Pundits aren’t optimistic about members of Congress’ stock trading

With US confidence in government at an all-time low and members of Congress trading stocks that appear to pose a conflict of interest, some Northeastern University experts argue that curbing lawmakers’ involvement in the financial market is urgently needed.

The Stop Trading on Congressional Knowledge Act of 2012 requires lawmakers to comply with insider trading prohibitions, and while the law can prevent lawmakers from using information they obtain through their jobs for their own financial gain, it doesn’t go far enough to prevent the suggestion of wrongdoing says Blaine G. SaitoAssistant Professor of Law at Northeastern who is a tax expert and previously worked on Capitol Hill.

“The appearance of impropriety is just as important as the actual thing itself. We’re talking about trust and trust here,” says Saito. “Based on my judgment, experience and my own training, I think the 2012 law doesn’t go far enough.”

Congress is routinely considered one of the institutions with the lowest public trust ratings, Saito notes. A September Gallup poll found that 37% of Americans trust the legislature. Confidence in the industry has not exceeded 40% since 2009.

Examples of lawmakers engaging in seemingly unethical financial transactions can be seen on the political side. Nancy Pelosi, Speaker of the Democratic House of Representatives came under fire for her husband’s purchase of $2.2 million in Tesla stock as the federal government seeks to transition to electric vehicles. Democratic Senator Joe Manchin did regularly criticized for its income from the coal business. And former Republican Senator David Perdue was lambed for the sale of more than $1 million in stock in a financial company on whose board he sat.

“It raises some important questions, although it won’t necessarily cloud this member of Congress’s judgment,” Saito says. “This may not mean that they are doing anything, implicitly or explicitly, for the company they have invested in, but from a public and democratic perspective, that appearance of impropriety is almost as pernicious as actual impropriety.”

Potential conflicts of interest arise not only for legislators but also for other officials. In September, two Federal Reserve chiefs announced their resignation after criticism of personal investments that seemed to raise ethical issues.

Nancy Kimelmanan assistant professor of economics at the Northeastern Economics professor who worked on Wall Street was shocked by the scandal, particularly because members of the Fed were not subject to the same restrictions as the banks they are tasked with regulating, which require strict disclosure of Investments are needed.

“The weird thing here is that the Federal Reserve is the regulator of banks. Why are bank regulators not subject to the same rules as the bank’s actual executives?” asks Kimelmann.

Since the Fed scandal, the US banking system has implemented new rules governing the trading activities of its top officials. But more needs to be done to avoid these types of conflicts of interest and to build public trust in federal institutions, notes Kimelman.

“I hope this is the beginning of a larger process to try to bring more accountability and honesty into a system that many people believe is corrupt,” says Kimelman.

In February, a bipartisan group of senators introduced a bill banning members of Congress from trading stocks. These rules appear to have widespread public support, with 63% of voters supporting such a ban, according to Morning Consult/Politico opinion poll from January.

The Federal Reserve Building in Washington, DC, USA.  Federal Reserve Chair Jerome Powell on Wednesday reiterated the central bank's plan to hike interest rates at the forthcoming monetary policy meeting, noting that he is inclined to support a 25 basis point rate hike.  Photo by Liu Jie/Xinhua via Getty Images

There are already laws in place to address the same problem in other branches of government, Saito points out. Senior law enforcement officials and members of the judiciary must place their assets in blind trusts where they have no access to their holdings. However, such a system also allows officials to evade taxes through the so-called “stepped-up basic loophole,” which allows them to keep their wealth for life without paying taxes on the profits they make from stock sales. This allows those who are required to place their assets in blind trusts to defer paying income taxes. If they die, the person who inherits their wealth does not have to pay taxes.

“There’s great power in this deferral of profits, because the longer they defer selling the stock, the more beneficial it is seen,” says Saito, but notes that a blind trust system would still be better than nothing.

Professor of Northeast Law David M Phillipswho has written extensively on business ethics and foreign trade and investment, agrees that a blind trust system may make the most sense, since less conflicts of interest can arise when lawmakers give their holdings to a professional wealth manager and are unaware of their wealth portfolio.

“With individual stocks, your decisions can affect individual companies differently. Manchin seems to be an extreme example,” explains Phillips. “According to newspaper reports, he has interests in energy interests in West Virginia. It’s clearly problematic based on some of the positions he’s taken on climate control.”

A system of blind trust can also limit the legislature’s participation in the open market less than an outright ban on trading in stocks.

“We don’t usually think about people staying in Congress for only two years. So does that mean someone who gets elected very young can’t participate financially without things affecting their particular vote?” asks Phillips.

Part of the resistance to lawmakers banning stock trading is their relatively low salaries, according to the Northeast law professor JeremyPaul, who teaches constitutional law, where the powers of Congress are a subject of study. Banning legislators from trading stocks must go hand in hand with increasing their salaries, he argues. But such a proposal would likely be extremely unpopular with the American people, Paul concedes.

“It wouldn’t cost much to give them a raise, but it would look bad,” says Paul. “But by not paying them more, we’re putting the congressional service out of reach financially for ordinary Americans and we’re implicitly structuring things that compound distrust of Congress, because now they’re looking for all sorts of loopholes, like trading stocks by using them.” Improper use of campaign funds, etc.”

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