Thursday, April 9, 2020
Congressional securities trading has attracted a good bit of attention after controversial trades by Senators Burr and Loeffler. The scrutiny has even drawn more attention to another surprisingly well-timed trade by Senator Burr.
In his essay, Shill takes up the issue from a policy perspective, looking at how we ought to regulate Congressional Securities Trading. He draws from ordinary securities regulation and suggest pulling over the trading plan approach and short-swing profit prohibition we use for corporate executives. This approach should help manage ordinary securities transactions by members of Congress and their staff. He also advocates for limiting Congressional investing to U.S. index funds and treasuries. This would reduce the incentive to favor one market participant over another.
The proposed reforms would be a substantial improvement over the status quo. We should not have legislators with significant financial incentives to favor one company over another when making law and setting policy. We should also not subsidize public service by tolerating Congressional trading on Congressional information.
Of course, we'll still face some implementation challenges. When and how would we require newly-elected and currently-serving officials to liquidate existing portfolios? What kinds of exceptions would we make for private-company investments where no ready, liquid market exists? These implementation challenges strike me as mild compared to the benefits.
And Congressional adoption of the proposal would certainly yield substantial benefits. Although difficult to quantify, two broad benefits seem clear. First, adopting the proposal would generally increase confidence in government's integrity. As we're seeing with the pandemic, public trust in public officials can shift how society responds in times of collective crisis.
Allowing federal officials to trade securities generates real harm, confusion, and suspicion. Consider the hubbub over Trump's indirect ownership of a tiny stake in drug-maker Sanofi. Some have seized on the small, indirect interest to contend that he now hypes a particular drug for personal gain. A public-trust-focused regime limiting all elected officials to only broad index funds and U.S. Treasuries would likely cut down on the fear that officials recommend particular things to the public because of their economic interests. To be clear, it strikes me as extremely unlikely that the President now hypes the drug because of his minuscule ownership stake. The much likelier explanation is simply disordered magical thinking.
Many politicians have been targeted by similar attacks. This particular type of ill-informed charge has also been leveled at Senator Elizabeth Warren. One deeply misleading headline claimed she "invested in private prisons" before going on to explain that she owned a Vanguard index fund. It would be better to remove this line of attack entirely by sharply limiting the ways public officials invest.
Limiting Congressional ownership would also advance another vital national interest by increasing confidence in American securities markets. Our ability to attract capital and move it from investors to the real economy depends on confidence in the system. If investors fear that Congressional insiders have a leg up, they may not be as likely to participate in our markets.
As Congress considers how to regulate on these issues in the future, it should pay close attention to Shill's recommendations.