Another Possible Stock Trading Loophole

Members of Congress would be allowed to continue trading industry funds under the two leading stock trading ban bills in Congress.

Another Possible Stock Trading Loophole

Following public outrage over recent congressional stock trading scandals that look a lot like insider trading, momentum is growing in Congress for banning members from making trades. 

Several bills on the issue have recently been proposed and some of them have been steadily racking up cosponsors. Speaker Pelosi reversed her position and said she is open to holding a vote on stock ban legislation, and the House Administration Committee has scheduled a hearing to consider the laws governing congressional stock trading and reforms that could be adopted to improve compliance. 

Several of the proposed stock ban bills, however, have loopholes that would likely limit their effectiveness. Sludge previously wrote about a loophole in some of the proposals that would allow senators and representatives’ spouses to continue trading stocks. But there is also another loophole in some of the bills that pertains to the types of investments that would be targeted. 

The two leading stock trade-banning bills, in terms of number of cosponsors, are the Ban Conflicted Trading Act (H.R. 1579 and S. 564) and the TRUST in Congress Act (H.R. 336). Both bills would prohibit members of Congress from trading corporate stocks, but they contain the same exemption: they would not apply to widely held investment funds, which is defined in the legislation as a fund that is either publicly traded or composed of assets that are widely diversified, and where the investor does not exert control over the assets held by the fund. So while members of Congress would be banned from trading individual corporate stocks, they would still be allowed to trade products like mutual funds or exchange-traded funds composed of bundles of corporate stocks. 

This loophole may undercut what the bills’ sponsors describe as their goals: restricting the conflicts of interest that are presented when members of Congress make decisions that affect the stocks they are trading. While the Ban Conflicted Trading Act and the TRUST in Congress Act would ban members of Congress from trading a stock like ExxonMobil or Chevron, it would allow them to continue buying and selling shares in something like the Energy Select Sector SPDR Fund, which is composed of shares in ExxonMobil, Chevron, ConocoPhillips, and 18 other prominent oil, gas, and energy equipment companies. At least nine House members are invested in that fund, according to a Business Insider database compiling 2020 annual financial disclosure information.

Stock holdings of the Energy Select Sector SPRD Fund. This is an example of the type of industry-specific funds members of Congress would be allowed to continue trading under the Ban Conflicted Trading Act and the TRUST in Congress Act.

Most actions that Congress takes affect whole sectors or industries rather than specific companies. In fact, in many cases Congress is prohibited from taking action against specific companies because such legislation would likely be deemed an unconstitutional bill of attainder. 

Members of Congress invest in similar exchange-traded funds focused on industries including health care, finance, technology, utilities, consumer staples, communication services, and other sectors. Sludge found in the Business Insider data that at least 31 House members hold investments in industry-specific exchange-traded funds worth as much as a combined more than $7.9 million. In many cases, these sector fund investments appear to pose conflicts with their owners’ committee positions. For example, Rep. Peter Welch (D-Vt.) has up to $250,000 in the Technology Select Sector Fund—an ETF composed of shares in Apple, Microsoft, NVIDIA, and more—while sitting on the Communications and Technology Committee. Another example is Rep. Rick Allen (R-Ga.), the ranking member of the Health, Education, Labor, and Pensions Subcommittee. Allen has up to $50,000 invested in a health sector ETF composed of stocks in companies including UnitedHealth, Johnson & Johnson, and Pfizer. 

Read more Sludge news:

Rep. Manning Violated the STOCK Act 51 Times Last Year

At Least 100 House Members Are Invested in Fossil Fuels

Financial Services Dem Buys and Sells Finance Stocks

Pelosi-Controlled Committee Blocks Votes on Congressional Stock Trading