The general public has strong feelings about individual members of Congress having an unfettered ability to trade in cash, equity, and derivatives markets using information gained in their service on Congressional committees, in special briefings, and through confidential communications. It looks suspicious in the eyes of many investors, and this suspicion undermines trust and confidence in our elected leaders.

Typical examples of where this could become a problem include having inside knowledge of developing security, health and safety, and cyber vulnerabilities, looming pandemics, as well as any emerging vulnerabilities in the financial and banking system. To put it bluntly, armed with this information, members of Congress could potentially enter or exit a market position in relative calm before any market storm.

You might think this is something the voting public would have insisted on resolving years ago. You would be wrong. Only when the political winds blow too strongly to be ignored does Congress begin the move to repair the offending behavior. Rather than being masters at threading the ethical needle, members of Congress should address the matter, once and for all, without leaving too much room for exceptions. 

There are several bills currently circulating in Congress that intend to bring some transparency and limits to this potential for abusive trading. However, if Congress truly wants to address the reality of trading financial instruments by those who gained information over the course of their service to the American people, then we at CFA Institute have some ideas. These ideas don’t result in half measures; rather, they address the concerns that the voting public and constituents of every stripe have expressed.

Investors and the public suspect Congress of gaming the system under the cloak of public service. CFA Institute has focused on investment ethics and professional conduct for 75 years in support of market integrity. When it comes to personal trading practices, these issues are clear cut: Fiduciaries and those in the position of public trust must be committed to fair and honest practices. They must never use material non-public information for their own investment gains or tip others ahead of the market-moving information becoming public.  

The SEC, other regulators, and the industries they oversee are intolerant of those taking personal advantage of privileged, non-public information. An entire compliance practice has evolved over the years to monitor and prevent personal trading abuses in the financial industry. The Federal Reserve Board just recently implemented its own approach that should serve as a guide to congressional practice in this area.

In our view, five key principles should guide Congress in the establishment of formal rules addressing personal trading by members of Congress and related parties (covered persons).

Personal transactions ban

During their daily activities, members of Congress have unique access to a continuous flow of confidential, non-public information as political leaders. They are in the inner circle on potential market-moving data, intelligence, and policy announcements that must not be used to trade. 

Since it is extremely difficult to know the source, nature, and timing of the information they are exposed to or acquire in their Congressional duties, there is a constant potential for personal trading abuse. Quite succinctly, personal trading should not be permitted.   

Use of blind trust services

Like all Americans, members of Congress should be encouraged to invest and prepare for retirement. In theory, there should be no prohibition on having personal investments and having accounts that are actively trading in the markets.

In the case of Congress, lawmakers will continually have an informational advantage over other public market investors. Given this reality, members of Congress should insulate investment decisions in their accounts from this unfair advantage via a blind trust arrangement.    

A pre-clearance process is inadequate

Lawmakers’ inside information access is constant and highly variable as to source and timing, so it is not plausible to establish an effective or efficient process designed to pre-clear trading requests–a practice that is standard at investment firms. 

Assessing the timing of trades against the confidential information lawmakers may have access to is simply impractical. In most cases, the confidential information will not be available to preclearance staff. As a result, they lack the ability to make an informed decision using traditional preclearance factors in use by most financial institutions.

Covered persons

There must be specificity around the application of the policy to other covered persons beyond members of Congress. Their personal trading policy should be also applied to immediate and extended family members as well as to the congressional staff who may be exposed to the same privileged, non-public information.

It should be clearly stated that passing on privileged, non-public information to others who are not covered by the policy, is prohibited.

Limited exceptions

Any exceptions to the principles of a trading ban and use of blind trusts should be limited. However, some are necessary:

• There should be no forced liquidation of personal investments in existing accounts of the member of Congress who is just beginning his/her service.   

• Investment assets held prior to starting in Congress and retained by the member without transfer to a blind trust investment service can be held but not traded. Any transactions in such existing accounts should be done only under the auspices of a blind trust.

• Automatic contributions to any Congressional savings or retirement plans would be encouraged and not considered personal trading. The policy should address trading or asset reallocation activities by the member of Congress in any of these congressional savings or retirement plans.  

Members of Congress regularly pound the table and call for more regulations to prevent unfair trading practices across Wall Street. And we agree. The same standard should apply to Congress.

Paul Andrews is head of research, advocacy, and standards at CFA Institute. He is a former secretary general of IOSCO and previously held senior roles at FINRA and the SEC.

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