After Senator Kelly Loeffler, Republican of Georgia, was investigated over insider trading claims last spring, along with at least three of her colleagues, she announced that she and her husband would no longer trade individual stocks; her family would divest them and move their money into diversified mutual funds.
Ms. Loeffler, one of the two Republican candidates in Georgia’s Senate runoff elections on Tuesday, was publicly pressured to do what Congress had long resisted requiring of its members: stop trading individual company stocks.
After she was involved in key meetings early in the pandemic, she sold some stocks just before they lost significant value. Ms. Loeffler denied wrongdoing, and the investigation ended without prosecution. With that — and amid a heated presidential election — any momentum to pass new legislation to prevent persistent questions about whether lawmakers were profiting from trading individual stocks was lost.
“Congress clearly isn’t doing enough to police its members, so what other options to restore basic integrity are on the table?” asked Tyler Gellasch, a former staff member for Senator Carl Levin who helped draft the Stop Trading on Congressional Knowledge Act of 2012. Mr. Gellasch, who is now the executive director of the Healthy Markets Association, says that STOCK Act, which makes it illegal to use inside information to trade but does not preclude lawmakers from buying or selling individual stocks, “was never going to be enough.”
There may be a solution that doesn’t need even a sentence of new legislation.
It relies on the Securities and Exchange Commission, an agency that is singularly empowered to uphold the credibility of the markets — and in this instance, it could also help bolster the credibility of our political system.
For the past month, I have spent hours on the phone and on Zoom calls discussing an idea I developed that could significantly reduce, if not end completely, questionable stock trading by members of Congress by creating more transparency around trades. I spoke to lawmakers, former prosecutors and former chairmen, commissioners and heads of enforcement at the S.E.C. to help me hone an approach.
“The S.E.C. has very broad powers,” said Harvey L. Pitt, the chairman of the agency during President George W. Bush’s first term. “There ought to be more sunlight on the people who trade in Congress. That’s why I like this idea. It is clever.”
Here is how it would work: The next head of the S.E.C., expected to be named in the coming weeks, could seek to put in place a new rule for broker-dealers, the financial intermediaries that all trades go through and that the agency oversees. The rule would require the broker-dealers to set up a special compliance program for clients known as “politically exposed persons,” a term that financial institutions know well as part of anti-money-laundering and bribery laws.
The S.E.C. compliance program would require the broker-dealers to ask those clients — which could be defined as members of Congress, their spouses and senior members of staff — to personally answer a questionnaire every time a trade is executed, irrespective of whether the trade is instigated by them or a financial adviser. That would eliminate the frequent excuse that Congress members give about not being involved in trades, even when they are. (David Perdue, the other Republican in Georgia’s Senate runoff election, was found to have executed 2,596 trades in one term, the most of any of his colleagues; a spokesman for Mr. Perdue said the senator was not involved in the day-to-day decisions of his portfolio.)
The form would include questions like: “Have you attended any meetings in the past 28 days that could be perceived as being related to or possibly influencing your decision to make this trade?”
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The broker-dealer would be required to submit details about each trade and the questionnaires within 24 hours to the S.E.C., and, crucially, both the trade information and the questionnaire would be published on the S.E.C.’s website, where they could be viewed by investors and the public.
Of course, members of Congress could still buy and sell broad-based mutual funds. But timely disclosures of the trades, along with a questionnaire that would create liability for officials if they didn’t tell the truth, are likely to stop the trading of individual stocks.
The compliance program suggested in this column is a variation on the way the S.E.C. itself polices staff at the agency. Employees of the S.E.C. are required to authorize their broker to disclose all trades to the agency. Employees also cannot trade the stocks of companies under investigation by the agency, and they have to clear all trades ahead of time and certify that they don’t have inside information about a company.
An effort by the S.E.C. to introduce such a plan for members of Congress would require a vote of its five commissioners; three will be Democrats, two Republicans. Such an effort is likely to be challenged by a member of Congress or a broker-dealer, but the S.E.C. has expansive authorities on behalf of investors. For example, the S.E.C. requires hedge funds to disclose their largest positions on a quarterly basis.
And there is no expectation of privacy by Congress members about trading because the STOCK Act already requires that they publish their trades within 45 days. This dampened their stock trading, but it has been considered largely toothless; no member of Congress has been prosecuted under the law.
If you’re asking why the S.E.C. hasn’t already tried a stricter approach, there is an answer: Congress approves the S.E.C.’s budget. It is a bit like biting the hand that feeds you.
That’s why it will take a bold leader of the S.E.C. to make new rules, and follow through by creating a task force charged with enforcing them. Unlike criminal prosecutors, however, the S.E.C. can only bring lawsuits to enforce the law. But there is power in that: A criminal case requires that guilt is “beyond a reasonable doubt,” but the threshold for a civil case is lower, simply requiring a “a preponderance of the evidence,” which should allow the S.E.C. to pursue cases aggressively.
Of course, if the idea works, there hopefully won’t be any cases to pursue.