Experts aren’t optimistic about members of Congress trading stocks

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With U.S. confidence in government at an all-time low and members of Congress negotiating actions that appear to pose a conflict of interest, some Northeastern University experts say restrictions on lawmakers’ participation to the financial market are absolutely necessary.

The Stop Trading on Congressional Knowledge Act of 2012 requires lawmakers to observe insider trading prohibitions, and while the law may prevent lawmakers from using information obtained through their work for financial gain, it does not go far enough to prevent any suspicion of wrongdoing. , said Blaine G. Saitoassistant professor of law at Northeastern, who is a tax expert and previously worked on Capitol Hill.

“The appearance of irregularity is as important as the thing itself. We’re talking about trust and faith here,” Saito says. law of 2012 goes far enough.

Congress is consistently rated as one of the lowest rated institutions in terms of public trust, Saito notes. a september Gallup poll found 37% of Americans trust the legislature. Trust in the branch has not exceeded 40% since 2009.

Examples of lawmakers engaging in seemingly unethical financial dealings are seen in the political aisle. Democratic House Speaker Nancy Pelosi came under fire for her husband’s purchase of $2.2 million worth of Tesla stock as the federal government plans to switch to electric vehicles. Democratic Senator Joe Manchin was regularly criticized for its coal mining revenues. And former Republican Senator David Perdue was castigated for selling more than $1 million worth of stock in a financial company of which he was a board member.

“It raises some important questions, although it’s not necessarily going to cloud this congressman’s judgment,” Saito said. “It may not mean that they will implicitly or explicitly do anything for the company in which they have invested, but from a public and democratic point of view, this appearance of impropriety is almost as detrimental as the real irregularity.”

Potential conflicts of interest arise not only for legislators, but also for other public servants. In September, two heads of the Federal Reserve announced their retirement following criticism due to personal investments that seemed to pose ethical problems.

Nancy Kimelmanassistant professor of economics at the Northeastern Economics Professor who worked on Wall Street, was shocked by the scandal, in particular because members of the Fed were not subject to the same restrictions as the banks they are responsible for regulating, which have strict investment disclosure. terms.

“What’s strange here is that the Federal Reserve is the regulator of the banks. Why isn’t the regulator of the banks subject to the same rules as the real rulers of the bank?” asks Kimelman.

Since the scandal involving the Fed, the American banking system has adopted new rules for the business activity of its senior officials. However, much more needs to be done to avoid these kinds of conflicts of interest and improve public confidence in its federal institutions, notes Kimelman.

“I hope this is the start of a larger process to try to bring greater accountability and honesty to a system that many people believe is corrupt,” Kimelman said.

In February, a bipartisan group of senators introduced a bill to ban members of Congress from trading stocks. These rules appear to have broad support among the public, with 63% of voters backing such a ban, according to a Morning Consult/Politico survey from January.

The US Federal Reserve Building in Washington, DC, USA.  US Federal Reserve Chairman Jerome Powell on Wednesday reaffirmed the central bank's plan to raise interest rates at the next policy meeting, noting that he was inclined to support a 25 basis point rate hike. base.  Photo by Liu Jie/Xinhua via Getty Images

Legislation already exists to address this same problem in other branches of government, Saito points out. Senior executive officials and members of the judiciary are required to place their assets in blind trusts, where they cannot access their assets. However, such a system also allows public servants to evade taxes through the so-called “enhanced base loophole”, where they can keep their assets for life without paying taxes on the earnings they earn. they derive from the sale of shares. Thus, those who must place their assets in blind trusts can defer paying taxes on the gains. If they die, the taxes are wiped out for the person who inherits their property.

“There’s great power in this deferral, where the longer they delay selling the stock, it’s seen as more beneficial,” Saito says, noting, however, that a blind trust system would still be better than nothing. .

northeastern law professor David M. Phillipswho has written extensively on business ethics, foreign trade and investment, agrees that a system of blind trust may make the most sense, as fewer conflicts of interest may arise if legislators entrust their assets to a professional fund manager and do not know their asset portfolio.

“With individual actions, your decisions can affect individual companies differently. What seems like an extreme example is Manchin,” says Phillips. “According to newspaper reports, he is involved in energy holdings in West Virginia. This is clearly problematic based on some of the positions he has taken on climate control.

A blind trust system may also be less restrictive for lawmakers’ participation in the free market than an outright ban on stock trading.

“We don’t generally think people stay in Congress for just two years, does that mean someone elected at a very young age can’t participate financially without issues affecting their particular vote?” asks Philip.

Part of the resistance to lawmakers banning stock trading is their relatively low salaries, says North East law professor Jeremy Paul, which teaches constitutional law, where the powers of Congress are a subject of study. Banning lawmakers from trading stocks must be done at the same time as raising their salaries, he argues. However, such a proposal would likely be extremely unpopular with the American people, Paul acknowledges.

“It wouldn’t cost that much to give them raises, but it would look bad,” Paul said. “But by not paying them more, we’re financially putting congressional services beyond the reach of ordinary Americans and implicitly structuring things that deepen distrust of Congress because now they’re looking for all sorts of loopholes, like trade in actions, the use of campaign funds. incorrectly, etc.

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