Banning Lawmakers From Trading Stocks Won't Fix Congress

But it will make the market worse.


After a collection of questionable stock trades by members of Congress at the beginning of the pandemic, and similar trading scandals in the federal judiciary and the Federal Reserve, there is growing momentum to ban members of Congress from trading or even holding individual stocks while in office. Recent polls show wide support from the American public to impose limits on holding individual stocks, and both Republicans and Democrats have introduced bills with different frameworks for limiting lawmakers' financial holdings. Even House Speaker Nancy Pelosi (D–Calif.)—who has historically opposed such a bill—has recently signaled her willingness to advance such legislation.

A leading argument in favor of banning congressional stock ownership is that such a ban is needed to prevent legislators from insider trading. This is wrong because restricting Congressional trading not only has the potential to harm markets, but a focus on insider trading obscures the broader question of how to address lawmakers who may use their positions for personal, financial gain.

Illegal insider trading is when someone trades a stock misusing non-public information that impacts the stock's value. The STOCK Act, passed in 2012, made clear that trading on non-public information derived from a member of Congress's official position is an insider trading violation. The Securities and Exchange Commission considers insider trading to "undermine investor confidence in the fairness and integrity of the securities markets." 

Those who support limits on congressional investments point to well-timed trades and research showing that members of Congress outperform normal people in the stock market. That research tends to draw on trading data from before the STOCK Act, and some studies, including this recent one by the National Bureau of Economic Research, have found no particular outsized returns for lawmakers. Although voters look poorly on elected representatives who may be making unfair gains, it's a leap to conclude from the body of research that unlawful insider trading is widespread on Capitol Hill. 

Prohibitions on insider trading already harm market efficiency by preventing a stock's price from reflecting all of the information known about the stock. A broad-based ban on stock trading or ownership would add to that market inefficiency by preventing lawmakers from contributing information that allows the markets to engage in price discovery. Because the type of information that members of Congress are privy to relates not just to individual companies, but to entire industries and the whole economy, such information should actually be absorbed quickly into the market—particularly when doing so does not violate existing insider trading law—rather than kept out.

The fact that prosecuting insider trading violations by members of Congress is challenging, and lawmakers from both parties have a poor record in complying with trade reporting requirements, does not mean that a prophylactic ban on holding individual stocks is a good idea or a necessary one.

Justifying a stock-ownership ban based on insider trading rules also makes little sense. The issue is not with maintaining investor confidence in the market—the stated reason for insider trading rules. The issue is with maintaining voter confidence in their elected officials—two very different issues. The more apt question when considering limitations on congressional financial holdings is whether, and to what degree, members of Congress should be permitted to gain personal financial advantage from their positions.

The question, properly framed, focuses on potential conflicts of interest faced by members of Congress. Uniquely positioned members of Congress have information that may impact the value of particular stocks while also having the ability to impact the value of particular stock by legislating, by calling for investigations, or by otherwise exerting their political influence. 

That means potential conflicts of interest can exist not only in a member's individual stock ownership, but also in fund investments, crypto holdings, or business interests of lawmakers, their families, or their staff. Managing these potential conflicts of interest is a complex task, asking lawmakers and voters alike to determine the proper balance between lawmakers' personal financial interests, their stake in particular issues, and their ability to represent their constituents. At best, focusing only on stock ownership and trading provides an incomplete picture. 

Insider trading law has a reputation for lacking clarity and generating confusion. It would be a mistake to add to that confusion by attempting to justify a ban on congressional stock ownership in the name of preventing illegal insider trading, particularly when the motivation for such restrictions is protecting Congress's integrity, not the market's. Instead, potential solutions should be evaluated against the full range of financial conflicts of interest that members of Congress face.

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  1. I think the issue people have is that congress voted themselves immunity from insider trading. They are a defacto ruling class that has a different set of laws that apply to them.
    Eight insider trading (along with many others) is legal or illegal. Being in the Gov shouldn't exempt you from the law

    1. I think there is a problem, though, with having the executive branch policing this. Particularly in light of, I dunno, Bush Justice Dept under Ashcroft and Nancy Pelosi. Or Obama's Justice Dept under Holder and John McCain (a political rival)?

      I'd simply prefer a 100% tax on returns over the S&P 500 for all investment accounts.

    2. As far as I've read these proposals/bills, all this nonsense just forces it a little deeper. Do we really think that passing another law helps reform the criminal mind or does this just force them to hide it a little deeper?

      Having investigated for bankruptcy courts in the past, I've seen people become quite imaginative with hiding their assets, and this goes for trades as well. Put those assets in shell accounts, kids and grandkids' names, trust funds, or fuck it... just move it all out of state, buy up some real estate and then vote the new highway to go through it or next to it, and then sell the land 5 years after you're out of office. There's just no way to track the movement of every legislator who wants to get away with shit.

      What needs to happen is total transparency of everyone's financial data and severe consequences, measured in years in prison for lying about that or misusing the public trust. Pelosi for example could care less if she had to pay a $10K fine if she got caught. But spending 5 years in federal prison with no Botox would be unthinkable.

  2. But it will make the market worse.

    Like how Pfizer might show a price slip when the Democrats can't trade it?

  3. <i"Prohibitions on insider trading already harm market efficiency by preventing a stock's price from reflecting all of the information known about the stock. A broad-based ban on stock trading or ownership would add to that market inefficiency by preventing lawmakers from contributing information that allows the markets to engage in price discovery. Because the type of information that members of Congress are privy to relates not just to individual companies, but to entire industries and the whole economy, such information should actually be absorbed quickly into the market—particularly when doing so does not violate existing insider trading law—rather than kept out."

    I don't know if I find this argument particularly convincing. Sure, it would be better for the public to have more information, and sooner.

    But isn't the problem with the insider trading the fact that these congresscritters are acting on that information *before* the effects of that information have had a chance to be publicly known? That's the whole advantage.

    1. Learn to code

      1. LOL, literally I failed at coding.

    2. The point is that "price" is literally the integration of information- public or private.

      Let's say that a company is going to fail. There is private information such as direct knowledge of a major sale that will fail. And there is also public knowledge such as the likelihood that any major sale failure will cause problems.

      The argument for markets in general is that they accumulate all sorts of information and that gets reflected in the price. A company with particularly risky financials will find its stock price decreasing as more analysts look at its balance sheet and decide it is a baaaaad idea. The argument being made above is that people with insider knowledge will reveal these problems quicker in return for a profit.

      This is all true. It is a moral question of whether you think making a market more efficient means letting people- maybe even people with conflicts of interest- make profit. For example, if I had the power to tank a company's stock by bombing a sales pitch, we have moved from mere insider trading to a conflict of interest where I am incentivized to abandon my ethical or fiduciary duties for profit.

      From a libertarian standpoint, I can get on board with letting companies determine what is right. No company wants its employees trading in a way that doesn't align with company interests, and ultimately (outside government rent seeking) companies have to do what is best for consumers in order to stay in business. This would lean towards supporting giving governance to corporations here.

      1. On the other hand, fuck these congress bitches with a sideways rake. I just spent the last month detailing every single transaction I've made in the past 10 years because my new employer is a bank. I cannot invest in a family business without their permission. My boss has to ask permission to buy or sell a stock.

        If this red-tape nightmare is "justice" for the private sector, then the congress can get the fuck with the program and at least do exactly the same. That means letting an electronic compliance system monitor your brokerage accounts. It means every time you want to buy a security, having to go into a 1990's era interface to fill out absurd "proposed trades" which then a compliance officer reviews over a couple of days before approving.

        If you want to buy a rental property, or (OMFG!) some crypto, get ready to file a proposal ticket with your compliance office and to deal with tut tuts and concerns from your leadership. Why are you personally thinking about these alternative assets, Mr Overt? Aren't long term investments in index funds enough?

        If that is the standard I have to live by, then the fucking law-makers foisting this shit on me better live by it too. I'll cut them some slack just as soon as they do the same for me.

        Because at the end of the day, these laws aren't about being fair to lawmakers. They are about forcing lawmakers to live by the same goddamn draconian laws they foist on every one of us. The time to apply a libertarian benefit of the doubt is not with the folks making the laws, but with the people subject to them.

        1. And if you could somehow position yourself to take advantage of that information that might affect the price, or even - heaven forbid - make some sort of announcement or policy that would directly change it - if you acted on that in the market beforehand, that would usually be seen as somewhat criminal, right?

          I mean, the SEC has come down hard on Elon Musk for twitter twatter chatter.

  4. This is well-intentioned, but spectacularly bad legislation. What is needed: Real-time (or within 24 hours of trade execution) reporting of trading in securities for members of Congress. What is not needed: Summarily stripping liberty from anyone, including congress-critters (who I do not care for).

    We need quicker transparency of transactions. I don't think taking away the ability to make trading decisions on securities is the answer.

    1. Why should anyone get to know what stocks I trade, unless they have a warrant and probable cause?

      1. That depends on whether your job provides you with insider information.
        No access to insider info, no worries.
        Access to insider info, full disclosure.
        If you don't like the rules, don't take the job.

      2. You're a member of Congress?

    2. Amen, as a Plan B.

      Better to just eliminate insider trading as a crime. Better still to reduce government power.

      But as long as wishing for utopia has no effect, Plan B is a damned good move.

    3. I'd say what is needed is much like executive trades, pre-trade disclosure of intention to buy or sell. Let people infer from that whether the trades are based on unpublished information or not and act accordingly as their risk tolerance accepts.

    4. The only concern I have is that there are two powers at play here.

      1) Insider knowledge gives you insight into a material change in prospects that will profit you. (For example, I know a billion dollar contract will be awarded to Boeing before it is public)

      2) Your power as a legislator gives you a conflict of interest. (For example, I have the power to influence whether Disney is regulated or not.) This would be normally called a conflict of interest.

      As a libertarian, I don't necessarily have problems with insider info. But I do have a problem with conflicts of interest. It is the difference between getting a tip on a stock, and the power to point a gun at a competitor for a stock you own. It is important that these two issues do not get conflated.

  5. So Reason finally stands up for freedom. When it involves Congress profiting from their perfidy.

  6. How will members of Congress retire millionaires if they can't engage in insider trading? That's not fair.

    1. Book deals, the speaking circuit and Netflix specials?

      1. Yeah, ban that shit too. Democrats have learned to grant their party elites a book deal, the Party uses deductible donations to buy hundreds of thousands of them, and that way even Kirsten Gillibrand can become a NYT bestseller. Seriously, who has ever thought that they should spend 20 bucks to find out what Kirsten Gillibrand thinks? Nobody even questions this. And wasn't Bill Clinton making upwards of $750K for a 30-minute speech?

        If you want to run the country, live off the income and pension you make from that, and then go home and live under the rules you made. If someone doesn't want to do that, then don't.

        1. During the Constitutional Convention, one of the main reasons proponents of keeping the term limits from the Articles of Confederation agreed to leave them out, was that public service was seen as a hardship, and thus a noble service rendered out of patriotism. Pay wasn't great, and you had to step away from your public business while in office. These hardships were seen as a barrier to professional politicians, because no one couldn't afford a lengthy stay in power. Also, not to mention the physical dangers and discomforts that they faced once DC was founded and the government moved there.

          It is popular opinion that our founding fathers were wealthy, but most were business or property owners, who had little in the way of actual liquid wealth, but were property rich. Washington, Adams and Jefferson were all farmers, in addition to Adams's law practice. Washington and Jefferson had extensive debts. The Southern planters especially, but to some extent the northern planters too, were often described as money poor, land rich, and all carries heavy debts. They could only meet these debts by selling crops every year, much like most modern farmers today. Playing the stock market wasn't something they really considered, as what we know as the stock market wasn't really formed at the time. They may have occasionally invested in backing a private venture, often some form of mercantile trade, usually with some of their own product involved. But far more common was land speculation (and would remain through the first half of the 19th century). The biggest problem we have today, is political service no longer carries the risk and hardships it did when our country was founded. Even people of modest means who are elected, somehow leave public service wealthier than they entered it. The physical hardships of DC have been nearly eradicated with air conditioning and the removal of endemic malaria and yellow fever. Thanks to AC and DDT, DC is no longer a fetid swamp, but it is even more a figurative swamp.

    2. For example, a member elected before 1984 and thus qualifying under the CSRS plan, who worked for 22 years and who had a top three-year average salary of $154,267 would be eligible for a pension payment of $84,847 per year.[4] A member elected after 1984 would have been enrolled under the FERS plan, and their pension payment under similar conditions ($154,267 top three-year average salary, but with only 20 years of service, rather than the 22 in the CSRS example) would be $52,451.[4]

      My math puts an 18-yr.-old Congresscritter serving the full 22 yr. term at between $1.7 and $2.7M paid out by 72.

      1. by 72

        Sorry, paying out $85K/yr. at 65 until the age of the current President only comes to $1.2M.

      2. How will members of Congress retire leave office millionaires if they can't engage in insider trading? That's not fair.


  7. They aren't acting on internal information - they are the insider information.

    1. Right- exactly my point above. Knowing about shit that is happening, and causing shit to happen is the difference between insider trading and conflict of interest. Both have the same causes, and get conflated too often.

  8. >>Even House Speaker Nancy Pelosi (D–Calif.)—who has historically opposed such a bill—has recently signaled her willingness to advance such legislation.

    ya now that she's +$300million ... "I was against the bill before I was for it."

    1. And it's not like her husband can't do the trading for her.

      1. wonder if $300million is enough to want to *not* trade Nancy?

      2. ... or daughter

      3. These laws would rope in her spouse.

        FYI: I now work for a bank and all the rules that govern my trading also govern my wife. If that is the case for us, then it can be the case for Mr Pelosi.

    2. Gotta pull up that ladder behind you, right?

  9. But Trump was supposed to totally cut himself off from his business dealings.

  10. particularly when the motivation for such restrictions is protecting Congress's integrity, not the market's

    Hol-y Fuck!

    OK, first of all, how is definitively requiring the severing of any/all ties between government and corporate ownership not definitively anti-fascism? Like, I get that abjectly impoverishing your public servants has some severe consequences but we're nowhere near that. "Give up your stock holdings or don't run for public office." doesn't seem abjectly terrible, especially since the public is footing the bill for their salary and healthcare and, frequently, giving them a pension anyway.

    Second of all, "We can't enact legislation that would enhance the market's integrity if it might also enhance Congress's integrity to a larger degree."? WTHF?

    Managing these potential conflicts of interest is a complex task

    I'm going to go out on a limb and guess that that link doesn't lead to anything discussing the Clinton Foundation's circumventing the Emoluments Clause by routing all donor approvals through the Administration and then failing to route all donor approvals through the Administration.

    1. Any law they craft will be well understood by the people crafting it, and they certainly aren't going to craft it in a way they can't get around it or the built-in loopholes. What it will mean however, is they get the virtue-signaling that comes with passing a law that supposedly circumvents your abilities and the claim that you were technically within the boundaries of the law. To a degree, such a bill just makes it far more complicated. Neither do any of the bills being proposed, limit the ability to do business outside of the securities markets. So instead of trading stocks that are easily tracked, you now start investing in other things that you can influence and aren't as easily tracked.

    2. And FYI: This problem has been solved for about two decades. Put your money in a blind, managed account. You can neither see, nor influence your holdings.

      This isn't that fucking hard. If you have the power to march troopers to someone's house, you lose the freedom to make discretionary investments. Would this exist in libertopia? No. But neither would government congress critters with the power to march troopers to someone's house.

  11. If the author thinks letting Congress trade on inside information will materially impact efficiency on more than a few lightly traded shares she’s smoking something. What would actually have an impact is requiring any such information to be publicly disclosed.

  12. I think we should ban it anyway. Because The Science.

  13. There is no real way to address the current situation, easily, however, Reason's take in this piece seems to be another in a history of ignore the inherent bad behavior because it helps the markets. It's similar to their pieces on ignoring market manipulation and protective trade practices from China (and Canada with timber) because they sell cheap goods. I don't see this is true libertarianism or capitalism, because ignoring bad behavior that does harm some people violates the NAP, and ignoring market manipulation is not free markets.

  14. Fixing government is simple, prohibit it from initiating force then Congress couldn't effect stock prices by picking winners and losers.

  15. It would be more sensible to compel representatives who are attorneys to resign from the bar before being sworn in as Representatives , for a truly egregious conflict of interest attends lawyers who make laws.

  16. I’m sorry, but it’s not like these people are just receiving a hot tip from a guy they hang out with at the bar. They are literally crafting laws and regulations and then using that information for personal gain.

    I say they get a choice: keep your ability to buy and sell as much stocks as you want, BUT you can’t be on any committees, sponsor or vote on any legislation that you or your family could profit off of.

    I don’t know, that’s probably a stupid idea too.

  17. Make all trades by members of Congress public. Then the electorate can decide if they've been scumbags. (Hint: they have)

  18. Banning Lawmakers From Trading Stocks Won't Fix Congress...

    NOT in a Nazi-Regime it won't.

    Banning Lawmakers From violating the people's law over their government ( i.e. The US Constitution) would though.

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