On February 7, 2020, there were 34,876 confirmed cases of Covid-19 worldwide, but none in the United States. On that day, Fox News published a reassuring opinion piece co-authored by Republican Senator Richard Burr, arguing that the US is prepared to face any outbreak. Around February 13, a couple of days before the first confirmed cases in the US were discovered and before the stock markets began to plunge, Burr sold hundreds of thousands of dollars’ worth of stocks, many of which were in the hotel industry. Senator Burr’s stock sale was not public at the time; the sales were first reported by ProPublica only a month later.
We do not yet know whether Senator Burr’s decision to dump his stocks was based on confidential government information to which he had special access. On the one hand, new information on the Covid-19 pandemic was coming out every day, and perhaps Senator Burr was simply one of many investors who changed their minds regarding the outbreak and were lucky to exit the market in time. On the other hand, Senator Burr is the Chair of the Senate Intelligence Committee, which was receiving regular briefings on the coronavirus situation, so the suspicions towards him are understandable. (It also didn’t help matters that a few weeks after the publication of his op-ed Senator Burr told wealthy donors in a closed-door meeting that the Covid-19 outbreak “is probably more akin to the 1918 pandemic,” but never revised his previous public reassurances.) Whether justifiably or not, Senator Burr was harshly criticized (including on this blog), with many calling for his resignation, and he has been sued for insider trading by a shareholder of one of the companies whose stocks he dumped. In addition to the criticism leveled at Senator Burr, several commentaries, including Cristina’s post on this blog, have argued that this incident demonstrates the need to amend the 2012 STOCK Act to impose stricter limitations on the freedom of senior US government officials, including Members of Congress, to trade in stocks.
My perspective is somewhat different. While I acknowledge the legitimate concerns that motivated calls to strengthen prohibitions on stock trading by government officials, in my view regulation should be more focused on ensuring the transparency of those trades, rather than on further limiting or blocking stock trading.
For starters, given adequate transparency, insider trading by self-interested public officials, though ethically troublesome, is often (though not always) less harmful than insider trading by corporate executives. The main rationale behind prohibiting insider trading by corporate executives is that an executive with nonpublic information about her firm’s future performance can buy or sell the firm’s shares in a way that benefits her at the expense of the shareholders, and that the collective effect, if such behavior is pervasive, is an increase in the cost of obtaining capital. This rationale, however, barely holds for public officials, who are most likely to possess nonpublic information that relates to entire sectors (or to the market as a whole), rather than to some specific firm. And even if several public officials trade on their nonpublic information, this is unlikely to have more than a negligible effect on the stock market as a whole.
Moreover, stock trading by public officials—if it is sufficiently transparent—may perform a useful public function, because it conveys information to the public that politicians may otherwise prefer to keep hidden for improper political reasons. It is precisely the self-interest of those public officials that trade in their own stocks that make it possible to draw reliable inferences from their trades. To take the Covid-19 pandemic as an example, during the first month of the outbreak, several governments, most prominently the US and the UK, were criticized for downplaying the severity of the situation and not taking the required steps to contain the outbreak, conveying overly optimistic information to the public. If Senator Burr’s stock dumping had been discovered earlier—say, on the same day as his trades, rather than a month later—this could have triggered a public response that would have brought about an earlier shift in the federal government’s response to the Covid-19 pandemic. The resulting benefits would have outweighed whatever infinitesimal harm Burr’s stock dumping caused to the efficiency of the capital markets.
This is an illustration of a more general point: Often, and especially in times of crisis, politicians and public officials hide vital information from the public, convey inaccurate information, or act in other ways that leave the public short of answers that it deserves. But politicians’ financial self-interest may cut in the opposite direction of their political self-interest, and government officials’ financially self-interested stock trades, if promptly disclosed, can speak louder than their speeches or op-eds or formal pronouncements.
For this reason, reforms to the STOCK act should focus on increasing the transparency of trading by public officials, rather than blocking or limiting it. The STOCK Act already implements some transparency measures, and organizations such as OpenSecrets, which discovered Senator Burr’s stock dumping, make use of these measures. However, the STOCK Act’s existing transparency provisions are insufficient, as best exemplified by the fact that Senator Burr’s actions were revealed and made public only a month after the trading took place. Transparency should be enhanced in (at least) two ways:
- First, stock trades by those officials covered by the STOCK Act should be reported instantly, rather than weeks or months later. Given the current state of internet technology, this type of transparency could be achieved with negligible costs.
- Second, the information should be made available online in a format that is machine-readable and machine-accessible (no scanned documents or captchas, for example). This would allow automated monitoring by any interested party, including journalists and investors. The technology to implement such a measure is readily available, so feasibility is not an issue. But specific provisions to ensure this level of accessibility are almost completely absent from the STOCK act.
That said, while there are many circumstances in which the information conveyed by the timely release of officials’ stock trading information, there are also many (possibly more) cases where insider trading by public officials may be harmful. Public officials are often privy to information that is classified for good reasons, and trading stocks based on that information is equivalent to a harmful leak. Moreover, public officials might deliberately try to manipulate the market. (For example, a senior public official might buy or sell stocks to induce a price change, as other investors wrongly infer that the official’s trades are due to some inside information; the official could then exploit the artificially-created price changes by dumping or snapping up the stocks in question.) So any moves to enhance transparency would need to be accompanied by stricter regulations to ensure that public officials do not engage in these sorts of improper practices. But assuming that such safeguards can be developed and implemented, allowing officials to continue to trade stocks, but requiring those trades to be promptly publicized, may have more overall public benefits than a more stringent approach that would block these trades altogether.