there are hopefully no cases to pursue.