as published in The Hill - February 21, 2023
Last month Sen. Josh Hawley (R-Mo.) introduced the Preventing Elected Leaders from Owning Securities and Investments Act, or, the PELOSI Act. The goal is to clarify the boundaries and limitations of political leaders’ stock trading and to prevent profit from insider information.
This isn’t the first time there has been an attempt to address this issue. Previously, Congress passed the Stop Trading on Congressional Knowledge Act, or the STOCK Act, to curtail congressional insider trading. The act quickly became unenforceable. The Stock Act had no teeth due to the Constitution’s “speech and debate” clause, which provides members of Congress with immunity from civil and criminal legal action based on the performance of legislative duties.
At first glance, the PELOSI Act would be a great solution. The proposal would ban members of Congress from trading individual stock, but is this the best solution?
When asked about banning members of congress from trading, former Speaker Nancy Pelosi (D-Calif.) responded, “We are a free market economy. They should be able to participate in that.”
The comment is easy to dismiss, as it comes from someone who is the literal namesake of the current proposed congressional insider trading laws. However, there is some truth to her response.
Members of Congress should be able to trade because removing policymakers from the consequences of their policy has never worked. History has countless examples of the American people suffering when the decision-makers in government do not participate in the same systems they legislate.
One example is the Federal Reserve, which monitors the world’s financial system and supports a healthy domestic economy. One of the Fed’s tools is setting interest rates, which is done after reviewing factors like economic health and the economy’s direction. Setting interest rates is a powerful tool allowing the Fed to move the stock market drastically. In the fourth quarter of 2021, in response to controversy over its investing practices, the Federal Reserve banned its policymakers from holding individual stocks.
In hindsight, the Fed’s policymakers and senior officials sold their stocks and left the market during what was the highest peak in the last three years. Since then, the Fed has increased rates and made policy decisions that have directly caused the economy to slow. Policymakers sold off individual stocks right before the start of 2022, one of the worst years in stock market history and the worst year since the 2008 crash.
Whether the Fed’s policy decisions are right or wrong, the people who make them should not insulate themselves from the effects of their choices. Giving Congress the same insulation would be a mistake. If we want an economy that works for everyone, we must include everyone, especially those whose decisions most influence the system.
However, a solution already exists in the United States Code SEC Rule 10b5-1.
Rule 10b5-1 addresses insider trading among executives. All policymakers, their staff and direct family should be subject to Rule 10b5-1, which governs executives in the private sector.
Under this provision, policymakers must create a contract laying out the specifics of their trades, including the stock ticker, share amount, trade limit prices and trade dates. They would then sign the contract with their broker, and after a cooling-off period, the broker places the trades on the policymaker’s behalf.
The law could be tailored even further by making parts of these contracts public. Americans should know the companies a policymaker buys or sells shares of, to expose potential violations. Moreover, there should be a fixed cooling-off period. Currently, 10b5-1 allows companies to set their cooling-off periods. Public officials should be prohibited from trading for 45 days after the 10b5-1 contract is signed and released publicly. Finally, there must be clear and strict policies to punish those who ignore these laws.
Almost every broker in the country has a 10b5-1 department and the policies to handle these contracts. The 10b5-1 laws provide a solution that complies with the Constitution’s “speech and debate” clause and provides much-needed public scrutiny of congressional insider trading. These rules have a track record of over 20 years of success while providing more transparency and accountability than the STOCK Act ever has.
George Ferris is a fellow for Economic Empowerment with the Joseph Rainey Center for Public Policy.