Last year, the S&P 500 fell 18%, but you wouldn't know it from looking at the portfolios of US lawmakers.
Overall holdings by members of the US Congress outperformed the S&P 500 by about 17.5% on average in 2022, according to Subversive Capital, a company that creates ETFs which track stock trading by senators and representatives.
Some Democratic Senators think that divergence could have an unethical slant to it. In response, they've announced a new bill, The Ending Trading and Holdings in Congressional Stocks (ETHICS) Act, that would prohibit all members of Congress and their family members from buying or selling individual stocks.
The act is the product of a working group formed by Senate Majority Leader Chuck Schumer more than a year ago to address reports of rampant insider trading amongst lawmakers.
Multiple news outlets reported that numerous members of Congress had violated the Stop Trading on Congressional Knowledge (STOCK) Act, which prohibits the use of non-public information for private profit, including insider trading by members of Congress and other government employees.
Several members of Congress were also scrutinized for their financial transactions during the early days of the coronavirus pandemic, when they received closed-door briefings that warned of an impending financial crash.
The ETHICS Act would not only ban lawmakers, their spouses and dependent children from trading single stocks, it would also create a searchable, electronic database of their stockholdings and impose large penalties for any violations.
Before the Bell spoke with Sen. Jeff Merkley, the lead sponsor of the Senate bill.
This interview has been edited for length and clarity.
Before the Bell: What does this bill do? Who can trade and under what parameters?
Sen. Jeff Merkley: I've been trying to push this notion that there are deep conflicts created by members [of Congress] trading stocks, and they're significant enough that they both produce corruption and they certainly produce the impression among the public of corruption. For both reasons that stock trading needs to end.
There's two forms of corruption. One is that having a portfolio of individual stocks concentrated in a particular area changes a member's view of how they would write legislation that might include breaks for that particular industry that would drive the value of their stock. It might change how they would vote on legislation.
And then there's the second aspect, which is that members have access to often confidential information and briefings that precedes actions by the [Biden] administration, or what bills are going to be coming to the floor.
That is information that the public doesn't have. The result is members tend to do better than the general public and better than the S&P 500. There's an unfair advantage for [lawmakers], you could tackle that by just ending the trading of individual stocks.
Have you witnessed anything in the Senate or among lawmakers that makes you think unethical trading is taking place?
I can tell you this, in the course of both the briefings here on the Hill and in fundraising that members do, including myself, you will hear people say, 'hey, six months from now we're planning to launch product XYZ.'
And you kind of walk away from that going 'I'm so glad I'm not trading individual stocks, because it would be wrong for me to have that information that the public doesn't have.'
How would this bill actually enforce these new rules?
I'll start with really expensive penalties that will scare people a lot. If you're in violation of the selling, buying or holding provisions of this law in any given month, the penalty is a month's salary, or 10% of the amount of stocks that were traded or held. And that is a huge amount.
If this bill were to pass, would some members forego reelection?
The provision for lawmakers buying stock goes into effect immediately. The provision for not selling goes into effect after 90 days, so they can sell their portfolio.
The place where it affects reelection is the spouse and children. The conversation among members was that in this modern age, spouses have their own lives and their own habits. And while it's fair to change the rules right away for us, it's not fair to do that to spouses, so the rules would only be applied to them after reelection. I think there's just a widespread sense that this bill has to apply to spouses and minor children.
A version of this bill was released and didn't pass. What makes this different when other efforts have previously stalled?
This is a product of intense conversations throughout our caucus and with everyone in the caucus who produced a bill last time, and of conversations with a whole bunch of Republicans that we strived to work with. Sen. Elizabeth Warren had conversations with Sen. Lindsey Graham and Sen. Steve Daines of Montana.
This is the most comprehensive bill to come out of all those discussions. It has by far the largest number of sponsors in the Senate, 21, that any bill has had to date.
Would you consider a bill that applies the same restrictions to the Supreme Court?
There is a huge appetite for ethics reform for the Supreme Court. There was a sense among members that we need to get our own house in order. Show what it looks like and then take the principles we learn to extend to the judiciary and the executive branch. And you know, many of us would like to write them in now, but anything you do that makes the bill more complicated now makes it less likely we ever get the bill passed.
So, on balance it seemed like the more responsible thing to do was to say 'let's prove we can get our own house in order before we start lecturing other branches of the government.'
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