Elected Representatives and Senators of the U.S. Congress are tasked with a demanding workload during their campaign and, subsequently, throughout their appointed term. They endure prolonged working hours, partake in high-pressure decision-making and face continuous scrutiny from both the media and their constituents. Thus, unlike most public servants, they are adequately compensated, receiving an annual salary of $174,000. This base allowance, which is funded by tax dollars through the U.S. Department of Treasury, is nearly 200% higher than that of the average American citizen, whose median income this past year was just $59,428.
Moreover, a much larger discrepancy exists when you examine the accrued wealth — which is measured in net worth — of these individuals compared to most Americans. In 2021, only 4% of American citizens were millionaires, whereas 51% of people in Congress had surpassed this benchmark. Unsurprisingly, this considerable and expanding margin is not caused by the sizable difference in salary. It’s the additional, unofficial sources of income that congressional representatives receive.
Trading practices
The leading portion of supplemental earnings that congressional members receive come from actively managed personal portfolios of publicly traded equities in the stock market. In 2022, 24% of congressional members reported financial transactions executed by themselves or an immediate family member, amounting to a collective $788 million in total trading volume. The continued permissibility that members of the legislative branch possess to unrestrictedly transact public securities provides them with an advantage over the general public.
This promotes an unfair market environment, which prevents the economy from prospering. The primary reason congresspeople retain unparalleled supremacy compared to even the most successful firms on Wall Street is because it’s common practice for congressional members to have exposure to privileged information, relating to unfolding crises, ahead of the general public. To permit sufficient time for influential decision-making, these “closed-door” disclosures are imperative for members of Congress to uphold their duties to their constituents, all while maintaining national security by withholding classified or potentially sensitive information from the public eye.
Despite their extensive access to insider information, there are few regulations inhibiting congressional members from making transactions in the stock market, therefore unfairly exploiting their access to private insights.
Historical instances
The 2020 congressional insider trading scandal remains the most discernible occurrence of U.S. senators and representatives using their internal briefings for monetary gain. On Jan. 24, 2020, the Senate Committees on Health and Foreign Relations commenced a series of closed-door briefings to educate members of Congress on the COVID-19 outbreak which, at that point, had not become the principal concern of the general public. As time progressed and conditions worsened, investor sentiment shifted, prompting a sizable correction in global equity markets. This ensued on Feb. 20, 2020, nearly a month after the first clandestine congressional hearing.
In the aftermath of this border market crash — which the U.S. economy took years and billions in stimulus expenditures to recover from — it became abundantly clear that before the selloff in markets began, elected representatives positioned themselves to incur abnormal returns on their investments in specifically impacted markets, such as the healthcare sector. Dozens of reports indicate that Senators and Representatives on both sides of the political aisle rapidly sold off assets and realigned their portfolios to accommodate the anticipated forthcoming market reaction before it transpired. Pushback from regulators prompted the U.S. Department of Justice and the U.S. Senate Select Committee on Ethics to open an investigation into the matter. Though the evidence was clear, the probe eventually concluded after yielding no meaningful repercussions.
This represents just one of many examples of situations in which congressional members unethically capitalized on insider information to conduct financial transactions with the singular intention of personal gain. Additional incidences in recent years include trades executed in the defense sector prior to the eruption of the Russia-Ukraine war, transactions in the pharmaceutical sector before the public announcements of pivotal vaccines and treatments, investments in the technology manufacturing sector before the official passing of the CHIPS Act, which moved semiconductor production back stateside, and countless other examples.
To make matters worse, a thorough study conducted by the New York Times found that at least 97 members of Congress executed trades in companies or sectors directly correlated to their congressional work and committee assignments. This intersection of work relevance and investment philosophy further exacerbates the point that these transactions are influenced by information received on the job.
Legislative proposals
In an effort to combat this unfair advantage that congressional members innately possess, numerous articles of legislation have been proposed to place limitations on their financial transactions and implement reporting practices to prevent self-serving behaviors. Nearly a dozen bills were introduced from the 1980s to the early 2000s, but almost all of them failed to pass.
Finally, in 2012, H.R. 5815/S. 2957: The Stop Trading on Congressional Knowledge Act, also known as the “STOCK” Act, was passed in 2012. It largely expanded the reporting requirements for securities transactions by members of Congress and other federal agencies. The landmark passage was marred by various oversights that undermined its effectiveness in ensuring Congress prioritized public interests.
Attributes such as insignificant penalties as low as $200 and the extended timeframe for permissible reporting did little to disrupt the patterns of unfavorable conduct. Supplementary legislative initiatives, such as H.R. 1309/S. 2239: The TRUST in Congress Act of 2017 and H.R. 2577/S. 1100: The DISCLOSE Act of 2019, were introduced several times to further strengthen the parameters of financial disclosure requirements but unfortunately were not passed.
Alternative approaches
Since 2020, when the issue resurfaced and once again became heavily publicized, bipartisan attempts to reintroduce regulatory bills have been started, but none have gained the necessary traction to become law. Even in more recent legislation, loopholes remain because drafting members failed to take into account the shortcomings of previous attempts. These vulnerabilities can be hard to identify, as they are usually concealed in subclauses but can be seamlessly exploited in the event that a bill passes.
More recently, backlash from the public has transformed from lobbying for pragmatic, legislative changes into innovative solutions to “level the playing field.” Websites and services that track congressional trades have become popular among the retail investing community, even though their accuracy is limited by lengthy reporting timelines after a transaction occurs. Furthermore, the U.S. Securities and Exchange Commission (SEC) this past year approved a plethora of Exchange Traded Funds (EFTs), which are designed to replicate the portfolios of certain congressional members. Two of the more popular investment vehicles trade under the Democrat-tracking ticker $NANC and Republican-tracking ticker $KRUZ, named after former Speaker of the House Nancy Pelosi and Sen. Ted Cruz, respectively. As could be expected, both of these ETFs have outperformed the S&P 500, which is customarily used as a benchmark for the overall market, by a multiple of 1.5 over the past three months (as of the end of 2023).
This ongoing predicament continues to unfold as the greed of U.S. lawmakers remains unwavering. Last year, according to the New York Times, “stock trades reported by nearly a fifth of Congress show possible [ethical] conflicts.” In the past three years, top offenders transacted hundreds of millions of dollars, including Rep. Michael McCaul (R-Texas) with 6,632 trades, Rep. Ro Khanna (D-Calif.) with 13,000 trades and Rep. Josh Gottheimer (D-N.J.) with 1,260 trades. Keep in mind that these were merely the trades they elected to report and do not account for the additional transactions that went unreported.
Undoubtedly, this issue persists and will continue to evolve until widespread bipartisan backing for more stringent policies is cultivated. The challenge is in motivating members of Congress to take action, given that their support would require them to prioritize their ethical obligation over their desire for profit. And, to say the least, that is an incredibly tall order in our capitalistic system of governance.