The Economist January 29th 2022 United States 33Insidertrading
Capitol gains
A
ttentiontolawmakers’financesis
not new. What is surprisingly recent is
a ban on insider trading by members of
Congress. It was outlawed only in 2012, on
the heels of the financial crisis, through
the aptly named stockAct (Stop Trading
on Congressional Knowledge). But as re
cent allegations of foul play show, the is
sue is far from resolved. Two newly intro
duced bills hope to put an end to it.
Before the stockAct, trading on non
public information obtained as a sitting
member of Congress was not an offence.
The act banned it and requires members of
Congress and their senior staff to disclose
financial holdings, sales and purchases
within a 30day notice period. But enforce
ment is flawed. Deadlines frequently pass
without members disclosing their transac
tions: recent research by Business Insider,
a financialnews site, counts 54 tardy law
makers in 2020 and 2021. Violations are
not publicly reported, and neither are pay
ments of the initial fine of a paltry $200.
No member of Congress has been pros
ecuted under the stockAct. Court filings
made public in October suggest that a
probe by the Securities and Exchange Com
mission into allegations against Senator
Richard Burr is still going on. This con
cerns a suggestion that in February 2020
Mr Burr ordered stock sales of up to $1.7m
after a briefing on the threat of the fledg
ling covid19 pandemic.
Trading scandals are not limited to
Congress. Beginning in September 2021,
the Federal Reserve drew criticism as the
Dallas Fed’s president, Robert Kaplan, and
the Boston Fed’s president, Eric Rosen
gren, and vicechairman, Richard Clarida,
made large trades at a time when they were
involved in wrangling over policy in the
early stages of the pandemic. Mr Clarida
moved between $1m and $5m out of a stock
fund before repurchasing from the same
fund just three days later—just as the Fed
was poised to announce a large stimulus.
All three ultimately resigned.
Two senators have introduced bills to
limit congressional trading. Jon Ossoff, a
Democrat elected in Georgia in 2021, intro
duced the Ban Congressional Stock Trad
ing Act on January 12th with Mark Kelly, a
Democratic senator for Arizona. The next
day Josh Hawley, a Republican from Mis
souri, introduced his Banning Insider
Trading in Congress Act. He had previously
been in talks with Mr Ossoff about a joint
bill. The bills barely differ, mandating not
just members of Congress themselves but
also their spouses and, in Mr Ossoff’s case,
dependent children to place any individual
stocks in a “qualified blind trust” upon as
suming office. Both bills foresee large fi
nancial penalties for noncompliance.
Through a qualified blind trust an inde
pendent trustee would control any assets a
member of Congress or their family may
hold, thus mitigating the risk that they will
abuse access to information. Mr Ossoff,
who during his election campaign accused
his opponent of profiting from trades early
in the pandemic, placed his stocks in a
blind trust soon after taking office. Only
nine other sitting members of Congress
have done the same.
These proposed rules differ markedly
from the ones the Fed has now implement
ed. It has put in place a complete ban on
purchasing individual stocks. Should Fed
officials wish to sell alreadypurchased
shares during their time in office, they will
have to give 45 days’ notice. This way, the
Fed hopes to prevent officials from abusing
their knowledge of monetary policy.
They will still be allowed to buy and sell
diversified mutual and exchangetraded
funds. “Frankly, I’m mystified by the focus
on individual stocks,” says Simon Johnson,
of the mit Sloan School of Management.
“Fed professionals and congresspeople
have plenty of access to policy changes that
can impact the market as a whole.”
Donna Nagy, a law professor at Indiana
University, agrees. “Insider trading is al
ready illegal,” she notes. “What is not ille
gal is owning stocks that are directly and
substantially affected by policy the Con
gress member shapes.” At least 15 lawmak
ers on the House and Senate Armed Servic
es Committees hold stock in defence con
tractors. John Hickenlooper, who serves on
a SenateSubcommittee for Communica
tions, Media and Broadband, holds be
tween $250,000 and $500,000 each in Al
phabet, Amazon and Facebook stock. “The attention on trading obscures the
fact that ownership itself can create con
flicts of interest,” Ms Nagy argues. She
points to the stringent regulation placed
on federal judges, which requires them to
recuse themselves from cases if they are a
shareholder in any of the involved parties.
And, she adds, the assets initially placed in
a blind trust are decidedly not blind.
Among Democratic voters, 70% agree
that members of Congress should be
banned from trading individual stocks.
Even more Republicans, 78%, say the
same. Within Congress, both sides of the
aisle seem in agreement. And yet any bill
has large hurdles to surmount. Nancy Pelo
si, the House speaker, opposes a ban on
congressional trading. She has said that
spouses should be able to take part in a
freemarket economy, stating that she had
trust in her members. Overcoming the
speaker’s opposition is a tall task, especial
ly with two competing bills. But pressure is
building: on January 24th a letter signed by
27 members of Congress (25 Democrats and
two Republicans) urged her and the Repub
licans’ leader in the House, Kevin McCarAllegations of insider trading spur thy, to bring the legislation to the floor.n
vigorous new efforts to stop it
SportsbettingPlaying for
high stakes
B
link at thewrong moment while driv
ing south on the I605 into Long Beach
and you might miss it. A sign advertising
the Gardens Casino is one of the few mark
ers for the town of Hawaiian Gardens, a
square mile nestled at the bottom of Los
Angeles County. Inside the casino, hun
dreds of tables offering poker, baccarat and
other games are filled with Angelenos
there to eat, drink and gamble. The casino
accounts for 70% of Hawaiian Gardens’ tax
revenue. The prospect of legal sports gam
bling could have been a boon for small Cal
ifornia towns supported by such card
rooms, licensed to play select games. In
stead, it could pose an existential danger.
After years of failure by the state legisla
ture in Sacramento to forge a compromise,
the battle to legalise sports gambling in
California has shifted terrain. Now large
onlinegambling websites, Native Ameri
can tribes and the card rooms are taking
advantage of California’s permissive refer
endum rules to sponsor four measures,
aiming to qualify them for the ballot in No
vember. Each measure would favour one
group at the expense of the others. Rather
than usher in a new, competitive market,H AWAIIAN GARDENS, CALIFORNIA
Small casinos may lose out in the fight
over sports gambling in California