Experts not bullish on members of Congress trading stock

Traders work on the floor of the New York Stock Exchange in New York City. U.S. stocks opened low after rallying to start the week. Photo by Michael M. Santiago/Getty Images

With America’s trust in government at a historic low, and members of Congress trading stocks that appear to pose a conflict of interest, some Northeastern University experts argue that restrictions on legislators’ participation in the financial market are sorely needed.

The Stop Trading on Congressional Knowledge Act of 2012 requires lawmakers to abide by insider-trading prohibitions, and although the law may prevent legislators from using information obtained through their work to benefit themselves financially, it does not go far enough to prevent the hint of wrongdoing, says Blaine G. Saito, assistant professor of law at Northeastern, who is an expert on taxation and previously worked on Capitol Hill.

“The appearance of impropriety is as important as the actual thing itself. We’re talking about trust and faith here,” Saito says. “In my judgment, in my experience, and in my own training, I don’t think the 2012 law goes far enough.”

Congress is routinely found to be one of the lowest-scoring institutions in public confidence, Saito notes. A September Gallup poll found 37% of Americans trust the Legislature. Confidence in the branch has not surpassed 40% since 2009.

Examples of lawmakers engaging in seemingly unethical financial transactions are seen across the political aisle. Democratic House Speaker Nancy Pelosi came under fire for her husband’s purchase of $2.2 million in Tesla stocks as the federal government looks to transition to electric vehicles. Democratic Sen. Joe Manchin has been routinely criticized for his coal business earnings. And former Republican Sen. David Perdue was lambasted for selling more than $1 million in stocks of a financial firm whose board he sat on.

“It raises some significant issues, even if it’s not necessarily going to cloud that Congress member’s judgment,” Saito says. “It may not mean they’ll implicitly or explicitly do something for the company they’re invested in, but from a public standpoint and a democratic standpoint, that appearance of impropriety is almost as detrimental as the actual impropriety.”

Potential conflicts of interest do not just arise for legislators, but for other officials as well. In September, two Federal Reserve chiefs announced their retirement following criticism due to personal investments that appeared to pose ethical problems.

Nancy Kimelman, an assistant teaching professor of economics at Northeastern who worked on Wall Street, was shocked by the scandal, particularly because members of the Fed were not subject to the same restrictions as the banks they are charged with regulating, which have strict investment disclosure requirements.

“The weird thing here is that the Federal Reserve is the regulator of banks. Why is it that the regulator of banks isn’t subject to the same rules as the actual officers of the bank?” Kimelman asks.

Since the scandal involving the Fed, the U.S. banking system has adopted new rules for trading activity of its senior officials. However, more needs to be done to avoid these kinds of conflicts of interest and improve the public’s trust in its federal institutions, Kimelman notes.

“It’s my hope that this is the start of a bigger process to try to bring greater accountability and honesty to a system that many people believe is corrupt,” Kimelman says.

In February, a bipartisan group of senators introduced a bill to ban members of Congress from trading stocks. These rules appear to have widespread support among the public, with 63% of voters backing such a ban, according to a Morning Consult/Politico poll from January.

Legislation already exists to address this same issue in other branches of government, Saito points out. High-level executive branch officials and judiciary members are required to put their assets into blind trusts, where they cannot access their holdings. However, such a system also lets officials evade taxes through what is called the “stepped-up basis loophole,” where they can hold onto their assets for their entire life without paying taxes on the gains they make from stock sales. Thus, those who have to put their assets into blind trusts can defer paying gains taxes. If they die, the taxes are wiped out for the person who inherits their assets.

“There’s big power in that gain deferral, where the longer they defer selling the stock, it’s viewed as more beneficial,” Saito says, noting, however, that a blind trust system would still be better than nothing.

Northeastern law professor David M. Phillips, who has written extensively about business ethics and foreign trade and investment, agrees that a blind trust system may make the most sense, as fewer conflicts of interest may arise if lawmakers give their holdings to a professional money manager and do not know their asset portfolio.

“With individual stocks, your decisions can affect individual companies differently. What seems to be an extreme example is Manchin,” Phillips explains. “From newspaper reports, he’s involved in energy holdings in West Virginia. It’s clearly problematic based on some of the positions he has taken on climate control.”

A blind trust system may also be less restrictive on legislators’ participation in the free market than an outright ban on trading stocks.

“We ordinarily don’t think of people staying in Congress for just two years, so does that mean someone who is elected very young can’t participate financially without things affecting their particular vote?” Phillips asks.

Part of the pushback against banning legislators from trading stocks is their relatively low salaries, according to Northeastern law professor Jeremy Paul, who teaches constitutional law, where the powers of Congress are a subject of study. Banning lawmakers from trading stocks must be done in conjunction with raising their salaries, he argues. However, such a proposal would likely be wildly unpopular with the American people, Paul recognizes.

“It wouldn’t cost that much to give them raises, but it would look bad,” Paul says. “But by not paying them more, we place congressional service financially out of reach for ordinary Americans and we implicitly structure things that make distrust for Congress worse, because now they’re looking for all sorts of loopholes, like trading stocks, using campaign funds improperly, etc.”

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