According to the Securities and Exchange Commission (SEC):
“Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.” Unlawful insider trading can be prosecuted in civil proceedings by the Securities and Exchange Commission or in criminal actions by the Justice Department.
The primary issue surrounding insider trading is trading on material, nonpublic information that provides the opportunity for profit that is not available to the public. There were multiple instances of Senators on the Senate Intelligence Committee selling stock during the coronavirus pandemic. Senators on the Senate Intelligence Committee also had access to material, nonpublic information and briefings on the coronavirus and how it would impact the U.S. economy. Whether the securities transactions of the Senate Intelligence Committee members were illegal is debatable, as well as the ethicalness of such transactions. What is not debatable are the millions of dollars in profits that the transactions provided; profits not afforded to the American public when information was made public. The point of insider trading is that you should not be able to be “first-in-line” to conduct a securities transaction using insider information and profit before the public knows the information.
Congress passed the Stock Act in 2012 which states that all senators and representatives owe a duty of trust and confidence to the nation with respect to material, nonpublic information they obtain in the course of their official duties. Ethics rules already prohibited members of Congress to use information they gain as part of their official duties in order to make a private profit. However, although the Stock Act provides for fines, there are no criminal penalties. Although theoretically it is illegal for members of Congress to trade based on non-public information gathered during their official duties, neither the SEC nor the Justice Department has ever prosecuted a lawmaker for trading on government information.
A new federal law prohibiting lawmakers from owning stocks in individual companies would stop trading in any company in which the lawmaker had insider information. A more expansive law could prohibit any stock trading (public or private company, stock or fund), in an account owned by the member of Congress, their families, or any trust in which they have an interest, while that person is serving in Congress. This would prevent members of Congress (regardless of political party) from trading on material, nonpublic information that the public does not have. It would also avoid any sense of impropriety and any conflict of interest. After all, Congress should be acting in the best interests of the American public – not their own.
Exactly what constitutes insider trading can be murky, and proving insider trading can be an expensive, time consuming endeavor that essentially would be paid for by taxpayers. The Stock Act of 2012 was a good first step, but clearly it did not go far enough to end questionable stock trading by Congressional members. Both the Senate and House have rules on financial disclosure for members. Unfortunately, financial disclosure does not prevent dubious securities transactions. Congressional members having inside information on companies or likely economic events can conduct profitable stock transactions that are at the very least a potential conflict of interest. Of course, the challenge to new regulation on stock transactions for Congress to prevent conflicts of interest and any wrongdoing – Congress would have to pass the legislation and lose the opportunity to profit from such transactions.
For further information:
- Definition on insider trading from the SEC:
SEC – Insider Trading - Ethics and Financial disclosure rules for the House and Senate:
House Ethics Committee Rules on Financial Disclosure
Senate Rules on Financial Disclosure
CBEI Blog Series: The Coronavirus – Why the U.S. Economy Will Never be the Same
Part 1: What Happened – A Review of the Economic Impacts
Part 2: What Happened – A Review of the Stock Market
Part 3: What Will Change – Supply Chains
Part 4: What Will Change – Healthcare
Part 5: What Will Change – Deficits and Government Spending
Part 6: What Should Change – An Appreciation for Service Sector Workers
Part 7: What Should Change – Securities Regulation of Congress
Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point.