Should lawmakers refrain from taking actions in their financial portfolios when they have information not yet known by the public?
That is the question at the heart of a Washington Post analysis published Sunday which found that 19 Democrats and 15 Republicans, many in leadership positions, adjusted their portfolios 166 times within two business days of contacts with Federal Reserve or Treasury officials.
The Post’s lengthy analysis found no smoking guns. For example, it found no evidence of insider trading and said that the portfolio moves it did discover were permitted under congressional ethics rules and the STOCK Act, which Congress passed this year. Under that law, lawmakers and senior congressional staffers cannot use confidential information for their personal benefit.
But the Post points out that Congress has imposed stricter rules on executive branch officials, such as the chairman of the Fed or secretary of the Treasury, who cannot invest in the stock of financial institutions.
So the main takeaway of the Post article is that, even following the passage of the STOCK Act, lawmakers can still take actions that would be prohibited for Treasury Secretary Tim Geithner or Fed Chairman Ben Bernanke. In other words, the STOCK Act does not prevent lawmakers from trading in stocks of companies they oversee or in shifting their portfolios after meeting with senior Fed or Treasury officials.
Readers can judge for themselves the scenarios the Post describes. A typical one involves Kent Conrad (D-N.D.), chairman of the powerful Senate Budget Committee. At 4:30 p.m. on Aug. 13, 2007, Conrad met with then-Treasury Secretary Hank Paulson at a time when the market was plunging in reaction to the first revelations of the subprime mortgage crisis.
The day of the meeting with Paulson, Conrad shifted some $150,000 to $300,000 invested in three mutual funds in his wife’s 401(k) account (congressional rules allow for ballpark rather than precise amounts) to safe money-market accounts.
The move proved savvy; countless stories at the time related the depletion of assets in 401(k) account invested in stocks. But Conrad vigorously denied any connection between the meeting with Paulson and his portfolio moves.
Quotes the Post: “The decision that my wife and I made with our financial advisers to diversify into lower-risk investments had everything to do with what was happening that was on the front pages over every paper, including yours. His call to me had absolutely nothing to do with those issues.”
Other lawmakers, with quite similar stories, told the post that any portfolio shifts occurring after meetings with senior administration officials were purely “coincidental.”
A number of issues would seem to emerge from the fact scenarios reported by the Post.
First, it can be very difficult to ascertain whether lawmakers’ portfolio moves following meetings with senior administration officials were mere coincidences. Do lawmakers therefore have a duty to refrain from actions because of the mere appearance of impropriety?
Secondly, judicial rules allow for judges to recuse themselves in areas where they have some personal stake. How is it that lawmakers can trade stocks of companies in industries they oversee? Can they serve in the public’s best interest where they may hve personal interests pulling them in one direction?
Third, if lawmakers do in fact make sell decisions based on unequal information not available to all market participants, when does that sale rise to the level of fraud? Normally, a buyer in such a situation would have been a fraud victim. But what if the thrust of that information genuinely was “on the front pages over every paper?”
What do financial advisors think of the ethics of lawmakers making portfolio decisions in the course of their work as law and policy are set?