Michael Brochstein/Sipa USA via AP Images
House Speaker Nancy Pelosi (D-CA), reversing an earlier position, has said she is open to holding a vote on a congressional stock trading ban.
Sludge produces investigative journalism on lobbying and money in politics. The American Prospect is re-publishing this article.
Following public outrage over recent congressional stock trading scandals that look a lot like insider trading, momentum is growing in Congress for banning members from making trades.
Several bills on the issue have recently been proposed and some of them have been steadily racking up cosponsors. Speaker Pelosi reversed her position and said she is open to holding a vote on stock ban legislation, and the House Administration Committee has scheduled a hearing to consider the laws governing congressional stock trading and reforms that could be adopted to improve compliance.
Several of the proposed stock ban bills, however, have loopholes that would likely limit their effectiveness. Sludge previously wrote about a loophole in some of the proposals that would allow senators and representatives’ spouses to continue trading stocks. But there is also another loophole in some of the bills that pertains to the types of investments that would be targeted.
The two leading stock trade-banning bills, in terms of number of cosponsors, are the Ban Conflicted Trading Act (H.R. 1579 and S. 564) and the TRUST in Congress Act (H.R. 336). Both bills would prohibit members of Congress from trading corporate stocks, but they contain the same exemption: they would not apply to widely held investment funds, which is defined in the legislation as a fund that is either publicly traded or composed of assets that are widely diversified, and where the investor does not exert control over the assets held by the fund. So while members of Congress would be banned from trading individual corporate stocks, they would still be allowed to trade products like mutual funds or exchange-traded funds composed of bundles of corporate stocks.
This loophole may undercut what the bills’ sponsors describe as their goals: restricting the conflicts of interest that are presented when members of Congress make decisions that affect the stocks they are trading. While the Ban Conflicted Trading Act and the TRUST in Congress Act would ban members of Congress from trading a stock like ExxonMobil or Chevron, it would allow them to continue buying and selling shares in something like the Energy Select Sector SPDR Fund, which is composed of shares in ExxonMobil, Chevron, ConocoPhillips, and 18 other prominent oil, gas, and energy equipment companies. At least nine House members are invested in that fund, according to a Business Insider database compiling 2020 annual financial disclosure information.
Most actions that Congress takes affect whole sectors or industries rather than specific companies. In fact, in many cases Congress is prohibited from taking action against specific companies because such legislation would likely be deemed an unconstitutional bill of attainder.
Members of Congress invest in similar exchange-traded funds focused on industries including health care, finance, technology, utilities, consumer staples, communication services, and other sectors. Sludge found in the Business Insider data that at least 31 House members hold investments in industry-specific exchange-traded funds worth as much as a combined more than $7.9 million. In many cases, these sector fund investments appear to pose conflicts with their owners’ committee positions. For example, Rep. Peter Welch (D-Vt.) has up to $250,000 in the Technology Select Sector Fund—an ETF composed of shares in Apple, Microsoft, NVIDIA, and more—while sitting on the Communications and Technology Committee. Another example is Rep. Rick Allen (R-Ga.), the ranking member of the Health, Education, Labor, and Pensions Subcommittee. Allen has up to $50,000 invested in a health sector ETF composed of stocks in companies including UnitedHealth, Johnson & Johnson, and Pfizer.
Government ethics advocate Craig Holman, of Public Citizen, told Sludge that he believes the bills allowing members to keep trading industry funds would still be an improvement on the status quo.
“Even if members were allowed to continue trading in ETFs, these funds are nevertheless more diversified than individual stocks and thus would be a significant improvement over the current system,” said Holman. “But the ideal would be limiting members to the even broader class of funds specified in the Warren/Jayapal bill as ‘widely-held and diversified investment fund.’”
The Warren and Jayapal bill, called the Bipartisan Ban on Congressional Stock Ownership Act, would only allow members of Congress to trade investment funds that “[do] not have a stated policy of overly concentrating its investments” and that “[do] not pose a conflict of interest.” That bill is much less popular among members of Congress—while the Ban Conflicted Trading Act and TRUST in Congress Act each have more than 50 House cosponsors, the House version of the Bipartisan Ban on Congressional Stock Ownership Act has just three co-sponsors so far. Its five Senate co-sponsors include two Republicans, Steve Daines of Montana and Marsha Blackburn of Tennessee. Another bill, the Ban Congressional Stock Trading Act that was proposed by Sen. Jon Ossoff (D-Ga.), would also ban the trading of industry-specific funds. It has 12 Senate cosponsors, all Democrats, and no House version.
