Is Insider Trading Legal For Congress? Trading stocks can be complicated, but one fundamental rule stands the test of time: buy low, sell high. In other words, no matter how complex the trading strategy, the goal is always the same – sell an asset for more than its purchase price.
The trouble is that the market is unpredictable. Individual stocks, entire sectors, and the market as a whole can experience dizzying highs and extreme lows with little or no warning.
Poor financial results can impact a company’s share price, and regulatory changes may have industry-wide effects. In some cases, there are events with global ramifications, and financial markets around the world experience dramatic consequences.
Professional traders collect and analyze information to forecast the behavior of particular assets. They carefully examine strengths, weaknesses, opportunities, and threats to guide investing decisions.
However, even the best analysis doesn’t necessarily offer any sort of competitive edge. After all, everyone has access to the same data. But what if traders could get a preview of important information before it was made public by building relationships with senior leaders and lawmakers? Wouldn’t that reduce risk and ensure higher profits?
What Is Insider Trading, And Why Is It Prohibited?
Business leaders, lawmakers, and other insiders have access to confidential information long before it is released to the public. As a result, their predictions about stock prices are often more accurate.
Theoretically, they could boost their personal profits or prevent substantial losses by trading on those secrets before the information is made public and the stock price responds.
However, that sort of behavior isn’t permitted under federal regulations because it gives insiders an unfair advantage over other shareholders.
Acting on material nonpublic information is “insider trading,” and it is illegal – a fact taken quite seriously by agencies like the SEC and the FBI.
Investigations into insider trading brought down billionaire Steve Cohen’s hedge fund, SAC Capital, and landed television personality Martha Stewart in prison.
In short, it is fine to have knowledge of confidential information, and it’s even okay to share those details with others. But if either party trades on that knowledge, both can be held accountable under insider trading regulations.
Are Members Of Congress Exempt From Insider Trading Laws?
Lawmakers get all sorts of confidential information due to the nature of their work.
In addition to their easy access to senior business leaders and economic advisors, they have unique insight into whether and how new regulations will affect various industries.
It would be simple to profit from stock trades based on that inside information, and watchdog organizations report that it is a common practice among members of Congress.
Does that mean Congress is exempt from insider trading laws?
No.
But historically, the repercussions for insider trading in Congress have been negligible. In 2012, the Obama administration attempted to reign in the worst of Congressional insider trading through the passage of the STOCK Act, which explicitly stated that there is no exception to insider trading regulations for lawmakers.
In addition, the Act implemented reporting requirements for members of Congress and their immediate family members.
Have Members Of Congress Been Investigated For Insider Trading?
Despite the STOCK Act, research shows that there is still quite a bit of questionable trading going on among members of Congress.
An analysis by the New York Times determined that from 2019 to 2022, 97 current members of Congress reported that they or their family members made more than 3,700 stock trades involving companies with a direct connection to their work.
While it is likely that a large percentage of those transactions do not fit the definition of insider trading, there is a growing sentiment that at least some of the trades were based on material nonpublic information. As a result, certain trades by members of Congress and their family members have come under intense scrutiny.
For example, Speaker Nancy Pelosi and her husband Paul were accused of insider trading after buying and then selling Nvidia – a computer chip manufacturer that was directly affected by sanctions against China and Russia, as well as the CHIPS and Science Act.
In another situation, Representative Carol Miller’s husband bought stock in AbbVie while Miller participated in the committee investigating drug pricing.
For some members of Congress, investigations weren’t limited to media reports. The Justice Department looked into certain “well-timed stock sales” made by Senator Richard Burr, who managed to avoid roughly $87,000 in losses by selling stock just before the 2020 market crash. He had participated in a confidential briefing on COVID-19 prior to making the trades – and before the information was released to the public.
Representative Chris Collins was one of the few actually prosecuted for insider trading, and he ultimately resigned his Congressional seat. He pleaded guilty to giving inside information to his son, who then traded on it.
The problem continues unabated because Congress is in an unusual position. Essentially, Congress is responsible for creating the laws that govern its members, and to date, there hasn’t been much of an appetite to strengthen the rules.
What Is The Ban Congressional Stock Trading Act?
In the years since the STOCK Act, a handful of lawmakers have suggested that Congress should be prohibited from trading individual stocks altogether. Alternatively, their portfolios could be placed in a blind trust so that an outside advisor manages all transactions.
These proposals didn’t get a lot of traction until 2022, when the issue suddenly entered the spotlight. According to several polls, a majority of voters want to see an end to Congress profiting from inside information. Lawmakers are stepping up with legislation like The Ban Congressional Stock Trading Act, which is intended to eliminate the issue.
For the moment, it is unclear what a final bill might contain. Some proposals extend the requirements to judges, but it is worth noting that the executive branch – the President and his staff – isn’t included. That’s because White House officials are required to sell their individual stock holdings when they take office to prevent any hint of impropriety.
It remains to be seen whether a regulation specific to Congress will include the same stringent requirements already in place for the executive branch, but one thing is clear. This issue is important to voters regardless of party affiliation. Bipartisan support increases the likelihood that Congress will take action to reduce insider trading.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
