Four U.S. Senators have been accused of trading stocks based upon non-public information about the coronavirus outbreak. The most disturbing cases appear to be Republican Senators Richard Burr and Kelly Loeffler. Senator Burr, who as Chair of the Senate Intelligence Committee attended a daily confidential briefing on the pandemic, divested between $628,033 and $1.72 million from industries hardest hit by coronavirus restrictions, including two major hotel chains. Senator Loeffler, who attended a confidential meeting about the coronavirus on January 24th, divested $1.275 million to $3.1 million from industries most hit, while also purchasing stock in teleconferencing companies. (Two other Senators, Democrat Dianne Feinstein and Republican Jim Inhofe, both also made significant stock sales during this time, but Senator Feinstein’s funds are in a blind trust, and Senator Inhofe has said his financial decisions are made by his financial advisors without consulting him.)
This is not the first time that concerns have been raised about Members of Congress corruptly taking advantage of their privileged access to inside information to enrich themselves, though the fact that Senator Burr engaged in these transactions shortly after having co-authored a piece claiming that “the United States today is better prepared than ever before to face emerging public health threats, like the coronavirus” makes his case particularly egregious. In 2004, a quantitative study found that the investment portfolios of U.S. Senators consistently outperformed the market, a result that at least suggests that Senators were using non-public information to inform their investment decisions. In response to this concern, in 2012 Congress enacted a bipartisan bill called the Stop Trading on Congressional Knowledge (STOCK) Act. (Senator Burr, it should be noted, was one of only three Senators to vote against it.) The main purpose of the STOCK Act was to expressly affirm that Members of Congress and their staffers were covered by the general prohibition on insider trading. The Act also increased transparency by requiring that Members of Congress and senior staff release financial disclosures within 45 days of major trades.
The STOCK Act was a step in the right direction, but it does not do nearly enough to prevent federal legislators from using their privileged positions to enhance their own wealth. To eliminate this form of corruption, the law should impose much more aggressive, prophylactic restrictions.
One of the STOCK Act’s most significant weaknesses is that it’s very difficult to enforce in those cases where Members of Congress receive information in confidential briefings, to which investigators do not ordinarily have access even after the fact. Indeed, in the case of Senators Burr and Loeffler, we don’t actually know that the confidential meetings they attended included discussions of the likely impact of the coronavirus epidemic. That such discussions took place is a reasonable inference, but in other cases it won’t be so clear whether a Member of Congress’s stock trades had anything to do with the content of their confidential discussions. (Indeed, Senator Burr is defending himself by arguing that he relied on publicly available information when deciding to divest from hotel chains.) And while it might be possible to amend the Act to provide select prosecutors with security clearances to examine confidential transcripts in certain cases, it’s not feasible or desirable to open up secret national security briefings to federal law enforcement monitors on an ongoing basis.
Even putting this issue to one side, the STOCK Act also fails to provide sufficient transparency with respect to the required financial disclosures. The original 2012 version of the Act provided that these disclosures were to be made available in a searchable online database, but after an independent report suggested that an online database would leave government officials vulnerable to identity theft, Congress amended the law in 2013 to eliminate the online database. Under the amended version of the law, to get access to the disclosures, one must visit an office in the basement of the House of Representatives building in Washington D.C., request the records of an individual, and print out those records for $0.10 a page. While it might be easy enough to amend the STOCK Act to reintroduce the online database (assuming the concerns about identity theft could be adequately addressed), this would still not solve the larger problems with the Act.
Much stronger medicine is needed to prevent Members of Congress from profiting off of their privileged access to inside information. One possibility, which has been advocated by (among others) Senator Jeff Merkley and Senator Elizabeth Warren (who included it in her proposed anticorruption bill), and which has some support in the House of Representatives, is to prohibit Members of Congress from owning individual stocks; Members could invest in the stock market only through diversified index funds or mutual funds. An alternative approach would be to require Members of Congress and their senior staff to place all their investments in a blind trust prior to assuming office. (As noted above, Senator Feinstein has defended herself from accusations that she benefitted from inside information about the coronavirus by emphasizing that all of her assets are in a blind trust, and decisions about what stocks to buy or sell are made by the trust managers without her knowledge or input.)
More aggressive measures along these lines would not only address concerns about improper use of inside information, but might also address the serious concerns about the conflicts of interest that can arise when legislators have investments in the very industries that they regulate. Of course, one obvious barrier to enacting any legislation along these lines is that it’s very difficult to convince a majority of legislators to vote against their own financial interests. But the public outrage provoked by the coronavirus insider trading scandal may provide a window of opportunity for reform advocates to pass a bill and implement one of these preventative solutions.