Members of LeaderEthics-Wisconsin receive a monthly copy of The Ethics Report. Each edition will include summaries of research as well as articles about ethical leadership in practice...frequently awarding a "green light" or "red flag" rating. Each month, we include a featured article from the most recent edition of The Ethics Report.

Featured Article

Transparency, Stocks and Congress

September 2022

Transparency is important for elected government leaders and a vital principle for ethical leadership. Of the many failed or failing nations around the globe, corruption is often at the core. The first step in reducing corruption involves improved transparency, coupled with freedom of the media. It is hard to argue with these principles. However, consider these recent reports regarding stock transactions involving members of Congress.

Federal law prohibits securities trades while possessing non-public information and material in violation of a duty to a third party. In the STOCK Act of 2012, Congress clarified that insider trading laws also bind members of Congress (as well as the President and certain members of the executive branch). It was viewed as important legislation at the time it was passed. However, Federal authorities have yet to prosecute a single member of Congress under the STOCK Act for information acquired within their Congressional duties.

In a September 13, 2022 report, the New York Times determined that at least 113 lawmakers (more than 21% on Congress) had stock transactions by themselves or family members that may have been influenced by inside information. These transactions occurred in 2021 according to a Capitol Trades analysis of disclosures. U.S. lawmakers bought an estimated $180 million worth of stock last year and sold $175 million.

Among the conflicts they found:

 Representative Alan Lowenthal (D-CA, sits on a House committee reviewing the circumstances involved in the two deadly crashes by the Boeing 737 Max jet. His spouse sold Boeing shares a day before a House committee that he sits on released a report exposing the companys mishandling of its 737 Max jet.

 Representative John Rose (R-TN), sold Wells Fargo stock, valued between $100,000 and $250,000 a few months before the committee he is on released a report that was critical of the bank.

 Senator Tommy Tuberville (R-AL) serves on the Armed Services Committee. His spouse sold options tied to Microsoft less than two weeks before the company lost a $10 billion contract with the Defense Department.

The problems with stock transactions go beyond insider information in trading. In a report by MarketWatchthe leading investments made by members of Congress often include big lobbying forces, from oil to defense. Major pharmaceutical and biotechnology companies are also popular investments for elected officials. Furthermore, Johnson & Johnson and Pfizer, the makers of COVID-19 vaccines, were the most-held pharmaceutical stocks in Congress in 2020, owned by 44 and 37 members, respectively. 

Despite the enactment of the STOCK Act, which requires members to quickly and publicly disclose when they buy and sell stocks and corporate bonds, BusinessInsider found that many have failed to comply, often disclosing trades late, if at all. Specifically, from 2020 to 2021, over 200 lawmakers and senior staff members have allegedly violated the reporting requirements of the STOCK Act without any indication from the House and Senate ethics committees of enforcement actions. Furthermore, ironically, disclosure of potential violations may actually benefit members of Congress. Bloomberg Law reports that, given weak enforcement with self-policing, the harm of the perceived conflicts of interests with congressional stock trading is evident in the rise of investor who copy the trades of members of Congress. The copy cats assume that members' trades are based on inside information. In some instances, stocks owned by lawmakers increase in value after they are disclosed under the STOCK Act! No wonder that the New York Times admitted that the 113 members of Congress cited in their report, may under-represent the true total. 

 There have been recent efforts to address this issues. In April 2022, Senator Elizabeth Warren (D-Mass.) and Senator Steve Daines (R-Mont.) introduced the Bipartisan Ban in Congressional Stock Ownership Act (3631) which would ban Members of Congress and their spouses from owning and trading individual stocks. The legislation has not received a vote. Critics point out that there are difficulties determining the extent of the reach (should other family members be included). And some feel it does not adequately address the concerns of self-policing. 

In the decade since the STOCK Act was passed, it has provided greater transparency into the stock trading activities of elected officials, yet it has also highlighted why mandated transparency alone is not enough to prevent the appearance of corruption – or the actual occurrence of corruption. The members cited in the New York Times report have received a red flag for their action. It should be noted that no one in the Wisconsin delegation was listed. It should also be pointed out that many members choose to refrain from stock trading while in office, or opt to place their investments into a blind trust. 

The STOCK Act should be replaced because of the gaping holes that have been exposed in the last ten years. But replacement legislation alone will not address the concerns unless individual members disclose their personal actions with their constituents. In terms of ethical leadership, this is what transparency is about. 

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