STOCK Act – Compliance Building

Ethics of Congressional Stock Ownership

The Washington Post published a story using Congressman John Dinghell as an example of the ethics issues involved when you have an investor lawmaker: Dingells and GM illustrate limits of congressional conflict-of-interest rules. Kimberly Kindy and Robert E. O’Harrow Jr. use Congressman Dinghell because of his financial connection with General Motors. This connection was one both of capital and income. His wife was an executive at General Motors and they held a significant amount of GM stock. (She no longer works for GM and old GM stock… well you know what that is worth.)

I did not find the Dinghell example to be compelling. Congressman Dinghell represents metropolitan Detroit. His constituents are just as interested in the future of the automotive business as he is. It seems to me that his personal interests are aligned with those of his district. He and his wife were up front about their ownership of GM and their connection with the company.

That is not to say that legislators’ ownership of stock is not a problem. Uncertainty created about lawmakers’ motivation undermines confidence in Congress and the political process. It is often impossible to know whether the lawmaker is acting in the interest of citizens or their own portfolios.

Insider Trading

On top of that, the lawmakers on Capitol Hill are not prevented from trading on stock with inside information. Congressional portfolios have regularly outperformed those of average Americans over the years. There

Availability of Records

Over at the Sunlight Foundation they decided to drill down further at look at the availability of Congressional ethics filings. Daniel Schuman found that many ethics filings are required to be publicly reported, but are not available online and that many ethics filings are not publicly reported. A cynic would say that Congress does not want this information to be widely available.

References:

Dingells and GM illustrate limits of congressional conflict-of-interest rules By Kimberly Kindy and Robert E. O’Harrow Jr. for The Washington Post
The ethics of congressional stock ownership by Eric Brown on the Political Activity Law blog
Policy, portfolios and the investor lawmaker By Robert O’Harrow Jr., Kimberly Kindy and Dan Keating for the Washington Post
Congress Should Make All Ethics Documents Available Online By Daniel Schuman for the Sunlight Foundation
Stop Trading on Congressional Knowledge Act – prior post
Insider Trading by Congress – prior post

Stop Trading on Congressional Knowledge Act

How can you beat the stock market? Become a member of Congress and trade on legislative actions!

You might think that a member of Congress would be prohibited from trading on non-public information that they obtain through their official position. You might be wrong. Members of Congress and their staff do not owe any “duty of confidentiality” to Congress. So they can’t be held liable for insider trading based on congressional knowledge. Since they do not have inside knowledge, members of Congress and their staff can share this non-public information with their friends.

Is this a problem? There is a 2004 paper that finds a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month. Federal law does require Senators to disclose their common stock transfers annually in their Financial Disclosure Reports. But that filing is long after the time of the actual stock transactions.

I will not go into the details of the report other than to note that a few Senators are more active than others. You can reach your own conclusions based on the data.

In these days with a greater focus on transparency, risk and governance, you would think that Congress would close this loophole. In January, U.S. Reps. Louise Slaughter and Brian Baird (pictured) introduced the Stop Trading on Congressional Knowledge Act (the STOCK Act)(H.R. 582). Slaughter and Baird also introduced similar bills in 2006 and 2007, without success.

If this bothers you, maybe you should call, email, or tweet your Congressman or Senator.

See also:

Closing the Congressional Insider-Trading Loop by Bruce Carton
Senators’ Stocks Beat the Market by 12 Percent by FT.com
Abnormal Returns from the Common Stock Investments of the U.S. Senate (.pdf) by Alan J. Ziobrowski, Ping Chenge, James W. Boyd and Brigitte J. Ziobrowski, published in the Journal of Financial and Quantitative Analysis (December 2004)
STOCK Act Text of the Bill
Insider Trading by Congress – Earlier post on Compliance Building

Insider Trading by Congress

Apparently members of Congress and their staff can make trades using non-public information obtained through their official positions.

House Rules Committee Chairwoman Louise M. Slaughter, D-N.Y., and Brian Baird , D-Wash., are sponsoring what they call the Stop Trading on Congressional Knowledge Act (HR 682) that would prohibit Members of Congress and their staffers from using nonpublic information obtained through their official positions to benefit themselves financially.

In a statement, the two said the legislation is more important now, given the amount of money Congress has authorized to help right the economy under the financial services bailout program.