Plenty of Room for Lawmakers to Profit Under Proposed Stock Ban
A better way to stop politicians’ insider trading is by allowing them to invest only in plain-vanilla mutual funds, Wall Street insiders told the Prospect.
Certain rich lawmakers are losing their minds over a proposed congressional stock-trading ban that a bipartisan group of senators advanced last month. They argue that forbidding them from using their inside knowledge to play the market will make public office “unattractive” and drive those who serve into poverty.
“Anybody want to be poor?” asked Sen. Rick Scott (R-FL), one of the richest people in Congress, whose health care company defrauded Medicare and Medicaid in the ’90s when he was its chief executive. “I don’t.”
But Wall Street insiders said Scott and his fellow wealthy electeds have little cause to worry. The proposal leaves plenty of room to profit off insider information, so much so that they described it as inadequate and “stupid,” and called carve-outs that can be traded under the terms of the bill, including corporate bonds, “insane.” These exceptions, they said, make the legislation a ban in name only.
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The HONEST Act, which stands for “Halting Ownership and Non-Ethical Stock Transactions,” would ban all members of Congress, their spouses, and their children from directly investing in securities, commodities, futures, options, and trusts, starting 90 days after the law’s enactment. It would require that they divest any assets of those types by the start of their next term in office.
Versions of this legislation have been debated for years, and there’s a parallel effort in the House. But the Senate bill, led by Sens. Josh Hawley (R-MO), Jeff Merkley (D-OR), Jon Ossoff (D-GA), and Gary Peters (D-MI) and building off a Merkley effort from last session called the ETHICS Act, surprisingly passed the Republican-led Homeland Security and Governmental Affairs Committee and could set a marker in Congress for a concept that is very popular and constantly invoked in campaign ads. But politicians in those ads vow to once and for all end corrupt self-enrichment, not to pretend to do so in easily escapable ways.
STOCK-TRADING BANS INTEND TO HALT the periodic incidents of members of Congress executing big trades right before a major policy shift, like Rep. Rob Bresnahan (R-PA) selling clean-energy stocks and buying stock in fossil fuel companies right before final passage of the GOP mega-bill, which reverses tax credits to renewables. Bresnahan, a freshman, has made 598 stock trades so far this year. Even more notorious were trades lawmakers like Sens. Richard Burr (R-NC) and Kelly Loeffler (R-GA) made at the height of the COVID-19 pandemic, capitalizing on information before it was public as hundreds of thousands of people dropped dead. (Loeffler is currently the head of Trump’s Small Business Administration.) Three years ago, The New York Times found that almost a fifth of lawmakers bought stocks that coincided with their committee appointments.
The HONEST Act would increase penalties from $200 to $500 for failing to make required disclosures under the Stop Trading on Congressional Knowledge (STOCK) Act, which lawmakers on both sides of the aisle have repeatedly violated since its enactment in 2012. Rep. Markwayne Mullin (R-OK) is one of the most recent to do so, according to a disclosure covered by Notus, which showed he failed for more than a year to report hundreds of thousands of dollars’ worth of trades he and his wife made.
The proposal would also apply to future presidents and vice presidents, though not to Trump or JD Vance. The original version did incorporate Trump and Vance until Trump got angry about it, calling Hawley a “second-tier Senator” in the process. The most prominent House version focuses only on congressional stock trading.
The HONEST Act would ban all members of Congress, their spouses, and their children from directly investing in securities, commodities, futures, options, and trusts.
The proposal would still allow lawmakers to invest in mutual funds and exchange-traded funds as long as they are “diversified,” which it defines as an investment vehicle that “does not have a stated policy of concentrating its investments in any single industry, business, or single country other than the United States.” But it is silent about derivatives, leverage, or holding periods.
That means lawmakers could use inside information to invest and get back out once the returns hit. Mutual funds, which trade once a day, would require they hold an investment for just that long.
“If you have received an intelligence briefing or an economic briefing that says tomorrow tariffs on copper are going to go up or down,” said one former Securities and Exchange Commission official, who spoke on condition of anonymity, “you could buy a mutual fund on day one, and enjoy a 2 to 10 percent pop, pocket it, and back out of the fund the next day.”
Exchange-traded funds, which trade throughout the day, could make a round trip even faster and can be heavily leveraged to amplify gains. Take the $27 billion ProShares UltraPro QQQ exchange-traded fund, which uses leverage to produce returns that are three times the daily performance of the Nasdaq-100 index. It’s a product meant for sophisticated investors to hold for short periods of time; it includes the same stock as in the index, with the biggest amounts in Nvidia, Microsoft, Apple, Amazon, Broadcom, Meta, Netflix, Tesla, and Costco. If a lawmaker expects any of those companies, or the overall market, to jump based on inside knowledge, they could increase their profit by a factor of three by investing in that ETF and getting out quick. There are dozens of such products and many are diversified.
The proposed law also allows investment in corporate bonds, as long as the covered person is holding them on the day the bill is enacted; in small businesses, as long as the supervising ethics office agrees it doesn’t present a conflict of interest; and in futures and commodities related to farming activities and the products of the farm or ranch.
Some Wall Street executives said allowing those makes no sense, especially corporate bonds, which are a method of lending money to a company. These generate regular interest payments to the holder throughout the bond’s life.
A MORE THOROUGH WAY TO OUTLAW insider trading, the former SEC official said, would be to limit lawmakers and their families to mutual funds alone. After a 2003 market-timing scandal, some mutual funds have voluntarily imposed 30-day holding restrictions to avoid leaving a fund once a gain is realized. If lawmakers only invested in those, they wouldn’t be able to make outsized profits on their position, because any gain based on insider knowledge would likely dissipate by the time they were allowed to sell.
The former official pointed to the Thrift Savings Plan as an even more ideal limit for lawmakers. That plan is available to all government employees and one of the most successful retirement plans on offer, with funds that routinely outperform others thanks in part to low fees. The Thrift Savings Plan includes a bunch of broad indexes made up of common stocks, small- and medium-cap equities, international stocks, fixed-income securities, government securities, and “lifecycle” funds with a target date. These indexes would make it difficult to use particular knowledge to time the market.
But anything stricter than the HONEST proposal was likely to fail, the former officials said. “I’d love to draw up a set of rules that are incredibly restrictive … but that kind of legislation would never get anywhere,” he explained, adding that he’s in favor of passing the HONEST Act as an intermediary step given that the Wild West of congressional insider trading is “making lawmakers despicably rich.”
“Given where we are at the moment,” he said, “it’s difficult to even pass a milquetoast law.”
The proposal is open to amendment, and Senate Majority Leader John Thune (R-SD) may or may not bring it to the floor for a vote. In the meantime, Democratic lawmakers are in support, including Sen. Elizabeth Warren (D-MA), who said that the “basic idea behind it is long overdue.”
“It’s a good solid bill,” she said.
Sen. Nancy Pelosi (D-CA) likewise supported the bill, even though the first iteration used her last name as its title, “Preventing Elected Leaders from Owning Securities and Investments,” in a nod to her reputation as a notorious insider trader via her husband, Paul.
Naysayers have taken to describing the ban in the most histrionic ways possible, as if their very survival hangs in the balance if they can’t supplement their legislative base salary of $174,000, plus $31,815 in outside earned income, along with special tax deductions and a health care plan average Americans can only imagine.
“So this idea that we are going to attack people because they make money is wrong. Is absolutely wrong,” Sen. Scott said at the markup, gesturing to his colleagues in an anguished appeal to stop the ban. “We should cherish all of our different backgrounds. Every one of us has a different background.”
Sen. Ron Johnson (R-WI), a multimillionaire who is heavily invested in finance and real estate, called the bill “legislative demagoguery.” There’s already enough financial disclosure, he said. “Trust me.”