At Hearing on Insider Trading, Senator Warren Makes Case for Her Bipartisan Bill to Ban Members of Congress From Owning or Trading Stocks
“Last year, Members of Congress and their spouses traded more than half a billion dollars in stocks and other investments. And here’s the most alarming part: on average, Members of Congress came out ahead of the S&P 500.”
Senator Warren's bipartisan bill with Senator Daines would ban Members of Congress and their spouses from owning or trading individual stocks.
Washington, D.C. — During a U.S. Senate Committee on Banking, Housing, and Urban Affairs, United States Senator Elizabeth Warren (D-Mass.) made the case for her bill with Senator Steve Daines (R-Mont.), the Bipartisan Ban on Congressional Stock Ownership Act (S. 3631), which would ban Members of Congress and their spouses from owning and trading individual stocks. The legislation is the only bipartisan proposal in the Senate to prevent members of Congress from owning or trading stock.
During the hearing, Senator Warren provided examples of how Members of Congress can engage in insider trading by using their special access to information on government and the private sector to gain a financial advantage by purchasing or trading stocks. Two top leading experts on insider trading, New York University School of Law Professor Robert J. Jackson Jr. and Columbia Law School Professor John C. Coffee, Jr., agreed with Senator Warren that this issue poses conflicts of interest and that there should be rules to ban Members of Congress from trading or owning individual stocks.
Transcript: Keeping Markets Fair: Considering Insider Trading
U.S. Senate Committee on Banking, Housing, and Urban Affairs
Tuesday, April 5, 2022
Senator Warren: Thank you, Mr. Chairman.
One of the biggest threats to functioning markets is insider trading. When some market participants get special access to information, they can use it to take advantage of everyone else. It’s cheating, plain and simple—and it’s illegal. Even so, it happens.
We’ve talked a lot today about one kind of market participant and that is company executives who trade stock based on secret information they have about their business.
But it can happen in other ways too. Sometimes a high-ranking government official might know about a change in government policy that can powerfully affect a corporation.
Professor Jackson, you’re one of the nation’s top experts on insider trading, so let me run through some examples with you. If an official – let’s say, a Member of Congress – learned that the federal government was about to award a company a huge new contract, and then that Senator bought stock in that company before the news of that contract was made public, could that be considered insider trading?
Professor Robert J. Jackson Jr: Yes, Senator, it could.
Senator Warren: Okay, let’s try another one. What about if that Member of Congress attended a top-secret briefing and learned that a company was facing big legal trouble? Could selling their stock before that company made that information public be considered insider trading?
Professor Jackson: Yes, Senator, it could.
Senator Warren: Okay. And what if that Member learned in a closed committee meeting of plans to boost the Pentagon’s budget by tens of billions of dollars. If that member bought defense stock generally ahead of the markup, could that be considered insider trading?
Professor Jackson: Yes, Senator, it could.
Senator Warren: Let’s do one more. What if that Member of Congress held drug company stocks and learned from their Committee Chair that legislation to cut drug prices would be moving in the Committee – and if they sold those stocks, could that be considered insider trading?
Professor Jackson: Yes, Senator it could.
Senator Warren: Members of Congress are in a unique position to obtain information that they can use to game the stock market.
In fact, the risks with government officials are even higher than they are with most CEOs because government officials can sometimes use their public positions to influence private outcomes—and the value of stocks they hold or trade. For example, voting on laws that will protect—or break up—a giant tech company could have a direct impact on the wealth of a Member of Congress who holds stock in giant tech companies.
So look, this isn’t a hypothetical problem. Last year alone, Members of Congress and their spouses traded more than half a billion dollars in stocks and other investments. And here’s the most alarming part: on average, Members of Congress came out ahead of the S&P 500. And yet not one single member was criminally charged with insider trading.
Now, there’s no doubt in my mind that Members of Congress who break federal law by engaging in insider trading should be criminally prosecuted. But there’s also no doubt, that’s not enough to fix this problem. That’s already the law. So let me ask you, Professor Jackson. do we need stronger rules to prevent insider trading in the halls of Congress?
Professor Jackson: Yes, this is critical, Senator. When Members are in the business of making decisions that can affect companies, at the same time that they have portfolios that could include those very companies, there's a risk of a conflict. We absolutely need rules to address this, Senator.
Senator Warren: Thank you. And Professor Coffee, you are also one of the country’s leading experts in the area of insider trading, would you like to weigh in on this?
Professor John C. Coffee, Jr: Well I think Professor Jackson was basically relying on the STOCK Act which is a very specific statute. I would point out that with respect to Section 16 here, if this was someone other than a congressman, or a person covered by the STOCK Act, it might be impossible to prosecute them because there would be no personal benefit paid for the information, and then you would not be liable under this proposed Section 16 with this personal benefit rule. When it comes to the broader question you asked, I think you might be suggesting that we should move beyond the criminal law which is always a blunt sword that can only be occasionally applied, and have Congress impose upon itself some prophylactic rules. It may be Congress should only invest in diversified portfolios like mutual funds and not own individual stocks. I’ve heard that idea has been suggested in these halls, I think it’s a very good idea.
Senator Warren: Thank you very much, Professor Coffee. You know, regardless of how trustworthy Members of Congress might be, trading in individual stocks undermines public confidence in the market, and it undermines confidence in Congress.
And this is why as Professor Coffee delicately alludes, I’ve introduced bipartisan legislation – with Senator Daines, who is also a member of this committee – to ban Members of Congress from owning or trading individual stocks. They can still do the big mutual funds but not individual stocks. We need to change the rules so that it is 100% clear that Members of Congress are not going to be allowed to game the system.
Mr. Chairman, I know you have introduced legislation to achieve a similar goal, and I look forward to working with you and working on a bipartisan basis. We need to get this done.
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