Elected officials shouldn't be able to own or trade stocks. Period.

There's a simple solution to the Senate insider trading scandal

A politician.
(Image credit: Illustrated | iStock)

It may already seem like a lifetime past, but only a week ago several senators got themselves in hot water when it looked like they may have sold stock on insider knowledge about the coronavirus outbreak. While they weren't the only ones, Sens. Richard Burr (R-N.C.) and Kelly Loeffler (R-Ga.) looked the worst: They apparently sold $1.9-to-$4.8 million worth of stock between the two of them, in late January and early February — before the markets crashed due to the coronavirus outbreak, but after the entire Senate had been briefed by the White House on the threat.

On Monday, it broke that the Justice Department and the Securities and Exchange Commission (SEC) are investigating what happened, and the FBI has already reached out to Burr's office. Burr and Loeffler both insist it was all perfectly legal and above board, which is pretty hard to buy on its face in some instances. But even if that claim is true, it points to the deeper problem here: The current law is not nearly sufficient.

There's a very straightforward way to fix this problem, and make sure our elected lawmakers always act with the utmost propriety: We should just flat out ban them from owning or trading individual stocks while they're in office.

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I imagine a lot of readers will be shocked we don't do that already. In fact, not only are elected politicians legally permitted to own and trade individual stocks, they're permitted to own and trade individual stocks in industries they regulate and oversee from their committee posts. The STOCK Act does forbid trading based on insider information that isn't available to the public, but it wasn't passed until 2012. It's also a difficult charge to prove, because prosecutors must show they made the trade based on insider information (as opposed to publicly reported information), and Congress as an institution isn't always cooperative with the SEC. Thus far, only Rep. Chris Collins (R-N.Y.) has been charged under the act, for insider trading of pharmaceutical stocks in 2018.

These gray area difficulties over what does and doesn't cross the line hopelessly infect the whole issue. Burr claims he and his wife sold their stock based on nothing but public news reports — though he was publicly writing that America is "in a better position than any other country to respond to a public health threat, like the coronavirus," while privately warning businesspeople about the virus' potential consequences. Loeffler insists the trades she and her husband — the chairman of the New York Stock Exchange — made were "by multiple third-party advisers without my or my husband's knowledge or involvement." But Loeffler then turned right around and bought stock in companies that support teleworking, of all things.

The third party claim here is also important to parse. Politicians often use blind trusts, wherein they hand their investments over to another person to run without their knowledge, to remove the appearance of conflicts of interest. But of course who that third party is, whether they know the politician personally, what they know about the politician's interests, and what email or phone or other contact they have with the politician, is what determines how "blind" the trust really is. Sen. Diane Feinstein (D-Calif.), for instance, has her investments in a blind trust controlled by her husband, which hardly seems like a sufficiently disinterested third party. And he sold between $1.5 million and $6 million in biotech stock in this period as well. (Admittedly, the trade lost them money since.)

The advantage of a ban is that it's a bright line. It's clear to see what actions fall on which side of it, and thus whether the elected officials we've entrusted with the public good are doing right by the citizens. "The simple perception that officials might have prioritized their own financial well-being over the well-being of American households is damaging enough, even if the trades were innocuous," as Annie Lowery wrote recently at The Atlantic. Nor is it just the possibility that they're getting a better deal than the public; we also have to worry that officials are designing regulation and policy around what maximizes their own returns as well. "We really have to establish a public trust of behavior," Sen. Jeff Merkley (D-Ore.) said in 2018, when he tried to outlaw stock trading by members of Congress. "As public officials, there are a lot of impositions on our lives. This is not one of them."

What would have to happen is for all elected officials (as well as their families and staff) to sell off all their stock upon entering office. Then that money could be placed in simple index funds that track things like the S&P 500 — i.e. the investments automatically adjust in proportion to whatever market capitalization each company in the index has at a given time. Basically, their money should be in a vehicle that involves no individual strategic decision-making by any human being whatsoever, and that has been cleared by federal regulators for avoiding conflicts of interest. The federal Thrift Savings Plan — essentially a government-run version of a 401(k) — is a good example of an investment vehicle that uses exactly those sorts of index funds. Once the officials have been out of office for a certain time period, they could liquidate those funds and reinvest the money however they see fit.

In fact, Sen. Elizabeth Warren (D-Mass.) has a sweeping anti-corruption proposal that, among many other provisions, requires all congressmembers and senior government officials to replace their stock holdings with investments in the Thrift Savings Plan, or in special mutual funds designed for this purpose by the government. "They can put their savings in conflict-free investments like mutual funds or they can pick a different line of work," Warren said of the proposal.

In 2018, Sens. Merkley and Sherrod Brown (D-Ohio), introduced another bill that would do something similar, requiring politicians to divest their stock and put the money in an independent blind trust — though as I mentioned, the nitty gritty of how such a blind trust is set up and actually operated matters enormously.

At any rate, scandals over insider trading by Congressmembers and high officials go back years, involving politicians from both parties.

Remember the STOCK Act, passed in 2012? An analysis of stock trading by senators by the watchdog group Public Citizen found a 66 percent fall in the dollar-value of trading activity from 2009 to 2015, and a 50 percent fall in the number of trades from 2012 to 2015 — neither of which says anything good about what senators were doing before the law was enacted. Perversely, Public Citizen's numbers even show a sudden burst of more trading activity in the year or two before it was passed, like everyone was trying to get a few final deals in under the wire. Other research of over 60,000 stock trades that politicians made between 2004 and 2010 showed they beat the market a remarkable 20 percent of the time.

In other words, the rot runs much deeper and goes much further back than the latest incident with Burr and Loeffler. It's long past time we cut it out, root and branch.

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