San Antonio Express-News (Sunday)
Legislators trading stocks is ethical disaster
Robert Kaplan resigned abruptly last month as president of the Federal Reserve Bank of Dallas, on the same day as his Boston counterpart Eric Rosengren.
Both cited personal reasons for their unexpected departures, but the public understood them to be a necessary response to a Wall Street Journal investigation of large personal stock trades they'd made during critical moments when the Federal Reserve intervened in markets in response to COVID-induced turbulence.
You might see these abrupt resignations as a failure of ethics and governance at the nation's central bank. But I think that's the wrong interpretation. Their resignations are actually a success of governance. It's a good sign that the Federal Reserve's code of ethics — and Fed Chairman Jerome Powell — prompted swift and decisive resignations in response to even the appearance of a conflict of interest.
Powell then promised a further review of ethics rules for Federal Reserve employees, as he should. It matters whether people see the Federal Reserve as an ethical institution.
All of this is good and noteworthy.
It also serves as our periodic reminder of how awful the governance and ethics rules and practices are for stock trading by members of Congress.
In short: They can get away with way too much. They should not be allowed to trade individual stocks. But they do, and they disclose way too little about it, and it's gross.
There is a law, first passed in 2012, called the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act). It requires officials to disclose any stock transactions within 45 days of trading. Dozens of members of Congress this year ignored or violated this law with late disclosures. Sometimes, elected officials make no disclosures at all. The penalties under the STOCK Act for these types of violations are tiny — like in the hundreds of dollars.
In late September, the ethics watchdog group Campaign Legal Center cited seven members of Congress for massive failures to disclose their stock trades.
This is a bipartisan problem. The Campaign Legal Center report named and shamed House representatives Cindy Axne (DIowa), Warren Davidson (R-OH), Lance Gooden (R-TX), Bobby Scott (D-VA), Thomas Suozzi (D-NY), Roger Williams (R-TX) and Michael San Nicholas (DGuam)
These seven engaged in hundreds of thousands of dollars in stock trading without reporting them. Five of the seven sit on the House Committee on Financial Services, which seems like a
particularly egregious violation of trust.
In June, Business Insider reported that Rep. Pat Fallon (R-TX) failed to disclose 93 stock trades worth between $7.8 and $17.5 million between January and April 2021. Fallon is a member of the House Armed Services Committee and was trading Boeing stock, which is obviously not OK.
After receiving COVID-19 briefings in February and March
2020, Georgia's two senators at the time, Kelly Loeffler and David Perdue — both Republicans who later lost their seats in special elections — reportedly traded millions of dollars worth of shares.
Earlier this month, Business Insider reported on 37 members of Congress who violated the STOCK Act.
The other Texas elected officials cited by Business Insider for STOCK Act violations include representatives August Pfluger
(R) and Dan Crenshaw (R).
Do we know for sure whether House and Senate members are profitably trading stocks using inside knowledge or their regulatory power? Not exactly.
Could these just be cases of overlooking details and failure to disclose, as the elected officials generally claim? Of course.
But that's missing the point. The point is that even the appearance of elected officials taking advantage of the system undermines trust in government and in markets.
Eliminating individual stock trading would not solve all instances of self-dealing, insider trading or influence peddling in Congress.
But the sheer ethical audacity of senators and representatives — having access to relevant insider information and exercising extraordinary voting and regulatory power to influence outcomes, and then being able to invest accordingly — is nuts. They shouldn't be able to do this.
Clear ethics rules forbid journalists from writing about stocks they have an interest in. Doctors have to periodically declare they have zero financial stake in companies associated with the prescriptions they write. Lawyers, Realtors, corporate and nonprofit board members have codes that forbid obvious conflicts of interest when it comes to investing.
It's so obvious that members of Congress should not be able to trade in shares of companies over which they have regulatory oversight — or about whose industries they receive privileged information — that their latitude to trade stocks seems ludicrous. This can't really be going on, right?
Surely there are tough rules in place to stop this?
Not really. It is going on. And it is hardly ever punished by Congress itself.
Incidentally, the executive branch has to follow much stricter financial ethics rules. Highranking officials — especially with significant investment portfolios — typically put their investment in a blind trust for the duration of their service. (President Donald Trump was a notable and unfortunate exception to this practice.) Lower-ranking employees of the executive branch have to disclose even things like gifts received over $15 in value. This signals to everyone, especially the voting public, that their decisions will not have even the appearance of being made for personal gain.
This is not true for members of Congress, who make their own rules — which also allow them to ride in other people's privatelyowned jets with few restrictions, unlike executive branch employees.
It's like an inversion of the cynical Golden Rule: “He who has the gold makes the rules.”
In the case of Congress, it's instead: “He who makes the rules makes the gold.”
I understand there's a biblical Golden Rule as well, but I'm in a cynical mindset today.