The Hill reported two years ago that four sitting senators had sold millions of dollars worth of stock within days of a classified Senate briefing on the possibility of a pandemic. The backlash was swift. The denials were absolute. What are the consequences? Congress is still working on it.
Three senators, James Inhofe and Dianne Feinstein are still in office. Richard Burr is the fourth. Kelly Loeffler (the fourth) lost her race in Georgia in Jan 2021. All four senators were cleared of any charges by the Justice Department. These senators didn’t do anything illegal. The Stop Trading on Congressional Knowledge Act of 2012. only requires them to disclose their trades within a specified timeframe. However, lawmakers are now considering a complete ban on stock trading by members in Congress.
It’s not just about suspicious congressional trades. Insider trading is prohibited for members of Congress, as well as all other individuals. This is because selling and buying stocks based on nonpublic information could be detrimental to financial markets. The risk automatically increases. Volatility rises. Liquidity decreases.
These problems can be solved by banning all trades between Congress and the White House. Maybe. My research indicates that this move could stabilize stock markets and increase market liquidity. However, it must include congressional employees in the ban.
This isn’t the first time Congress has attempted to limit the trading rights of its members. The Stock Act was passed into law in 2012. It was intended to reduce insider trading in Congress by requiring more financial disclosure from both Congress members and employees.
One year later, Congress amended the Stock Act to ease disclosure requirements for congressional employees who were not elected. The amendment was passed without opposition or debate on Friday afternoon. It was supported by arguments that focused on national security and the privacy rights of congressional staff. It was signed into law by President Obama on Monday.
Although the amendment was considered minor changes to the Stock Act’s provisions, the market effects suggested that it was a major overhaul.
My colleagues Ryan Whitby and Todd Griffith, who were both affected by the Stock Act Amendment, and I were able to examine its impact on financial markets. We looked at stocks that investors might believe are most susceptible to governmental insider trading. In comparison to the rest, stocks held by members in Congress had less liquidity and volatility during the days that followed the amendment.
The amendment did not repeal requirements for members of Congress but only congressional employees. We didn’t try to find bad actors or prove insider trading was happening in our research. One thing that changed was that Congress employees were no longer required to reveal their trades. This means that other investors would not know if they trade on nonpublic information.
Financial markets became less stable and more liquid simply by the possibility of insider trading being conducted by congressional employees.
These results have important implications on the renewed debate regarding whether members of Congress should ban stock trading. The likelihood is that staff and other employees will have almost as much access as elected members to the private information arising from legislative activities.
The research shows that a ban on trading will not have any meaningful impact on investors or the financial market if it does not include congressional employees.