About the author: Ben Blau is the department head of economics and finance and George S. Eccles endowed chair in finance at the Huntsman School of Business at Utah State University.
Two years ago, the Hill reported that four sitting U.S. senators sold millions of dollars of stock just days after a classified Senate briefing about the possibility of a pandemic. The backlash was immediate. The denials absolute. The consequences? Congress is still working on that.
Three of the senators—James Inhofe, Dianne Feinstein, and Richard Burr—are still in office. The fourth, Kelly Loeffler, lost her race in Georgia in January 2021. The Justice Department closed its investigations into all four senators without bringing charges. What these senators did wasn’t illegal. The Stop Trading on Congressional Knowledge Act of 2012 only requires that they disclose their trades within a certain time frame. But now lawmakers are considering an outright ban on any stock trading by members of Congress.
The stakes aren’t just about the dubious image cast by suspicious congressional trades. Members of Congress are banned from insider trading, just like everyone else. That’s because buying and selling stocks based on nonpublic information might be bad for financial markets. Risk automatically goes up. Volatility increases. Liquidity declines.
Will a ban on all congressional trades solve these problems? Maybe. My research suggests that this move could stabilize stock prices and improve market liquidity, but only if congressional employees are included in the ban.
This won’t be the first time Congress has tried to restrict the ability of its members to trade. In 2012, the Stock Act was signed into law. It attempted to curb congressional insider trading by requiring greater financial disclosure for both members and, importantly, employees of Congress.
A year later, Congress suddenly and quickly amended the Stock Act to loosen disclosure requirements for non-elected congressional employees. This amendment passed on a Friday afternoon with no debate and no opposition. Arguments in favor of it focused on national security and the privacy of congressional employees. The following Monday, President Obama signed it into law.
The amendment was handled like a minor tweak to the Stock Act, but the market effects seemed to indicate that it was a major overhaul.
The suddenness of the Stock Act amendment allowed my colleagues, Todd Griffith and Ryan Whitby, and I to study its effects on financial markets. We analyzed stocks that other investors might think have the greatest possibility of governmental insider trading. Relative to the rest of the market, stocks most held by members of Congress experienced less liquidity and more volatility in the days following the amendment.
Remember, the amendment only rolled back requirements for congressional employees, not members of Congress. In our research, we didn’t seek out bad actors or try to prove that insider trading was actually happening. The only thing that changed was that congressional employees no longer had to disclose their trades. In other words, if they traded on non-public information, other investors wouldn’t know.
Just the mere possibility of insider trading by congressional employees made financial markets become less stable and less liquid.
These results have important implications for the renewed debate about banning stock trading by members of Congress. Staffers and other employees are likely to have nearly as much access to private information coming out of legislative activities as elected members of Congress.
According to the research, a trading ban will have little meaningful effect on investors or financial markets if it doesn’t include congressional employees.
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