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House Admin Committee Hearing on Examining Stock Trading Reforms for Congress

House Administration Committee

Examining Stock Trading Reforms for Congress

Thursday, April 7, 2022

Topline

  • Chair Lofgren spent much of her questioning on how to address specific circumstances and comparisons between different types of assets.
  • There was agreement among at least a couple witnesses for an outright ban on ownership of stock in individual publicly traded companies by Members of Congress and support for blind trusts.

Witnesses

  • Liz Hempowicz, Director of Public Policy, Project on Government Oversight, Washington, D.C.
  • Donna Nagy, C. Ben Dutton Professor of Business Law, Indiana University Maurer School of Law, Bloomington, Indiana
  • Jennifer J. Schulpm, Director of Financial Regulation Studies, CATO Institute, Washington, D.C.
  • Donald Sherman, Senior Vice President and Chief Counsel, Citizens for Responsibility and Ethics in Washington
  • Jacob Straus, Specialist on Congress, Congressional Research Service, Washington, D.C.

Opening Statements
Chairwoman Zoe Lofgren (D-Calif.)

In her opening statement, Lofgren explained the history of legislation, including the STOCK Act, to curb government corruption and recent events concerning Members of Congress and Administration officials buying and selling stock. She cited House Speaker Nancy Pelosi’s (D-Calif.) request for the Committee to take up the issue of the hearing and said she does not yet know what the final work product from the Committee will be.

Ranking Member Rodney Davis (R-Ill.)

In his opening statement, Davis discussed some of the transparency policies already in place and said compliance requirements with the STOCK Act are not as straightforward as they should be. He added that it is time for Congress to reexamine the STOCK Act, and he hopes it can be done in a bipartisan way. He concluded it is the responsibility of the Committee to ensure Members of Congress are aware of their responsibilities when they come to Congress and pledged to fix this with new incoming Republican members.

Testimony
Ms. Liz Hempowicz, Director of Public Policy, Project on Government Oversight, Washington, D.C.

In her testimony, Hempowicz called for passage of legislation that merges the best elements of the TRUST in Congress Act, the Ban Congressional Stock Trading Act , and the Bipartisan Ban on Congressional Stock Ownership Act of 2022. She said restricting trades and ownership of certain financial interests by Members of Congress, their spouses, and their minor children would create a government ethics program in Congress that puts public duty over private convenience. She recommended that the Committee require Members of Congress and their spouses to divest a broad array of investments with no exception for those held before taking office, adding that Congress should then require congressional members to put any remaining assets in a blind trust that is subject to new disclosures about their holdings. She said divesting some assets and placing others in blind trusts, with the option to buy and sell diversified mutual funds, is not too much of a sacrifice for Members of Congress to make.

Ms. Donna Nagy, C. Ben Dutton Professor of Business Law, Indiana University Maurer School of Law, Bloomington, Indiana

In her testimony, Nagy focused on four parts of legislative reform in regards to Congressional Members owning stock. She said first, effective reform requires an outright prohibition on the ownership of

securities in publicly traded companies, adding that trading restrictions alone will not be an effective solution to the conflict-of-interest problem Congress is faced with. She said secondly, stringent anti-conflict laws apply to executive and judicial branch officials, whereas Congress has facilitated its own members’ financial conflicts, adding the lack of parity among the three branches of government underscores the urgent need for legislative reform. Nagy stated public disclosure of personal investments and the discipline of the electoral process do not constitute effective conflict-of-interest restraints. She concluded saying notwithstanding the STOCK Act, insider trading remains a serious concern that would dissipate if Congressional officials are prohibited from owning securities in publicly traded companies.

Ms. Jennifer J. Schulpm, Director of Financial Regulation Studies, CATO Institute, Washington, D.C.

In her testimony, Schulpm said that focusing solely on the question of trading or owning individual stocks obscures the broader questions of preventing lawmakers from using their positions for personal, financial gain and combatting the public perception that lawmakers are doing so. She concluded saying enhancing transparency permits voters to choose whether the conflicts faced by their elected representatives are problematic, even if those trades are perfectly legal.

Mr. Donald Sherman, Senior Vice President and Chief Counsel, Citizens for Responsibility and Ethics in Washington

In his testimony, Sherman encouraged Congress to embrace comprehensive legislation that would ban

Members of Congress, their spouses, and their dependent children from owning or trading individual stocks, bonds, commodities, futures, or other similar financial instruments. He added that any reform legislation passed by the Congress should contain bright-line rules that give clear guidance to members and their families and be accompanied by a civil penalty that is a significant deterrent and easy to administer. He said Congress must also ensure that any Congressional committees or federal agencies with oversight and enforcement responsibilities in the bill have the authority and resources necessary to do their job effectively and provide the American public with appropriate, transparent, and accessible information about compliance.

Mr. Jacob Straus, Specialist on Congress, Congressional Research Service, Washington, D.C.

In his testimony, Straus focused on three areas: (1) current financial disclosure laws under the Ethics in Government Act; (2) current disclosure requirements for financial transactions under the STOCK Act; and (3) an analysis of current legislative proposals to limit or prohibit certain financial transactions introduced in the 117th Congress. He discussed key elements of Congressional Research Service (CRS) products and concluded that fourteen legislative proposals identified by CRS, including prohibiting the holding, purchasing, selling, and active management of covered assets, requiring the use of qualified blind trusts to remediate real or perceived financial conflicts of interest, changing public access for financial disclosure documents, and amending penalties for non-compliance, are options Congress should explore if it choose to limit or prohibit Members of Congress from engaging in certain financial transactions.

Question & Answer

Qualified Blind Trusts

Rep. G. K. Butterfield (D-N.C.) asked for thoughts on proposals to allow qualified blind trusts. Sherman said qualified blind trusts could be useful if the Members allow for the sale of assets in the trust. Rep. Bryan Steil (R-Wis.) asked what the compliance cost are related to blind trusts. Schulp stated compliance costs with blind trusts tend to be substantial, adding that it usually takes thousands of dollars to set one up. Steil asked if blind trust are only beneficial as long as they stay blind. Schulp said yes. Davis asked if there are minimum amounts required for a financial institution to offer someone a blind trust. Nagy said there are minimum amounts, and they vary depending on the financial institution. She added that the minimum is a significant amount of assets.

Owning Stock

Davis asked if him owning stock in McDonalds since the beginning of his childhood undermines the ability of government officials to do their jobs. Sherman said it is reasonable for any constituent to question their Representative’s stock ownership. Davis continued by asking if it is unethical for him to go to McDonalds and buy lunch while owning stock in the company. Sherman said certainly not; however, Congress should craft ethics policy around the concept of one’s public services and public trust and design a policy that would give the public the greatest confidence that their Representative and Congress as a whole do not have conflicts of interest.

Recusal

Butterfield asked about the crisis of failure to recuse and lack of transparency about conflicts of interest in the Judicial branch. Sherman said conflicts of interest in the Judiciary need to be addressed by Congress but drew a distinction between issues in Congress and the Judiciary. Butterfield asked if there are already protections in place to prevent conflicts of interest, including oversight by good government groups and disclosure. Nagy said disclosure has not worked and that conflicts of one Member should not be allowed by the voting power of one Congressional district.

Scope of Reform

Rep. Pete Aguilar (D-Calif.) asked if stock trading reform should also cover children and senior staff. Nagy highlighted that children often are not the ones controlling their own stock. Steil asked if under a complete stock trading ban, a new Member of Congress with a significant portfolio would be required to divest their entire portfolio upon arrival to Congress. Schulp said yes, adding some legislative proposals would require that, which could result in substantial tax consequences and, depending on where the market is, substantial losses and/or gains to the Member’s investments. Steil asked if Members of Congress should be banned from sophisticated trades like swaps, options, and shorting stocks to improve the public’s confidence that Members of Congress are not engaging in insider trading. Schulp said no, and she believes it will make little difference in public trust.

Enforcement

Aguilar asked about the challenges facing specific enforcement mechanisms through the Executive branch. Hempowicz said penalties should be meaningful, easy to apply, and applicable across the board and then recommend the bill led by Sen. Jon Ossoff (D-Ga.). Nagy said, “the simpler the prohibition, the easier the enforcement.” Aguilar asked how to bolster the enforcement bodies. Sherman said the Committee should speak to the enforcement bodies to understand their capacity and need for resources but that the simplest and cheapest enforcement mechanism is an absolute ban on trading stocks and securities.

Lessons from the Executive Branch

Rep. Mary Gay Scanlon (D-Pa.) asked how the Executive branch guidelines on stock trading might inform the Committee’s work. Sherman discussed the conflict-of-interest statute that bans federal employees from working on specific matters that conflict with their financial holdings. Nagy said that unlike in the Executive branch, Members of Congress can own healthcare stock and still control healthcare policy, and she recommended a statutory change to address that issue. Rep. Teresa Leger Fernandez (D-N.M.) asked how long the panel would recommend a Member of Congress be given before they have to engage in divestment after being elected. Hempowicz said using the Executive branch timeline would be a good starting point, adding that Congress should not create a code of ethics that is impossible to comply with. Sherman agreed and said that the time period should be with all deliberate speed. Fernandez asked if there are divesting examples within the Executive branch that do not fit within the Congressional realm. Nagy said in relation to the time period for divestment, many congressional bills propose a 180-day timetable for divestment. She also said that for any divestment that is required under legislation that Congress enacts, she would also recommend the same type of rollover for capital gains tax that is currently enforced upon the Executive branch. Davis asked if there are tax benefits for officials in the Executive branch to divest their portfolio. Schulp said if a someone within the Executive branch divests, they would be able to receive a certificate of divestiture which would not give them a benefit or penalty and would simply maintain their status quo until after their government service, adding that after that, they would have to pay taxes.

Different Asset Classes

Lofgren asked why stocks are different than other assets, like businesses. Nagy said stocks are the low hanging fruit that can be dealt with by moving those assets into a trust. Lofgren asked if Members should be required to sell their homes. Sherman recognized conflict of interest inherent in a host of areas and emphasized the need for a balancing test, adding that rules applied to stocks impact a much smaller class of assets than the general public possesses.

Disclosure

Lofgren asked if dates should be aligned between tax and disclosure. Sherman said taking a poll of Members to align the dates would make sense. Aguilar asked what measures the Ethics Committee has in place for mistakes on periodic transaction reports (PTR). Straus said the Ethics Committee allows time to amend the filing. Lofgren asked if the dollar amount should matter in disclosure. Sherman conceded that the demarcation could use work. Davis asked if there is anything in the current disclosure requirements that is lacking and needs to be more transparent. Sherman said that the only way to know that a Member of Congress is acting on a conflict of interest is to see their communications in regards to that transaction but that Congress is exempt from Freedom of Information Act (FOIA). He added that the transparency requirements of Congress pale compared to the Executive branch. Davis asked what Congress should do to fix the current transparency process. Sherman said Congress should make the process more easily accessible. Schulp said the long lag between the time that trades happen and that PTRs are required to be filed is something to take a look at.

Special Circumstances

Lofgren asked how to address stock trading by an estranged spouse making unilateral decisions on trades. Hempowicz, speaking generally about specific circumstances like the one described by Lofgren, said the standard should be whether an exemption would undermine public trust. Logren also asked about 529 education savings accounts. Nagy said 529 contributions go into diversified funds, which Members do not have control over. Logren asked about inherited stock given to Members or minor children. Sherman said rules for specific situations should be decided by the Ethics Committees.

Ethics Violations

Rep. Barry Loudermilk (R-Ga.) asked if there has been insider trading by Members of Congress in the last few years. Schulp said there has been no prosecutions brought under STOCK Act provisions but that there have been Members of Congress convicted of insider trading. Davis asked if the ballot box would hold Members of Congress accountable. Nagy said the ballot box is not a sufficient remedy to ethics because ethics affect the nation.

Minimum Holding Periods

Steil asked if minimum holding periods would improve the public’s confidence in Members of Congress abiding by the law. Schulp said yes and that it may have some effect and be worth considering.

 

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.