[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
EXAMINING STOCK TRADING REFORMS FOR CONGRESS
=======================================================================
HEARING
before the
COMMITTEE ON HOUSE
ADMINISTRATION
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
----------
APRIL 7, 2022
----------
Printed for the use of the Committee on House Administration
[[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available on the Internet:
http://www.govinfo.gov/committee/house-administration
EXAMINING STOCK TRADING REFORMS FOR CONGRESS
EXAMINING STOCK TRADING REFORMS FOR CONGRESS
=======================================================================
HEARING
before the
COMMITTEE ON HOUSE
ADMINISTRATION
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
APRIL 7, 2022
__________
Printed for the use of the Committee on House Administration
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available on the Internet:
http://www.govinfo.gov/committee/house-administration
______
U.S. GOVERNMENT PUBLISHING OFFICE
47-699 WASHINGTON : 2022
COMMITTEE ON HOUSE ADMINISTRATION
ZOE LOFGREN, California, Chairperson
JAMIE RASKIN, Maryland RODNEY DAVIS, Illinois,
G. K. BUTTERFIELD, North Carolina Ranking Member
PETE AGUILAR, California BARRY LOUDERMILK, Georgia
MARY GAY SCANLON, Pennsylvania BRYAN STEIL, Wisconsin
TERESA LEGER FERNANDEZ, New Mexico
C O N T E N T S
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April 7, 2022
Page
Examining Stock Trading Reforms for Congress..................... 1
OPENING STATEMENTS
Chairperson Zoe Lofgren.......................................... 1
Prepared statement of Chairperson Lofgren.................... 5
Hon. Rodney Davis, Ranking Member................................ 9
Prepared statement of Ranking Member Davis................... 11
WITNESSES
Jacob Straus, Specialist on the Congress, Congressional Research
Service........................................................ 16
Prepared statement of Mr. Straus............................. 18
Liz Hempowicz, Director of Public Policy, Project on Government
Oversight 33
Prepared statement of Ms. Hempowicz.......................... 35
Donald Sherman, Senior Vice President and Chief Counsel, Citizens
for Responsibility and Ethics in Washington.................... 47
Prepared statement of Mr. Sherman............................ 49
Donna Nagy, C. Ben Dutton Professor of Business Law, Indiana
University Maurer School of Law................................ 59
Prepared statement of Ms. Nagy............................... 61
Jennifer J. Schulp, Director of Financial Regulation Studies,
CATO Institute................................................. 73
Prepared statement of Ms. Schulp............................. 75
QUESTIONS FOR THE RECORD
Jacob Straus, Specialist on the Congress, Congressional Research
Service, responses............................................. 111
Liz Hempowicz, Director of Public Policy, Project on Government
Oversight, responses........................................... 123
Donald Sherman, Senior Vice President and Chief Counsel, Citizens
for Ethics and Responsibility in Washington, responses......... 145
Donna Nagy, C. Ben Dutton Professor of Business Law, Indiana
University Maurer School of Law, responses..................... 160
Jennifer J. Schulp, Director of Financial Regulation Studies,
CATO Institute, responses...................................... 224
SUBMISSIONS FOR THE RECORD
February 17, 2022, Jacob R. Straus, Stock Trading in Congress:
117th Congress Proposals to Limit or Prohibit Certain Financial
Transactions, submission....................................... 239
Campaign Legal Center group letter to Speaker Pelosi and House
Administration, submission..................................... 243
Gonzaga University School of Law, The Shortsightedness of Blind
Trusts, submission............................................. 246
April 18, 2022, Project on Government Oversight letter to House
Administration, submission..................................... 287
April 7, 2022, National Taxpayers Union letter to House
Administration, submission..................................... 292
April 7, 2022, Krishnamoorthi, Ocasio-Cortez, and Neguse letter
to House Administration, submission............................ 294
March 17, 2022, The Wall Street Journal, Dozens of Federal Judges
Had Financial Conflicts: What You Need to Know, submission..... 307
June 18, 2020, Kelner, Koski, Bailey, The Challenges of
Prosecuting Congressional Insider Trading, submission.......... 311
Ayala, Marianne, Insider, 59 Members of Congress have violated a
law designed to stop insider trading and prevent conflicts-of-
interest, submission........................................... 315
February 22, 2022, Schulp, Jennifer, Banning Lawmakers From
Trading Stocks Won't Fix Congress, submission.................. 317
Leonard, Kimberly, Republican Rep. Rodney Davis doesn't trade
stocks. But that doesn't mean he's ready to stop other Members
of Congress who do, submission................................. 325
April 4, 2022, Stock Act at 10: Lawmakers reflect on what
worked--and what needs fixing--with Congress' conflicts-of-
interest law, submission....................................... 334
EXAMINING STOCK TRADING REFORMS FOR CONGRESS
----------
THURSDAY, APRIL 7, 2022
House of Representatives,
Committee on House Administration,
Washington, DC.
The Committee met, pursuant to other business, at 9:09
a.m., in Room 1310, Longworth House Office Building, Hon. Zoe
Lofgren [Chairperson of the Committee] presiding.
Present: Representatives Lofgren, Butterfield, Aguilar,
Scanlon, Davis, Loudermilk, and Steil.
Staff Present: Jamie Fleet, Democratic Staff Director;
Khalil Abboud, Deputy Democratic Staff Director; Caleb Hays,
Minority General Counsel and Deputy Staff Director; Dan Taylor,
Deputy Staff Director and Chief Counsel; Kulani Jalata,
Elections Counsel; Sean Jones, Professional Staff Member;
Andrew Garcia, Staff Assistant; Tim Monahan, Minority Staff
Director; Elliot Smith, Minority Professional Staff Member;
Kyle Parker, Chief of Staff for Representative Butterfield; and
Elizabeth Arevalo, Legislative Director for Representative
Leger Fernandez.
OPENING STATEMENT OF HON. ZOE LOFGREN, CHAIRPERSON
The Chairperson. The Committee on House Administration will
come to order. I want to say good morning to everyone.
As we begin, I want to note, we are holding this hearing in
person but also in compliance with the regulations for Remote
Committee Proceedings pursuant to House Resolution 8. Members
and witnesses were provided an opportunity to participate
remotely if necessary. None of the witnesses are doing so for
this proceeding. And, of course, we have the Members who are
here at the dais personally. I am very pleased to see everyone
here. I note that we are holding this hearing in compliance
with the most recent guidance issued by the Office of the
Attending Physician.
At this time, I ask unanimous consent the chair be
authorized to declare a recess of the Committee at any point
and that all Members have five legislative days in which to
revise and extend their remarks and have any written statements
be made part of the record.
And, hearing no objections, that is so ordered.
The Chairperson. For all of us who are fortunate enough to
work in public service, a guiding principle should be that a
public office is a public trust. Without the public's trust and
confidence, government loses its legitimacy.
That principle was of paramount importance to the Founders.
As ``The Federalist Papers'' put it, ``The aim of every
political constitution is, or ought to be, first to obtain for
rulers men who possess--I would add women as well--most wisdom
to discern, and most virtue to pursue, the common good of the
society; and in the next place, to take the most effectual
precautions for keeping them virtuous whilst they continue to
hold their public trust.''
Since the founding, this has remained a vital underpinning
of our democracy and informed periodic reforms to address
shortcomings in standards of conduct for public officials.
For example, this week marked the 10th anniversary of the
enactment of the STOCK Act. That measure, which President Obama
signed into law on April 4, 2012, amended the Ethics in
Government Act of 1978 and imposed new financial disclosure
requirements, among other provisions.
Overwhelming bipartisan majorities decided then that the
existing statutory framework to combat government corruption,
improve financial disclosure and transparency, and curb
financial conflicts of interest in government had to be
strengthened--or, as the Founders might have put it, that more
effectual precautions were necessary to keep our public
officials virtuous while they continued to hold their public
trust.
Accordingly, the STOCK Act enhanced public disclosure
requirements by introducing a requirement to report securities
transactions throughout the year closer in time to the
transactions rather than just the following year on an annual
statement.
Among other things, the STOCK Act also affirmed that
insider-trading prohibitions apply to Federal officials and
clarified that all Federal officials have a duty of
confidentiality and trust to the United States and its citizens
with respect to material nonpublic information that they derive
from their positions.
These were important steps forward. A friend to many of us,
the late Chairwoman, Representative Louise Slaughter, was the
primary champion of the STOCK Act and worked for years to see
it passed into law, and it is fitting that Congress named the
law in her honor.
The 10th anniversary of the STOCK Act would, on its own,
provide a good opportunity to review how officials have
complied with the law and whether there are ways it could be
updated.
Unfortunately, there have been examples in all branches of
government that further reforms are needed. Consider the
following examples, brought to light by government oversight
and ethics groups, several of whom are represented here today,
in public reporting.
Reporting by the Insider and other publications found that
a Member of Congress failed to file the periodic transaction
reports required by the STOCK Act on time.
Reporting has also questioned whether Members engaged in
improper trading activities or have financial conflicts of
interest. In the early weeks of the pandemic, several Senators
bought and sold millions of dollars in stock after attending
closed-door, confidential briefings with top national security
and health experts on the pandemic and the looming economic
shutdown. This included selling stocks that would soon take a
hit after the stock market plunged and buying stock in
industries that received a boom due to the pandemic, such as
remote-work technology, telemedicine companies, car companies
manufacturing ventilators, and pharmaceutical makers developing
vaccines.
The Department of Justice reportedly reviewed the trading
activity of several Senators, and, according to the Securities
and Exchange Commission, it is still investigating one
Senator's trading activities and related conduct.
Also early in the pandemic, the Chief of Staff to then-
President Trump sold between a quarter of a million dollars and
a half a million dollars in publicly traded securities the same
day that President Trump said the economy was doing, quote,
``fantastically.'' The next day, the value of those holdings
plummeted.
At the Federal Reserve, multiple senior officials,
including presidents of two of the Fed's twelve Reserve Banks,
engaged in large financial transactions when the Fed was
playing a key role in decisions about the Nation's economy
during the pandemic.
Even before the pandemic, though, there were other
troubling signs. The wealthiest President and the richest
Cabinet in modern history, which included a significant number
of billionaires, also exposed how the law's disclosure
requirements are out of date and particularly inadequate for
the super-rich who become government officials.
In one case, a former Member of the House was investigated
by both the Department of Justice and SEC for insider trading
and other violations related to his actions in sharing insider
information about a failed clinical trial of an Australian
biotech company. He ultimately pleaded guilty to conspiracy to
commit securities fraud and false statement charges, and he was
sentenced to 26 months in prison, but former President Trump
pardoned him, and he was released.
One Trump Administration Cabinet Secretary, a billionaire,
repeatedly came under criticism from the Office of Government
Ethics for failing to abide by his ethics agreement and for
repeated errors in his financial disclosure reports--errors
significant enough that OGE determined it could not certify his
reports. In the meantime, he reportedly made between $53
million and $127 million while heading the Commerce Department.
And, as CREW showed, it is possible that he earned even more
than that, but we don't really know how much more due to the
outdated loopholes in the disclosure laws.
Last month, a Federal judge imposed a penalty of more than
$60,000 against a former Trump White House official after
finding that she knowingly failed to file a financial
disclosure report, as required by law, for more than a year,
despite repeated warnings about her obligation to do so.
In the Judicial Branch, as work by good-government groups
and reporting by The Wall Street Journal has revealed, there
have been widespread problems with financial conflicts of
interest and failures by judges to recuse themselves. According
to those reports, between 2010 and 2018, more than 130 Federal
judges improperly heard hundreds of court cases in which they
or their family members held stock in a party to the
litigation. Under Federal law, Federal judges are required to
recuse themselves from cases in which they or their spouse or
minor child have a financial interest in the subject matter or
a party.
Plus, the problem could be even worse than that. The
judiciary is literally years behind in making judges' financial
disclosures publicly available. Only this year will judges'
annual financial disclosure filings covering 2019 finally be
available. 2020 still won't be ready. By contrast, when a
Member of the House files a financial disclosure report, the
Clerk must make it publicly available within thirty days.
Across the entire Federal Government, there have been
significant and troubling stories about financial conflicts of
interest in relation to stock trading and ownership. Together,
these stories undermine confidence that the American people
should be able to have in the faith and the trust that they put
in the integrity of public officials and our government.
Members of the public may ask, are our public officials acting
in the public interest or their private financial interest?
Considering these events, the Speaker of the House tasked
the Committee on House Administration with conducting a
comprehensive review of deficiencies in our financial
disclosure system and a review of various legislative proposals
introduced by Members to address financial conflicts of
interest in Congress, including those that aim to restrict
stock trading and ownership.
Our hearing today is a continuation of our review of the
diverse legislative reform proposals. While there is growing
bipartisan consensus that reforms are necessary, there remain
significant policy questions about the appropriate approach and
the details.
Today, we will have the opportunity to hear from well-
respected experts in government ethics and securities law and
regulation about what has prompted a significant momentum for
financial-conflict-of-interest reforms, the details,
variations, implications of various introduced bills, and
specific policy recommendations for reform.
It is our hope that this hearing today will bring us closer
to developing a consensus on recommended policy reforms that
will combat financial conflicts of interest and restore public
faith and trust in our government.
Frankly, I have been asked by several reporters, what is
the work product that is going to emerge from this hearing? I
have been honest to say, we don't know. We have a series of
experts who are going to help us understand the intricacies of
these issues and will help us in formulating good policy that
will buck up trust in the American Government. We do thank the
witnesses for their participation.
I would now recognize the Ranking Member--or, did you want
to go to Mr. Steil?
Mr. Davis. Only for the questions.
The Chairperson [continuing] The Ranking Member for any
statement he may wish to make.
[The statement of the Chairperson follows:]
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OPENING STATEMENT OF HON. RODNEY DAVIS, RANKING MEMBER
Mr. Davis. Yes, don't give Steil the glory of my opening
statement here, Madam Chairperson. First questions, yes, but, I
mean, please.
Nice to see you too, Ms. Spanberger. I saw you walk in.
Welcome.
Thank you, Chairperson Lofgren. I am glad we are holding a
hearing on this very important topic. The public has spoken,
and the demand is clear: Americans want more certainty that
their elected Representatives are acting in good faith with
their financial decisions.
Today provides a unique opportunity to bring together
experts from across the political spectrum to assess proposals
on how best to move forward to increase transparency and
accountability across Congress. I look forward to these
discussions, and I am confident this hearing will serve to
inform us as we move forward in the legislative process.
I would like to begin by discussing some of the financial
transparency measures already in place.
The intent of the 2012 STOCK Act is good. It was meant to
create a public disclosure system for Members of Congress to
report their trades in a timely manner. However, as we have
witnessed on multiple occasions since its passage, the STOCK
Act has deficiencies, and compliance with its requirements is
not as straightforward for Members as it should be. We have
given the STOCK Act ten years, and it is time for Congress to
take another look at this issue.
According to Business Insider, at least 59 Members have
reportedly violated the requirements of the STOCK Act since
2019. These alleged violators come from both sides of the
aisle, making this a bipartisan issue that requires a
bipartisan response.
Given the broad distribution of these alleged violations
across the various ideological groups in Congress, I am
confident that the majority, if not all of them, weren't
malicious but inadvertent, illustrating a failure on multiple
levels.
This particularly concerns me because it suggests that we
are not adequately educating our incoming Members on their
responsibilities to comply with the STOCK Act. It is the
responsibility of this Committee to ensure Members are aware of
their responsibilities when they come to Congress, and I pledge
to fix this lapse for new Republican Members. I would ask the
Chairperson to join me in this initiative for any incoming
Members of her party.
While the legislative fixes we discuss today are a critical
step forward, I would like to say also that this Committee
should hold further discussions on how best to educate and
assist all Members, especially freshman Members, with
compliance issues and questions so that we can achieve the
transparency that the American people demand.
The public and our Members deserve better from this
Committee, and, as Ranking Member, I will do everything I can
to fix that. I am sure the Chairperson will agree with this
sentiment, and I welcome the opportunity to work together on
this bipartisan issue.
Regarding potential STOCK Act updates, I am excited to hear
from our witnesses today. Since this issue has captured the
attention of the public, we have seen a wide range of proposals
for reform. These suggestions are diverse both in their
proposed requirements and with their enforcement mechanisms to
ensure compliance.
Now, I don't really have many stock holdings other than
retirement, but, in anticipation of this hearing, I spoke with
my financial advisor from my home district. He is from my home
district in Illinois. I wanted to get a better sense of how
some of these proposals would affect Members, especially
middle-class Members.
He raised the concern that blind trusts, for example, can
be cumbersome and expensive, would create perverse incentives,
and do not provide the level of transparency that some assume
they would. For example, most financial firms won't even take
on a client for a blind trust unless they meet certain asset
holdings and activity requirements. I don't meet either of
those requirements today, and I would guess that is true for
many Members. But these cost restrictions would put us in a
situation where these perverse incentives might force Members
to engage in more market trading to meet blind-trust minimums
and other requirements.
I hope we can address some of these concerns here today,
because I am sure many Members of Congress share them with me.
I am hopeful that the Majority will take this opportunity to
work together to build a bipartisan solution instead of
proceeding with a knee-jerk reaction that sends a one-party
bill immediately to the Floor.
I look forward to our expert witnesses' testimony and
further discussion, and I hope we can leave this hearing with a
better understanding of the ramifications of any proposed
solution as we embark on working together, hopefully, to craft
bipartisan legislation.
Thank you. And, with that, I yield back.
[The statement of Mr. Davis follows:]
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The Chairperson. Thank you, Mr. Davis.
And in just a moment I will introduce today's witnesses,
but before I do, as a reminder to our witnesses, each of you is
recognized for five minutes. There is a lighting system and a
timer in front of you, and when your time is up, we ask you to
try and wrap up.
Your full written statements will be made part of the
record and will inform not only this Committee but members of
the public.
The record will remain open for at least five days after
this hearing for additional material to be submitted, and we
may also have additional questions for you. If that is the
case, we would ask that you respond to those questions.
Let me introduce each of our witnesses.
Jacob Straus is a Specialist on the Congress at the
Congressional Research Service, where he has worked since
August 2007. He specializes in American Government and
politics, with a focus on Congress and other governmental
institutions.
He is an Adjunct Professor on governmental studies at Johns
Hopkins University and an Adjunct Professor at the University
of Maryland, Baltimore County in the Political Science
Department. Prior to that, he served as an Assistant Professor
of political science at Frostburg State University.
He holds a Ph.D. in political science from the University
of Florida, an M.A. in political science from the University of
Florida, and a B.A. in government and politics from the
University of Maryland.
Liz Hempowicz serves as Director of Public Policy for the
Project on Government Oversight, sometimes referred to as
``POGO.'' She is an expert on whistleblower protections,
conflicts of interest, ethics, the Freedom of Information Act,
separation of powers, and the National Emergencies Act.
She develops and advances policy solutions to combat
corruption and promote openness and accountability in
government, and she strategizes the best way to translate POGO
report findings to legislative reforms or executive action. She
has participated in efforts to improve the Inspector General
Act, the National Emergencies Act, lobbying and congressional
ethics rules, whistleblower protections, the Freedom of
Information Act, and other government accountability issues.
She graduated from the University of Bridgeport with a
bachelor's degree in international political economy and
diplomacy and earned her J.D. from American University's
Washington College of Law.
Donald Sherman, welcome. He serves as the Senior Vice
President and Chief Counsel for Citizens for Responsibility and
Ethics in Washington, otherwise known as ``CREW.''
He is a leading policy advisor on racial justice and
equity, government ethics, and congressional investigations and
oversight. He has served in various roles in the House, Senate,
and the Executive Branch, including as Special Assistant to the
President for Racial and Economic Justice at the White House,
Senior Counsel to Ranking Member Claire McCaskill on the Senate
Homeland Security and Governmental Affairs Committee, and Chief
Oversight Counsel to the late Representative Elijah Cummings,
then-Ranking Member of the House Committee on Oversight and
Government Reform.
Mr. Sherman began his career on Capitol Hill as Counsel on
the House Ethics Committee when I chaired that committee and
where he investigated allegations of ethical violations by
Members of Congress and staff. Prior to that, he practiced law
in Washington, D.C., for Crowell & Moring LLP and served as a
law clerk to the Honorable Neal E. Kravitz of the District of
Columbia Superior Court.
He graduated from Georgetown University with a degree in
American studies and earned his J.D. from Georgetown University
Law Center.
Donna Nagy is the C. Ben Denton Professor of Business Law
at Indiana University's Maurer School of Law. She joined the
law faculty in 2006 and teaches and writes in securities
litigation, securities regulation, and corporations.
Her scholarship includes co-authoring two books, one on the
law of insider trading and a casebook on securities litigation
and enforcement. She has written numerous Law Review articles
on topics including the selective disclosure of government
information, government officials and financial conflicts of
interest, insider trading, and fiduciary principles.
She is a member of the American Law Institute and served as
an appointed member of the ABA Corporate Laws Committee. She
also served a three-year term as a member of the National
Adjudicatory Council of the Financial Industry Regulatory
Authority. Before teaching, she was an associate with Debevoise
& Plimpton in Washington, D.C., where she specialized in
securities enforcement and litigation.
She received her B.A. from Vassar College and her J.D. from
NYU University Law School.
Finally, Jennifer Schulp is the Director of Financial
Regulation Studies at the Cato Institute's Center for Monetary
and Financial Alternatives, where she focuses on the regulation
of securities and capital markets.
Prior to joining Cato, Ms. Schulp was the Director in the
Department of Enforcement at the Financial Industry Regulatory
Authority, where she represented FINRA investigations and
disciplinary proceedings relating to violations of Federal
securities laws and self-regulatory organization rules.
Before joining FINRA, Ms. Schulp was a litigation associate
at Gibson, Dunn & Crutcher, and she clerked for the Honorable
E. Grady Jolly of the U.S. Court of Appeals for the Fifth
Circuit. She received her J.D. from the University of Chicago
Law School and her A.B. in political science from the
University of Chicago.
As all can see, we have a very distinguished panel of
witnesses before us. We do thank you.
We will now hear from you for five minutes each, and we
will start with you, Mr. Straus.
STATEMENTS OF JACOB STRAUS, SPECIALIST ON CONGRESS,
CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, D.C.; LIZ
HEMPOWICZ, DIRECTOR OF PUBLIC POLICY, PROJECT ON GOVERNMENT
OVERSIGHT, WASHINGTON, D.C.; DONALD SHERMAN, SENIOR VICE
PRESIDENT AND CHIEF COUNSEL, CITIZENS FOR RESPONSIBILITY AND
ETHICS IN WASHINGTON; DONNA NAGY, C. BEN DUTTON PROFESSOR OF
BUSINESS LAW, INDIANA UNIVERSITY MAURER SCHOOL OF LAW,
BLOOMINGTON, INDIANA; AND JENNIFER J. SCHULP, DIRECTOR OF
FINANCIAL REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, D.C.
STATEMENT OF JACOB STRAUS
Mr. Straus. Chairperson Lofgren, Ranking Member Davis, and
Members of the Committee, on behalf of the Congressional
Research Service, thank you for the opportunity to appear
today.
My testimony focuses on two areas: current financial
disclosure and periodic transaction reporting requirements; and
legislative proposals introduced during the 117th Congress to
limit or prohibit certain financial transactions by Members of
Congress and covered congressional employees.
Federal Government officials and employees, including
Members of Congress, when taking official action, are expected
to, quote, ``place loyalty to the Constitution, laws, and
ethical principles above private gain.''
Using this guiding principle, the Ethics in Government Act,
as amended, including by the STOCK Act in 2012, requires
covered officials, including Members of Congress and certain
congressional employees, to file annual financial disclosure
statements that report income, gifts, liabilities, and property
and make periodic transaction reports that disclose the
purchase or sale of certain financial assets.
Further, the STOCK Act affirms that Members of Congress,
congressional employees, and other Federal officials are not
exempt from insider-trading laws.
In the 117th Congress, as of March 1, 2022, CRS identified
fourteen bills or resolutions that proposed limitations on
Members of Congress and other covered congressional employees
from engaging in certain financial transactions. Broadly, these
measures propose to amend the Ethics in Government Act and/or
the STOCK Act, create new law, or amend House rules to prohibit
the holding, purchasing, selling, and or actively managing
certain types of assets.
Currently, Congress does not prohibit the ownership of
specified financial assets, but certain targeted restrictions
do exist in some Executive Branch agencies.
With regard to the legislative proposals before Congress,
six points are pertinent.
First, to address Member and covered individuals' financial
holdings and transactions, several legislative proposals would
either amend the Ethics in Government Act, the STOCK Act, or
both. Others would create new law.
Second, each of the legislative proposals would generally
prohibit covered officials from holding, purchasing, selling,
and/or actively managing certain types of assets.
Third, a number of the proposals would allow or require a
Member of Congress to place covered assets in a qualified blind
trust that is approved by the official's supervising ethics
office, the House Ethics Committee for the House of
Representatives. Qualified blind trusts separate the covered
official from day-to-day decisionmaking about their holdings,
which could serve to remedy potential conflicts that might
arise from officials' actions that could impact their
individual holdings.
Fourth, four of the proposals would expand public access to
information in the financial disclosure statements and periodic
transaction reports.
Fifth, ten of the fourteen legislative proposals would
change available penalties for noncompliance. Within these
proposals, two basic penalty strategies are suggested: fine
individuals for noncompliance and/or publish the names of
individuals who are found in violation of the law on a public
web page.
Finally, two legislative proposals would amend House Rule
XXIII, the House Code of Conduct, to add a new section that
would prohibit Members from trading stocks.
In closing, these legislative proposals include a range of
options to limit or prohibit certain financial activities.
Policymakers may wish to consider the scope of these proposals,
the benefits of proposals, any potential administrative
adjustments that might be necessary to implement a modification
of ethics laws, and the potential costs to covered officials to
comply with the proposed laws. My written testimony raises
questions that might be considered.
Should Congress choose to act, it could implement a
particular measure as introduced or incorporate various
concepts from several different measures. Each choice likely
has advantages and disadvantages that CRS is available to
discuss further.
Thank you again for the opportunity to testify. I look
forward to your questions.
[The statement of Mr. Straus follows:]
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The Chairperson. Thank you very much for your testimony and
your willingness to continue to work with us as we sort through
the various proposals.
Ms. Hempowicz, you are now recognized for five minutes.
STATEMENT OF LIZ HEMPOWICZ
Ms. Hempowicz. Chairperson Lofgren, Ranking Member Davis,
and Members of the Committee, thank you for inviting me to
testify today about addressing conflicts of interest in
Congress as they relate to the owning of individual stocks.
There is no denying that this issue has captured public
attention in a unique way. In fact, a strong majority of voters
from both major political parties support the congressional
stock ban. A FOX News poll recently found seventy percent of
those surveyed favored banning Members of Congress and their
immediate family and staff from trading stocks.
Those numbers didn't come out of nowhere. An avalanche of
eye-opening press coverage has demonstrated a congressional
stock-trading problem that ranges from seemingly benign missed
public disclosure deadlines to criminal insider trading.
In response, there are now entire online communities
dedicated to tracking congressional sales, not only to hold
Members accountable, but because many Members of Congress
outperform the market and an enterprising few in the public
want in on the action.
It is no wonder that the polling reflects an overwhelming
desire for change. Congress is listening. More than 125 Members
are now co-sponsoring legislation intended to address at least
some aspects of this problem. It is encouraging to see elected
officials so in tune with what their constituents want.
And so, now, Congress is poised to restrict stock trading
by lawmakers with bipartisan support, and we are here to help
hammer out the details.
The details are everything. There are several competing
bills in both chambers of Congress, and when we see legislation
advance, it will either be a first step towards creating real
ethics rules for Members of Congress or mere window dressing
for legalized corruption.
So, I want to spend the few minutes I have with you today
talking about what we at POGO see as some of the important
bright lines for you to consider as you move forward.
First, as a floor, we recommend that you require Members of
Congress to divest conflicting assets, with the option to put
any remaining assets in a blind trust that is subject to new
public disclosures.
The logic here is simple: Members of Congress have access
to nonpublic information and the power to move markets. We must
eliminate opportunities for insider trading and insulate
Members from even the perception that they are making decisions
based on the benefits to their own financial interest rather
than the public interest.
Second, to be meaningful, these requirements must cover
spouses and minor children. Again, the reasoning is simple: It
is a safe presumption that married partners discuss their work
dealings and that a minor child's affairs are under some
modicum of their parents' supervision. Now, in both cases, that
means the spouse or child also has the same access to market-
moving information that the public is so concerned about being
misused. In a less generous reading, exempting spouses or minor
children would supply an easy, opaque way for a corrupt Member
to hide self-dealing and make any added restrictions totally
moot.
Third, the new standards cannot exempt assets that were
owned before taking office. Unless Members of Congress are
willing to recuse from votes or committee assignments based on
their financial holdings prior to taking office, an exemption
for previously held assets creates a potential conflict without
serving any discernible public policy objective.
I want to be clear: POGO wants a much stricter ban than any
of those you are considering today. We would limit the holdings
that Members, their spouses, dependent children, and senior
staffers can own to diversified mutual funds and U.S. Treasury
bonds, with narrow exemptions applicable only in truly unusual
circumstances.
Today, we have focused our bright lines on improvements to
the law that will enhance accountability and public trust
related to concerns about insider trading. And there is
incredible momentum for these reforms that would respond
directly to one of the public's most acutely expressed
institutional concerns.
Now, some have suggested that Congress should slow down
this current effort so that it may include reforms to the
financial-conflicts-of-interest systems that apply to the
judiciary and the Executive Branch. You face the very real
possibility of passing no reforms if you slow down now. I urge
you to focus first on passing restrictions for Congress and
then use that momentum to pass additional and, yes, critically
necessary conflicts-of-interest reforms to the other branches
of government.
I want to close with this thought. The reason we are having
this conversation today isn't because of any one scandal or
missed STOCK Act filing deadline. We are here because the
barrage of the many different examples across both chambers and
parties has given the public an overwhelming perception that
Congress is engaged in corrupt behavior when Members are
allowed to freely own individual stocks.
My colleagues at the Project on Government Oversight stand
by, ready to aid in your efforts in addressing this problem
however we can.
Thank you again. I look forward to your questions.
[The statement of Ms. Hempowicz follows:]
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The Chairperson. I thank you very much.
Mr. Sherman, you are now recognized for five minutes.
STATEMENT OF DONALD SHERMAN
Mr. Sherman. Chairperson Lofgren, Ranking Member Davis, and
Members of the Committee, thank you for the opportunity to
appear before you today to address the ethics problems created
when Members of Congress and their families own or trade
individual stocks and other securities.
I am especially grateful for this opportunity to testify
before Chairperson Lofgren, who thirteen years ago hired me to
join the non partisan staff of the House Ethics Committee.
My organization, Citizens for Responsibility and Ethics in
Washington, is a nonpartisan, anti-corruption watchdog
committed to ensuring that government officials act ethically
on behalf of the people they serve.
It is with this purpose in mind that I encourage Congress
to embrace comprehensive legislation that satisfies three
principles: one, prohibiting Members from owning and trading
stocks and other similar commodities or securities; two,
extending this prohibition to Members' spouses and dependent
children; and three, incorporating a clear civil penalty that
is a significant deterrent and easy to administer.
In addition to these priorities, Congress must also ensure
that any relevant oversight and enforcement bodies have the
authority and the resources necessary to do their jobs
effectively and to provide the public with real transparency.
The ethics problems posed by Members of Congress owning and
trading stocks are not theoretical. At the beginning of the
pandemic, a moment when public confidence in our government was
critical, Congress was rocked by scandal.
Reports of Senators making significant financial
transactions following private briefings about the coronavirus
pandemic was just the tip of the iceberg. At least 75 Members
of Congress owned shares in COVID-19 vaccine makers Pfizer,
Moderna, and Johnson & Johnson in 2020. These Members were
asked repeatedly to vote on legislation that impacted these
companies' share prices.
Similar issues have been spotted in other sectors. For
example, fifteen Members that sit on committees overseeing U.S.
military policy have financial ties to military contractors
worth nearly $1 million.
These facts are both egregious and, sadly, unremarkable.
One reason for this litany of questionable conduct is the
weakness of our current legal regime. The STOCK Act, passed in
2012 to ensure that Members do not trade on nonpublic
information gained through their government jobs and to enforce
public transparency of their holdings, has failed to police
this kind of behavior. Exposing STOCK Act violations has proven
difficult, in part because periodic transaction reports and
financial disclosures are hard to access.
Still, the near-constant drumbeat of repeated and reported
violations is a death by a thousand cuts for the credibility of
this institution.
Since the passage of the STOCK Act, there have also been
significant changes that give individual Members even greater
ability to affect the market. Members now have a much larger
presence on social media, enabling them to impact corporate
stock prices with a single tweet. Congress has expanded the
power of committee chairs to issue unilateral subpoenas, and a
growing number of Members are conducting oversight from their
personal offices. Congressional rules need to change to help
address Members' expanded ability to influence the market.
Banning Members from owning or trading individual stocks
would address several problems, including: the actual conflicts
of interest that arise when they take official actions that
impact a company or industry where they or their families have
a direct financial stake; the appearance of financial conflicts
of interest; and the public outrage over Members appearing to
trade on confidential information.
A ban is necessary because, unlike other officials in other
branches of government, recusal is not a viable option for
Members of Congress. Yet both the Executive and Judicial
Branches have higher standards. Merely placing individual
assets into a qualified blind trust will not fully address
these concerns absent a requirement to sell the original
assets.
The ban must also extend to Members' spouses and dependent
children to ensure that Members can't simply circumvent the law
by transferring their individual assets to a close family
member.
Finally, the ban must include an enforcement mechanism that
is both clear and significant enough to serve as a deterrent.
For example, the legislation should not create a standard of
intent that would make enforcement unlikely.
While it is understandable that some Members may have
questions about the impact of these reforms on their own or
their families' interests, these concerns are not more
important than the public's right to know with certainty that
the people they choose to write their laws are acting on their
behalf and not in the service of their own financial interests.
In closing, the public is right to hold their
Representatives in Congress to the highest ethical standards
and to demand accountability when those Representatives fail to
live up to them. Wide bipartisan majorities are demanding that
Congress make changes to address Members' buying and owning
stock in industries that they oversee. Banning this practice
will help to restore public faith and bolster confidence in our
democracy.
Thank you for the opportunity to address the Committee
today. I look forward to your questions.
[The statement of Mr. Sherman follows:]
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The Chairperson. Thank you.
We will turn now to Professor Nagy for five minutes.
STATEMENT OF DONNA NAGY
Ms. Nagy. Chairperson Lofgren, Ranking Member Davis, and
Members of the Committee, thank you for inviting me to testify.
I have been teaching and writing about corporate and
securities law for more than 27 years. For nearly half of that
time, I have also been writing about government ethics.
What first drew me to that field were the controversies
that resulted in the STOCK Act of 2012. I had the great
privilege of testifying about insider-trading law in the House
and Senate hearings that preceded that legislation.
In connection with today's hearing, what I can also bring
to this table are my years of studying how conflicts of
interest undermine the legitimacy of decisionmaking by
officials entrusted with power.
Whether the decisionmaking occurs by corporate directors
inside a boardroom or by lawmakers here in the Capitol,
financial conflicts of interest contribute to a corrosive
belief that those entrusted with power are making self-serving
decisions that may not be in the best interest of those they
have been elected to serve.
My testimony today strongly supports your efforts toward
reform, and I have four points to highlight.
The first emphasizes a key difference in the many bills I
have reviewed. Whereas some seek to restrict the ownership of
certain investments by Members of Congress, others seek to
restrict only the trading of such investments during
congressional service.
In my view, trading restrictions alone will not be an
effective solution to the conflict-of-interest problem that is
plaguing Congress. Successful reform must also reduce
lawmakers' opportunities for personal gains in their investment
portfolios when they sponsor, support, oppose, and vote on
legislation.
So, I urge this Committee to focus on ownership and not
merely trading. What is most needed, in my opinion, is a
Federal statute that prohibits Members of Congress and their
spouses and dependent children from owning the securities of
individual, publicly traded companies.
My second point contrasts the lax conflict-of-interest
restraints that currently operate in the Legislative Branch
with the very strict anti-conflict laws that Congress has
enacted for officials in the Executive and Judicial Branches.
To be sure, ethics rules in both chambers prohibit Members
from deriving personal financial benefit from congressional
service. But longstanding interpretations permit and facilitate
a lawmaker's ability to work and vote on legislation likely to
affect their own investments so long as they are not the sole
beneficiaries.
The lack of parity among the three branches underscores the
urgent need for reform.
My third point refutes the notion that public disclosure of
personal investments coupled with the discipline of the
electoral process can adequately deter these troubling
financial conflicts.
Neither annual ownership disclosures nor specific 45-day
transaction reporting has managed to deter lawmakers from
owning and trading hundreds of millions of dollars in stock in
companies subject to their oversight. If anything, it has made
the perception of corruption worse, because, thanks to
journalists and good-government groups, the American public now
sees even more quickly how frequently and extensively some
lawmakers are benefiting from their legislative activity.
Moreover, self-interested legislative activity affects the
entire country, whereas only voters in a Member's district or
State can have a say in whether conflicts are serious enough to
warrant an electoral defeat.
My final point relates to insider trading. Notwithstanding
the clarity brought about by the STOCK Act, investigating
suspicious trading by congressional officials has proven to be
more challenging for the SEC and the DOJ than most may have
supposed a decade ago. The Constitution's Speech or Debate
Clause puts in place a very high hurdle for obtaining evidence
that relates to what a congressional official learned through
legislative activity, and, without evidence, prosecutions are
not possible.
This hearing constitutes a monumental step toward bringing
about real and profound change. I am truly honored to be a part
of it. I look forward to your questions, and I stand ready to
be of whatever help I can as the legislative process
progresses.
Thank you very much.
[The statement of Ms. Nagy follows:]
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The Chairperson. Thank you very much.
And now we have our final witness, Ms. Schulp. We will
welcome your testimony for five minutes.
STATEMENT OF JENNIFER J. SCHULP
Ms. Schulp. Thank you.
Chairperson Lofgren, Ranking Member Davis, and
distinguished Members of the Committee on House Administration,
my name is Jennifer Schulp, and I am the Director of Financial
Regulation Studies at the Cato Institute's Center for Monetary
and Financial Alternatives. Thank you for the opportunity to
take part in today's hearing.
As you know, the questions raised by Members of Congress
trading stocks are not new. A decade ago, the STOCK Act
clarified the applicability of insider-trading prohibitions to
lawmakers and required periodic disclosure of stock
transactions, but concerns have persisted about lawmaker stock
trading.
Although recent polling shows widespread public support for
banning lawmakers from owning or trading stocks, such measures
are too broad for preventing insider trading and too narrow to
effectively address the question of financial conflicts of
interest. Because financial conflicts of interest present
complex tradeoffs not easily solved by a simple prohibition, it
is better to focus on increasing transparency through
disclosure.
Despite headlines to the contrary, there is little evidence
that unlawful insider trading is widespread on Capitol Hill.
Recent research looking at post-STOCK Act trading data has
found that lawmakers do not reap outsized returns, including
for investments in areas where lawmakers hold committee
assignments. Yet questionable trading has fed a public
perception that lawmakers have financial advantages.
Analyzing lawmakers' trading is more than fair and has been
made possible in part by the STOCK Act's reporting
requirements. But current law already delineates when such
trading is unlawful. It does not follow that all stock
ownership or trading should be prohibited just because no STOCK
Act prosecutions have been brought. This is especially true
where there is no evidence of widespread insider trading.
Moreover, taking prophylactic action to combat insider
trading does not address the actual issue. There is reason to
believe that those calling for congressional stock-trading
reform are not motivated by a crisis of faith in the markets
but, rather, a lack of trust in lawmakers. A focus solely on
individual stocks distracts from the broader issue, that the
public perceives lawmakers to be using their positions for
financial gain.
Members of Congress are uniquely positioned to not only
have access to information impacting stock values but also the
ability to influence those values directly and indirectly. But
this complication exists not only for individual stocks but for
mutual funds, exchange-traded funds, crypto holdings, business
interests, and other financial interests. Individual stock
restrictions address only a narrow portion of these potential
conflicts and, as such, may do little in the long term to
enhance voters' trust in Congress.
The question, then, is how to manage this multitude of
potential conflicts. While it is tempting to say that conflicts
should be eliminated, this solution is not practical across the
range of potential financial conflicts of interest that
lawmakers face.
Importantly, seeking to eliminate a particular conflict,
such as trading in individual stocks, may have unintended
effects on the quality of representation that voters receive,
either by discouraging some from running for office or by
decreasing the connectedness between Representatives and the
impact of their decisions.
Disclosure provides a more complete solution, bringing the
conduct of lawmakers into the light, discouraging questionable
trading, and providing voters with information about the
conflicts of interest that their Representatives face.
The STOCK Act provides a good foundation for this
transparency, but it has fallen short of its potential, and
enhancements should be considered to provide additional
transparency.
The first place to focus is on ensuring that penalties for
noncompliance are consistently applied. It is worth examining
whether the penalty framework is sufficiently deterrent and
considering public reporting of delinquent disclosure. It is
also worth considering whether aspects of reporting can be
automated to ease compliance burdens.
Second, the disclosure requirements themselves could be
improved--for example, by shortening the long lag between the
execution of a trade and the deadline for disclosure.
Enhancing transparency permits voters to choose whether the
conflicts faced by their elected Representatives are
problematic even if the trading itself is perfectly legal.
Empowering voters with information limits unintended
consequences of restrictions and puts the choice in the hands
of voters, where it belongs.
Thank you, and I welcome any questions that you may have.
[The statement of Ms. Schulp follows:]
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The Chairperson. Thank you very much.
And thanks to each one of our witnesses for very useful
testimony.
This is the time when Members can address the witnesses
with questions. Mr. Steil is recognized, at the request of the
Ranking Member, to go first for five minutes.
Mr. Steil. Thank you very much, Madam Chairperson. We have
conflicting hearings today, and so I appreciate your
willingness to let me jump in.
I think where we maybe should begin is: One, what is legal
and illegal under current law? And two, what are the priorities
and objectives and goals of putting forth this framework?
And so, as I look at this--and, Ms. Schulp, I would love
for you to comment on this--it is to facilitate compliance with
the law. Under, current law, insider trading is illegal,
including for Members of Congress. We can have a conversation
about the enforcement of that. Using information derived from
one's position here in Congress is illegal under current law.
We could have a conversation about enforcement mechanisms of
that.
And so, compliance with the law I think is a key principle
that we should be looking at. Ensuring Members' family and
staff don't take unfair advantage of information gained from
their congressional work I think is an important topic for us
to consider as we look at this. And to provide confidence to
the American people that we follow that, that we avoid the
appearance of an impropriety. I think those are key principles,
amongst others.
Are there other key principles that you think that we
should consider before I begin my questioning here?
Ms. Schulp. Yes, I believe that those are the key
principles here. You are correct----
Mr. Steil. Okay.
Ms. Schulp [continuing]. That insider trading is already
illegal.
Mr. Steil. Okay. So, then, let's dive in.
We have heard a series of ways that we can enhance this to
make sure that we are avoiding the appearance of impropriety,
that we enforce the law, and we make sure that Members follow
that law.
Let's dive in first to the blind trust. Would the blind--
first, what are the compliance costs as it relates to a blind
trust? What would be the compliance costs for Members in a
blind trust scenario?
Ms. Schulp. Compliance costs for blind trusts tend to be
substantial. Usually, it takes multiple thousands of dollars to
set one up, and----
Mr. Steil. Okay. So----
Ms. Schulp [continuing]. There is an ongoing----
Mr. Steil. No, no. I am just going to move quickly because
I am limited on time.
So, it is substantial. We could decide whether that is good
or bad, but it is a substantial cost.
And then would the public have confidence in the execution
of the blind trust? Meaning, a blind trust is only as good as
it is blind. Is that a fair assessment?
Ms. Schulp. That is a fair assessment.
Mr. Steil. So, the structure of that blind trust, then,
becomes paramount if Congress chose to go down that path.
Let's shift gears: a complete stock trading ban, thinking
about the implementation of that. So, envision a Member of
Congress coming here. Say she was previously an executive at a
publicly traded company; she has a significant portfolio. Would
she then be required to divest that entire portfolio upon
arrival in Congress?
Ms. Schulp. Some of the proposals would require that.
Mr. Steil. And what would happen if somebody had to fully
divest--if she had to fully divest her portfolio, what would be
the general implications to her?
Ms. Schulp. The first is that there could be substantial
tax consequences for that. And, depending on where the market
is, there could be substantial losses to her investment.
Mr. Steil. Or substantial gains, but----
Ms. Schulp. Yes.
Mr. Steil [continuing]. Substantial tax implications for
her upon arrival. That may be a consideration as to whether she
chooses to run in the first place.
I think something worthwhile for us to consider is how we
would begin that implementation for somebody who arrives in
that capacity.
Let me shift gears slightly for something I don't think we
have talked a ton about. I used to work at a publicly traded
company. I was involved in the enforcement of section 16(a)--
officers, their compliance with securities laws. Our securities
laws give us a framework with which to understand how publicly
traded companies deal with this insider information, the
appearance of impropriety for those insiders as well.
Do you think that Members should be banned from what I am
going to call sophisticated trades--swaps, options, shorting
stocks? Would that improve individual--would that improve the
public's confidence that Members are not engaging in insider
trading?
Ms. Schulp. No. I think it will have little difference on
the public's confidence on that front.
Mr. Steil. Okay. I may or may--I may not fully agree with
that. I think there are some opportunities that we may want to
consider and look at in that space.
Let me shift gears, then: in particular, with other ways of
adjusting the protocols to accomplish the same benefit without
maybe a full ban of stock, just to explore this space. Would
minimum holding periods improve the public's confidence in
Members of Congress abiding by the law?
Ms. Schulp. It may have some effect.
Mr. Steil. So, if you had a--say, just for the sake of
throwing a number out, if you had a ninety-day minimum holding
period, or remove quick movements in and out of stocks, it
would be longer than the duration of a publicly traded
company's financing reporting, it may improve the confidence of
the American people in Members?
Ms. Schulp. There may be some effect in that.
Mr. Steil. May be worth us considering that.
The other is our current regime has a disclosure after the
sale of stock. Some public companies have gone forward with a
disclosure prior to the sale or acquisition--a delayed closing,
if you will, let's say for sake of discussion ten days, where
an announcement would be made ten days in advance, prior to the
sale or acquisition of a stock.
Would that alter the appearance of the impropriety as
people would be analyzing a Member of Congress or another
insider from engaging in a trade?
Ms. Schulp. It may have some effect.
Mr. Steil. And would the burden placed upon that Member, or
a spouse be significant or lighter than a blind trust scenario
or a forced sale?
Ms. Schulp. It should be lighter than a blind trust or a
forced sale.
Mr. Steil. I appreciate your insights today.
Cognizant of the time, Madam Chairperson, I yield back.
The Chairperson. The gentleman yields back.
Mr. Butterfield is recognized for five minutes.
Mr. Butterfield. Thank you very much, Madam Chairperson.
And thank you for convening this very, very important hearing
today.
I especially want to thank the five witnesses for your
testimony as well.
Mr. Sherman, it is good to see you again.
Mr. Sherman. Good to see you again, sir.
Mr. Butterfield. I was on the Ethics Committee when you
served as counsel to the Ethics Committee, and it looks like
you have landed well. I just want to thank you for your many
years of service.
Madam Chairperson, you were the Chairperson of the Ethics
Committee when I was there.
The Chairperson. That is correct.
Mr. Butterfield. I will say publicly that, out of the
eighteen years that I served in Congress, those two years or
four years on the Ethics Committee were the worst years of my
life.
The Chairperson. I don't take it personally because I
concur.
Mr. Butterfield. And it had nothing to do with you, Madam
Chairperson nor you, Mr. Sherman.
I had spent thirty years in a courtroom before coming to
Congress, and, you know, in a courtroom, the rules are so much
different than the rules for ethics for Members of Congress.
One, for example, there is a presumption of guilt. I don't know
if Members fully know that or appreciate it if you have not
been confronted with an ethics violation, but there is a
presumption of guilt. The burden of proof is on the Member to
prove that she is not guilty of the offense for which she is
charged. And that was just so, so different from what I had
been exposed to in a courtroom.
The final thing that I found very interesting was that a
Member's failure to cooperate with the process was deemed to be
a violation of the ethics rules.
And so, when I say those were some very difficult years,
they were.
But while I am with you, Mr. Sherman, let me just start
with you. You have testified that your organization recommends
a legislative proposal that requires a comprehensive ban on
both trading and ownership of individual stocks and other
securities by Members and their spouses and dependents.
So, my question to you--and I have great respect for CREW--
what is CREW's perspective of the various legislative proposals
that ban stock trading but permit stock ownership through the
use of qualified blind trusts, which are currently allowed by
law? I know you touched on it earlier, but if you would be a
little bit more illuminating in your response.
Mr. Sherman. Absolutely. And thank you for the question.
I think the misnomer with respect to qualified blind trusts
is that it only works if it is truly blind. Our position is
that qualified blind trusts could be a useful option if the
Member is required to effectuate the sale of all the assets
that would go into that trust beforehand. Right? A trust can't
be blind if the Member knows that they owned Microsoft the day
before it went into the trust. They know that they still own it
the day after.
Mr. Butterfield. Let's talk about judges. Half of my legal
career, I was a judge back in North Carolina, and I have great
interest in judicial service.
But does your organization have any recommendation for
addressing the crisis of widespread recusal failure--failure to
recuse--and lack of transparency regarding financial conflicts
of interest in the Judicial Branch, in the Federal Judicial
Branch?
Mr. Sherman. Absolutely. I agree with you that the
conflict-of-interest issues that have arisen in the Federal
judiciary and have been exposed through detailed reporting are
a crisis of confidence and need to be addressed by the
Congress.
I would note, though, that one distinction between the
ethics regime that applies to the Federal judiciary versus
Members of Congress is that recusal is an option. The problem
with the Federal judiciary is that judges didn't recuse. Here
in Congress, recusal is not a viable option for Members of
Congress that have a financial conflict of interest, because it
denies their constituents effective representation in this
body.
Mr. Butterfield. Finally, Professor Nagy--I can't pronounce
that exactly, but thank you for your service.
Ms. Nagy. Nagy.
Mr. Butterfield. Thank you for your testimony. Thank you
for your testimony thirteen years ago or whenever you testified
before the STOCK Act was passed.
Some people have argued that new prohibitions on stock-
trading activity or ownership are unnecessary. Some are saying
that. They are saying it because public disclosure and the
electoral process should be enough; it should be sufficient to
address conflicts of interest. They argue that disclosure
allows for the public and good-government groups to track
trading activity and assess whether elected officials have
acted ethically and that, informed by those disclosures, voters
can remove unethical lawmakers at the ballot box.
That seems extreme to me. What is your perspective on this
argument?
Ms. Nagy. Well, my perspective is that, in 1978, Congress
enacted the Ethics in Government Act with disclosure as the
solution, or the proposed solution, for the conflicts of
interest. Ten years ago, in the STOCK Act, we put in
transparency reporting requirements where 45 days after--and
disclosure hasn't worked.
If anything, disclosure of financial transactions puts it
glaringly obvious to the public that the conflicts of interest
are there.
The voters decide, let the voters and the ballot box
decide--that reflects a misconception of the corrosiveness that
conflicts of interest have. A----
Mr. Butterfield. Thank you.
Ms. Nagy [continuing]. Voter only in one district decides
the answer for that Representative, but that Representative's
conflicts affect us all.
Mr. Butterfield. I agree. Absolutely.
Thank you. I yield back.
The Chairperson. The gentleman yields back.
The Ranking Member is recognized for five minutes.
Mr. Davis. Thank you, Madam Chairperson.
This is a very interesting hearing. I appreciate all the
witnesses' testimony.
I am hoping that some of the witnesses' testimony hasn't
already led the majority to, kind of, assess what type of
legislative proposal they are going to put forth. Because I
think the discussion, we are having today is too important to
not take a step back and understand where we are as an
institution.
There is a common theme here, that corrupt people do
corrupt things. Right? And we should make sure that corrupt
people don't have an opportunity to do that.
Our goal also is to make sure that those who want to follow
the law and those who want to follow transparency measures can
do so without being labeled corrupt. That is our charge. Our
charge is to develop something that makes the public
comfortable that we, as Members of Congress, are transparent in
what we do financially, but, at the same time, we are working
through a prism of testimony that was based upon corrupt
individuals.
Did any of you research our or log into our financial
disclosure portal before you came here to testify today? Raise
your hand if you did.
Okay. Any of you look at mine? Raise your hand if you did.
Nobody? Why wouldn't you? Why wouldn't you look at our
disclosures, those of us who are questioning you?
Because if you did, you would see that I don't trade a lot
of stocks. I got my only individual stock holding when I was a
child because my father happened to work as a franchisee for a
corporation called McDonald's. I haven't traded that stock
since I got here. My kids, my dependent children have that same
asset. You know one reason I don't trade it? Because I don't
want to go through the paperwork of the STOCK Act reporting
requirements.
However, because I have owned this stock since I was a
child, much of your testimony says that maybe I should sell it,
right?
Now, since I own that one stock--Mr. Sherman, I have a
question for you. I was really interested in the comment that
you said, that, you know, owning and trading individual
securities undermines the critical work of the entire Federal
Government. Does my owning an individual stock since my
childhood undermine the credibility of the Federal Government?
Mr. Sherman. I think it is reasonable for any constituent
to question whether their Member's stock ownership----
Mr. Davis. They can do that at the ballot box.
Mr. Sherman [continuing]. Has an impact on----
Mr. Davis. I want to reclaim my time----
Mr. Sherman [continuing]. Their legislative work.
Mr. Davis. I am going to reclaim my time really quick,
because I want to go a little further on this.
Mr. Sherman. Sure.
Mr. Davis. So, now that I am a Member of Congress and I own
that one stock--my dependent children own similar stock that
they were gifted. My wife does not. So, if I go to, let's say,
a McDonald's restaurant--because that is the only stock that I
have owned since a child--and buy lunch, is that something that
is unethical?
Mr. Sherman. Certainly not.
I think we need to craft ethics policy around the concept
of, one, public service is a public trust. And we need to
design a policy that would give the public the greatest
confidence that their elected Representatives and the body does
not have financial conflicts of interest and that Members
aren't acting on them.
Mr. Davis. Well, it took me about two minutes to find my
disclosure. I would urge you all to go in and find out if any
of us here have any so-called conflicts of interest. Because we
need a baseline--we need a baseline of what all of you experts
think would be a conflict of interest. Because, I mean, we
think we are complying with all the rules and requirements that
we need.
Ms. Nagy, I am interested in your testimony. You talked
about the placement of--you testified, the placement of
accumulated assets into QBTs, qualified blind trusts, is only a
minimally effective anti-conflict measure.
How much does it normally take to have a financial company
offer you a blind trust? Don't they have minimums----
Ms. Nagy. They do.
Mr. Davis [continuing]. Minimum investments? What are they?
Ms. Nagy. I think it varies according to the financial
companies, but it's a significant amount of assets.
Mr. Davis. It is a significant amount.
My wife--because her financial advisor is a friend of ours
and because of our reporting requirements, he is not allowed to
change any investments in her mutual funds on any given year,
because it is very difficult to comply, and we want to be
sure--we want to do the right thing here.
But I asked my financial advisor, her financial advisor,
how much the minimum amount would be. You can go look at how
many stocks I own--which, again, is one--and I am nowhere near
the minimal amount for a $500,000 minimum investment to create
a qualified blind trust.
Were you all aware of those limitations? Do you know how
many Members of Congress would have that amount of money to put
into a qualified blind trust? Anyone?
Ms. Hempowicz. May I respond?
Mr. Davis. Sure.
Ms. Hempowicz. Yes. I think it is important to remember,
when we are talking about blind trusts, that I don't think any
of the legislation that is in front of Congress would force a
Member to take advantage of the blind trust. Therein, the
option is given to Members who would choose not to divest.
We see that same structure in the executive branch. And,
for the most part, most individuals going in, who are subject
to very similar restrictions in the executive branch, choose to
divest, including very successful millionaires and billionaires
who----
Mr. Davis. Are there tax----
Ms. Hempowicz [continuing]. Are in the Executive Branch.
Mr. Davis. [continuing]. Incentives for divesting as a
member of the Executive Branch?
Ms. Hempowicz. You can receive--in the same way that I
think some of the legislation would include here, if Members
are selling their stock and they would incur a penalty, they
would be able to get a certificate of divestiture, which would
put off the--it wouldn't give them a benefit and it wouldn't
give them a tax penalty.
It would simply maintain their status quo until after their
government service, and then they would have to pay whatever
taxes they would have had to pay on those assets, whatever they
did with them whenever. Which is the same thing they do in the
executive branch, sir.
Mr. Davis. All right.
I know I am out of time, but Mr. Sherman did raise his
hand.
Do you know the number of Members of Congress that would be
able to afford that?
Mr. Sherman. I don't. As my colleague Ms. Hempowicz
mentioned, divestment is an option, and it is an option that I
think is preferable, from the standpoint of--certainly of CREW.
QBTs may work for some Members, but there are other options
that Members should avail themselves of if----
Mr. Davis. Forced divestment.
Mr. Sherman. [continuing]. You pass a ban.
Mr. Davis. Forced divestment is the option you are talking
about, right?
Mr. Sherman. Well, you use ``forced.'' I would say that
being in public service is a choice. And----
Mr. Davis. It is a choice.
Mr. Sherman [continuing]. So--
Mr. Davis. And that is----
Mr. Sherman [continuing]. The choice to divest----
Mr. Davis [continuing]. What I am concerned about with many
of the proposals that are out there, that the choice for those
who are not independently wealthy is going to be limited
compared to those who are wealthy and can afford a qualified
blind trust.
Mr. Sherman. I certainly am aware that there are more
limited choices for individuals with less net worth than those
with more, and I think this is another example of that. I think
divestment remains a viable option.
Mr. Davis. Thank you for giving me the----
The Chairperson. The gentleman yields back.
Mr. Aguilar is recognized for five minutes.
Mr. Aguilar. Thank you, Madam Chairperson. And I appreciate
you holding this hearing and the opportunity to hear from our
witnesses.
Despite what the Ranking Member said, my belief--and I feel
I speak for folks on our side here--is, this is about gathering
more information. This is about ensuring that we need to hold
ourselves to the highest ethical standards, to realize that we
need to follow the letter and the spirit of the law, and to
recognize that there might need to be some changes along the
way, and that the idea of crafting good public policy means
that we have to weigh options and weigh equities, and that
individuals who run for this office have to make choices on
what public service and public sacrifice means.
And so, I appreciate hearing the information and reading
the testimony as well.
Ms. Nagy, there have been ongoing conversations about the
scope of covered persons within stock trading and ownership.
Should stock-trading reform efforts capture Members alone, or
should they include dependent children and the covered--covered
individuals, senior staff members? What is the importance of
the scope being widened here?
Ms. Nagy. Sure. Thank you, Representative Aguilar.
So I think the importance of the scope being wider relates
to my very first point, which is that, if the concern is a
conflict-of-interest concern about the ownership of securities
and if the concern is that a Member of Congress may be tempted
into self-interested decision-making, then that self-interested
decision-making is also going to relate to one's spouse and
potentially to one's dependent children, who that lawmaker has
control, often, of the assets.
And so, insider-trading issues and trading issues are
serious ones, but conflict-of-interest ones are very serious as
well. And that is the area where Congress and the rules that
apply to Congress and the laws that apply to Congress are very,
very different than what currently applies in the Executive
Branch and the Judicial Branch.
Mr. Aguilar. I appreciate that.
Ms. Hempowicz--and then I will go again to Ms. Nagy on this
question--there has been debate over the ideal enforcement
mechanism within the STOCK Act. Some potential bodies: SEC,
Securities and Exchange Commission; Department of Justice
Office of the Special Counsel.
What are some of the challenges facing these specific
enforcement mechanisms?
Ms. Hempowicz. Yes, I think when we are talking about
enforcement mechanisms that will go through the executive
branch, we are going to run into Speech and Debate issues.
Our preferred enforcement mechanism runs through Congress.
It is the one that you--I am sorry, these bills all run
together at this point. But it is the--I think it is the Ban
Conflicted Stock Trading Act, and it is the one led in the
Senate by Senator Ossoff. I think that one has the clearest
enforcement mechanism.
I think the high-level principles to consider with an
enforcement mechanism is that, you know, any penalties would be
meaningful, that it would be easy and simple to apply, and that
the public can have confidence that it is being applied evenly
across the board. And so there must be some transparency there.
And so, I think those are the three high-level principles.
But if you are asking what my preferred mechanism is, it is the
one in the bill led by Senator Ossoff.
Mr. Aguilar. Ms. Nagy.
Ms. Nagy. So, I think the enforcement mechanism could get
more complicated when there are various options to divest or
put in a blind trust. I think the administration of blind
trusts would be--the administrative challenges would be
immense.
If we look at the difficulties that Members have had in
complying with the STOCK Act's 45-day reporting requirement,
adding more disclosures, more forms, more supervision does not
seem, to me, the way to remedy the current problem.
I think the enforcement mechanism, the simplest one, is to
say that Members of Congress cannot own covered securities.
Exempt certain types of securities, like widely held
diversified mutual funds, Treasury bills, others. There might
be some other exceptions, and I think drilling down to that.
The simpler the prohibition, the easier the enforcement.
Mr. Aguilar. I appreciate it.
Mr. Sherman, you were the only one that mentioned--I am
sorry; you may not be the only one. But you specifically
mentioned Federal resources in oversight mechanisms. And can
you talk with me briefly about, you know, how we bolster the
enforcement bodies to improve our ability to tackle insider
trading and other conflicts?
Mr. Sherman. Absolutely.
I think it is incumbent upon this Committee to speak to the
enforcement bodies, whether that is the OCE or the House Ethics
Committee or some of the Federal law enforcement agencies that
were mentioned, to understand their capacity and how much
resources they would need to implement these policies.
I agree with my colleagues, though. I think the simplest
and the cheapest mechanism of enforcement is to implement an
absolute ban on Members and their families owning and trading
individual stocks and other securities.
Mr. Aguilar. Thank you, Mr. Sherman.
I yield back, Madam Chairperson.
The Chairperson. The gentleman from Georgia is recognized
for five minutes.
Mr. Loudermilk. Well, thank you, Madam Chairperson.
A very interesting hearing. I think this is something we
should be discussing and talking about.
But one quick question. I learned Mr. Sherman was part of
the Ethics Committee just since I have been here. I am curious,
how many ethics violations were prosecuted per year?
I mean, I know that it is politicized and there are tons of
ethics complaints for political purposes. But, on an average,
how many years of Members of Congress were we actually held
accountable for ethics violations?
Mr. Sherman. With apologies, I don't know the answer to
that question. I served on the Ethics Committee before the
STOCK Act was passed.
Mr. Loudermilk. Well, not just with stocks; with anything.
Mr. Sherman. Sure----
The Chairperson. Would the gentleman yield?
Mr. Loudermilk. Yes.
The Chairperson. Because I was chair----
Mr. Loudermilk. Okay.
The Chairperson [continuing]. Of the committee at that
time. And we had a very vigorous enforcement mechanism at that
time, one that Mr. Sherman was very actively----
Mr. Loudermilk. Right. What I was----
The Chairperson [continuing]. Involved in.
Mr. Loudermilk [continuing]. Wondering is just, whether it
is stocks or not, how many ethics violations do we catch people
with that are prosecutable or however you--the term you want to
use--in a year?
Mr. Sherman. Again, I would be guessing if I----
Mr. Loudermilk. Okay. That is fine.
Mr. Sherman [continuing]. Gave you a hard answer----
Mr. Loudermilk. But there are some?
Mr. Sherman [continuing]. But there----
Mr. Loudermilk. Yeah.
Mr. Sherman [continuing]. Are some----
Mr. Loudermilk. Which is a violation of an existing rule or
regulation or law, correct?
Mr. Sherman. Absolutely.
Mr. Loudermilk. Okay. That is all I was wondering.
I will turn it over to Ms. Schulp.
Insider trading. Has there been insider trading done by
Members of Congress in the last few years?
Ms. Schulp. There have been no prosecutions brought under
the STOCK Act provisions on insider trading.
Mr. Loudermilk. So there were some----
Ms. Schulp. But there have been Members of Congress
convicted of insider trading.
Mr. Loudermilk. Right. Right. Which is illegal.
Ms. Schulp. Correct.
Mr. Loudermilk. Okay.
I am kind of getting to a point, is that a misconception
that we have here is that government can change behavior. It
cannot. Laws can't change or shape behavior. It can only punish
for violations of those.
If we enact something like this that restricts the rights
and the freedoms of individuals--and everybody in this
Committee is a free American citizen that has rights. And part
of the rights, as explicitly defined by our Founders, was the
right to participate in a free-market society. The first stock
market came in 1790, shortly after the ratification of our
Constitution. It is part of a free-market system. It is no
different than having a bank savings account that you can draw
interest.
Now, I am speaking from somebody--if you pulled the
disclosures on me--and maybe you have--you found that there
were none. No stock trades. Why? Because the minimal stock
trades that I do is below the threshold of reporting. And so,
it is not going to affect me, what you do, one way or the
other.
Let me also bring this up. It is ironic--I am on the
Financial Services Committee, and part of the oversight that we
have is the stock markets, the SEC. There was an article that
was written about me a few months ago or a year ago criticizing
me that I have oversight and regulatory authority over the
stock markets, and I don't even trade stock so how could I know
anything about it.
Versus, one of the reasons I started trading a few stocks
on my own, so I could learn the intricacies of what I am doing.
That is not a conflict of interest. That is using the interest
I should have to further my knowledge, to know what is right,
what is wrong, how do we do this, how can we correct these
things.
Look, we cannot change behavior. At the founding of our
country, there were four Federal felonies. Today, we have rooms
of code books, of laws, but murders still happen. If government
could change behavior, we would have no murders, we would have
no thefts, we would have no fraud. We can't change behavior. If
we enact a law that prohibits Members of Congress from owning
or trading stocks, it will still happen by bad players.
John Adams put it this way. He said, our Constitution is
for a religious and moral people; it is wholly inadequate for
the government of any other. What he was saying is, basically,
the only way that you can control behavior is have such a
strong and powerful government that it strips the freedoms away
from everyone. If we have freedoms, if we have rights, you must
accept that bad people are going to do bad things, but you put
the guardrails in for punishment of those things.
So, I am just--whatever happens here, we have to keep in
mind that every person in this room is an American citizen that
has rights and freedoms, and part of that right and freedom is
to participate in a free and fair market economy.
And, if you look, there are so many ethics controls on
Members of Congress right now, I think you are going to run
some people out.
And I just--I wanted to take my few minutes to bring a
different perspective on this from somebody who it is not going
to make a difference to me personally. But it does make a
difference to me as an American citizen.
And, yes, seventy percent--look, if you polled a Republican
district after it came out that the Speaker's husband made all
these millions of dollars on a stock trade, I guarantee you
most of them would say, yes, ban it. Ban it. But if you went to
a Democrat area, it probably wouldn't be as much. Because
people are emotional, and our Founders put in a system that was
slow and methodical so we wouldn't react emotionally but
thoughtful, based on law and protecting freedoms.
And so, Madam Chairperson, I see my time has expired, and
so I yield back the time I no longer have.
The Chairperson. The gentleman yields back.
The gentlelady from Pennsylvania is recognized for five
minutes.
Ms. Scanlon. Thank you so much. And thank you for having
this hearing.
I mean, obviously, the public has been appalled by the
reporting we have seen about Members of Congress and the Senate
using inside information to profit themselves. The whole point
of public service is to serve the public, not line politicians'
pockets.
I do think there is a lot of usefulness in establishing
firmer laws. I would have to disagree that laws have no impact.
Thinking of smoking or speeding, we certainly set some
guardrails. And when people know what the rules are, they
follow them better.
I certainly find myself in the unusual position of agreeing
with the Ranking Member that we do need to do a better job of
educating Members of Congress about what those guardrails are.
Because the whole process of getting here is such a firehose of
information that this is not one that is well-emphasized.
A couple of you have talked about Executive-Branch
guidelines being maybe something we should be considering. And
maybe we could start with Mr. Sherman. I know, Ms. Nagy, you
also discussed this. If anyone else wants to chime in.
Can you talk about how the Executive-Branch guidelines with
respect to stock trading might inform what we are trying to do
here and if there are any important differences we should be
thinking about?
Mr. Sherman. Sure.
Well, the conflict-of-interest statute that applies to the
Executive Branch but does not apply to Congress creates
provisions that ban Federal employees from working on specific
matters where they have a conflict with their financial
holdings. It doesn't name specific securities. It is pretty
broad. It applies to spouses, and it applies to dependent
children.
I think that is a good model for Congress, in part because
we know Congress thought that it was important. I don't know
why Congress opted themselves out of it.
I think that is a good floor, with the recognition,
however, that Members of Congress are differently situated than
executive-branch employees, because Executive-Branch employees
have the opportunity to recuse themselves from matters where
there is a financial conflict.
Again, with respect to Members of Congress, it hurts your
constituents if you are recused from any matter that is within
the purview of Congress. It denies them representation. Which
is why the prophylactic measures for Members of Congress should
be higher, not lower, than applied to members of the executive
branch.
Ms. Scanlon. Ms. Nagy.
Ms. Nagy. Yes. Thank you.
If one is a member of the Executive Branch and one is
charged with shaping healthcare policy, one cannot own
healthcare stocks, full and simple. Sometimes it is prohibited
by statute directly. Sometimes it is prohibited because of the
conflict-of-interest statute that Mr. Sherman just took us
through.
Members of Congress can own stocks and shape healthcare
policy. And they do.
Ms. Scanlon. Yes.
Ms. Nagy. And they are complying with all current rules and
all current disclosure requirements when they do, which says to
me a change needs to be made.
We have had instances where Legislative Branch officials,
where lawmakers, when the President nominates them to move to
the Executive Branch, have to sell their stocks because they
can't do their jobs. But they went for decades doing their jobs
here in Congress, and they were complying with congressional
rules, which says to me congressional rules need to change. I
think a Federal statute is the way to change that.
Ms. Scanlon. Okay. And it is interesting since the scope is
so broad. I mean, we have to deal with wars in Ukraine and we
have to deal with childcare tax credits and everything in
between. So that is an interesting distinction.
I think you had something, Ms. Hempowicz.
Ms. Hempowicz. Yes. I just want to--in addition to what my
colleagues have said, I think it is also important, the
Executive Branch provides a really good model for any
particular exemptions or unique situations as they come
forward.
You know, I know people have asked questions about, how
would you handle cryptocurrency underneath the new
restrictions? I think the Executive Branch you know, has
provided a really good roadmap of how to do that.
There are also questions about you know, non-nuclear
families and how would they be approached. The Executive Branch
has had restrictions that are stronger, in many ways, than what
is being considered right now for Congress and has found a way
to make it work--and has found a way to make it work without
deterring successful people or, you know, people from the lower
economic ring in our society from participating in the
Executive Branch while under those stricter restrictions.
Ms. Scanlon. I have a gazillion more questions. Also
wondering how much public financing of campaigns would help.
But thank you, and I will yield back.
The Chairperson. A vote has been called on the Floor of the
House. We have two votes. So, we will recess at this time to go
vote. It is probably going to take at least forty minutes to
come back, so you may want to go get a cup of coffee or
something. We have at least three Members who have questions,
and there has been discussion of maybe having a second round if
you all are game to stick around for that.
So, at this point, we will recess, and we will come back
promptly after the second vote.
[Recess.]
The Chairperson. We are waiting for Jennifer Schulp to
rejoin. Apparently she is downstairs and on the way. We have
the gentlelady from New Mexico, but she has not yet arrived,
and Mr. Raskin is participating online. We don't know the
answer, so I will turn to myself for some of the questions that
I have.
Let me just say, Mr. Davis has talked about his gigantic
stock portfolio, which he inherited as a child. I have never
purchased or sold a stock or a share of stock. So in some ways,
this is very much an educational experience for me on the
nuances and the questions that are before us. I am sure the
Ranking Member has had the same experience I have had, people
asking questions, what about this, what about that, that, by
and large, I don't have the answer to.
So let me pose this question. Several people have--I think
the goal, if I am hearing everyone correctly, is that a Member
of Congress should not be able to personally benefit
financially from the information they receive because they are
a Member of Congress, or because of decisions that they are
making as a Member of Congress. I think most of us agree with
that. So the question is how to address that. I think, as
people have asked me questions, it seems like there are more
complications than it would seem at first blush.
So let me ask the fundamental question which has been asked
to me: Why stocks would be different than other assets? For
example, we have Members of Congress who are allowed--who own a
business that they owned before they were elected, an insurance
company or a store or, you know, car dealership, whatever, and
the decisions being made, or the information received could
have an impact on the value of that asset.
We have Members of Congress who have professional licenses.
When I chaired the Ethics Committee--Mr. Sherman may remember
this--you are not allowed to practice your profession as a
Member of Congress to avoid conflicts of interest. The medical
doctors approached the Committee with the point that if they
didn't practice a certain number of hours, they would lose
their license, and they would never be able to practice
medicine again. And so, we arranged for a scheme where the
medical doctors could put in the number of hours that they
needed to retain their license, and the remuneration could be
no more than what was necessary to pay their malpractice
insurance for doing those hours. And I think that has worked
reasonably well.
On the other hand, you know, Medicare reimbursements, a
whole variety of things impact what an M.D. will, in the
future, be able to expect as an income stream. The same with
dentists or even attorneys. You don't have the minimum hour
issue with M.D.s, but if you vote on something that provides
for a private right of action that is remunerative in the
future, you could benefit from that.
So why are those issues different than stocks? Whoever
could answer that would be helpful.
Ms. Nagy. Well, thank you. So stock in individual publicly
traded companies is the low-hanging fruit, and let's go after
the low-hanging fruit. It would be great to go up the tree and
get higher-reached fruit, and as we do it is more nuanced and
it is more complicated. But a total of hundreds of millions of
dollars of assets of Members of Congress are currently invested
in publicly traded company stock.
The Chairperson. I understand that, and I think there is a
genuine desire to address the issue. But from a policy point of
view, what is the distinction?
Ms. Nagy. So the policy distinction is if we rid that
interest and shift it, because it is not completely abolished,
basically then the stock is held in diversified investment
funds. Members of Congress in a diversified fund would not have
as much impact.
The Chairperson. Let me ask you this: Members of Congress--
most American middle-class American families, the single most
important financial asset they have is their personal dwelling.
I think that is true--other than the extremely wealthy people
in Congress, and there are some, that is true for most of us.
Obviously, there are a lot of things that can impact real
estate. I mean, mortgage rates and the like. Should we require
Members to sell their homes?
Mr. Sherman. So, I think we have to recognize two things:
One, there are conflicts of interest with respect to most of
what Members of Congress do, right? Members set tax policy,
and, presumably, they all pay taxes.
I think how we have to approach this is a balancing test
that takes into consideration the risk of a conflict of
interest materializing in a way that impacts Members in their
representation of their constituents, as well as consideration
of how large a pool of individuals the conflicts that Members
have impacts beyond them, right? For example, with tax policy,
or with owning a home, or paying for college, right?
These are things that affect the general public, you know,
across income levels, across various different factors. And I
think everyone agrees that it is reasonable to understand why
Members of Congress, you know, are elected to make policy with
respect to those issues without selling their homes or, you
know, taking other extreme measures.
With respect to individual stocks and other assets that are
under discussion with some of these proposals, one, they impact
a much smaller class of assets than the public possesses in a
much more substantial way. I don't think there is any way to
compare the stock portfolio, or the financial portfolio, of the
average American as compared to the portfolio of the Member of
Congress.
The Chairperson. I agree with that. I am understanding your
conflict rules. I think they match the conflict rules of the
House, in terms of if it broadly impacts the public, you know,
it doesn't--but let's talk about businesses.
Lawyers--and I know several lawyers who are in the House,
and if they were in private practice, they had to shut their
practice down and lay off all the employees. Other people who
don't have management of businesses, they can keep those
businesses.
Why would those businesses be treated differently than a
stock portfolio, because, obviously, most Americans don't own a
business? How would that be dealt with and what is the policy
distinction, if any, being made?
Mr. Sherman. I don't think they necessarily should. I will
give you an example from the depths of the Ethics Manual. With
respect to recusal, there is a provision, an example in the
Ethics Manual that says it is okay for Members of Congress who
own a brewery to vote on prohibition legislation. That seems
like an obvious conflict of interest that any normal person
could understand that the congressional ethics rules not only
explicitly allow but articulate as an example of how Congress
should function.
I think that is a problem. I think there are lots of
businesses and interests in privately held companies that
present the same level of conflicts of interest that we are
seeing with stock trades. As Professor Nagy said, I think we
should handle as much as we can, as judiciously as we can, but
that doesn't mean that other conflicts don't exist and
shouldn't be addressed.
I think there is a reasonable test and a line that can be
drawn. We have seen it with small farms and things like that,
but certainly they present the same conflicts that we are
dealing with here.
The Chairperson. Let me ask a question, and maybe this is a
dumb question, but as I indicated earlier, I have never
purchased any stock or sold any stock. If you look at my
disclosures, however, it looks like there are all these stock
trades, but what it is, my husband, he is a lawyer, he is a
sole practitioner, and he has a retirement fund that some guy
at the bank manages for him.
I don't know what he is doing, and I suppose my husband
could find out, but I don't think he does. We just say, don't
buy fossil fuels, don't buy tobacco, don't buy gambling, and
sometimes he doesn't even adhere to that. But that is not a
blind trust, but, in fact, we don't know what he is doing.
Could you substitute the very burdensome--and, you know,
there are problems in terms of what you put into a blind trust,
but the asset requirements and all the blind trust rigmarole
with a more simple approach that you attest under penalty of
perjury, the Member, that you don't know and you are not
directing and you are not receiving information, and the person
who is doing the investing does the same penalty-of-perjury
attestment. Does that work?
Ms. Hempowicz. If I could jump in on this one.
The Chairperson. Sure.
Ms. Hempowicz. The scenario you describe, kind of where the
holdings are in a retirement account, is not necessarily what
we are talking about here. I think that would likely follow the
current restrictions.
I think the benefit of a blind trust is that there is a
statutory definition there. The individual is, like you are
saying, under penalty of perjury, but in there, it is the
individuals administering the trust also have a professional
responsibility and will receive professional penalties.
But to the point that you are making, that you don't own
individual stocks and Ranking Member Davis that you made also
along those lines, that puts you in line with most of the
American public. Again, I think the restrictions on how they
would apply to Members of Congress would not shut Members of
Congress out of the financial market, as was suggested earlier.
It would simply limit their ability to engage in those markets
with financial instruments that don't pose those same conflicts
as individual stock ownerships do and then would allow--and I
think also to your point earlier about what the goal is here,
absolutely the goal is to make sure that Members of Congress
aren't corruptly using information that they have.
I think the goal must be a little bit bigger than that too,
and it has to be that Congress crafts ethics rules and laws
that are strong enough that the public doesn't even have to
worry about whether or not that is happening.
The Chairperson. It is the appearance as well.
Ms. Hempowicz. The appearance of a conflict is as damaging
to the integrity of the institution as an actual conflict.
The Chairperson. Let me ask a couple of questions that I
have been asked. If the goal is basically to keep the Member of
Congress in the dark--and if they don't know something they
can't act upon it, I overstate that--it occurs to me that, to
some extent, the STOCK Act reporting undercuts that whole goal.
For example, once a year, my husband grumbles about it. He must
fill out this form because I don't know what is going on. Once
a year I find out what he has been doing. I guess there is that
value as a spouse. But otherwise, I would never know. So, to
some extent, the reporting aggravates the situation, and you
must report for tax purposes and then once again, for
disclosure purposes.
Would it make more sense to align the dates of the
disclosure so that the tax and reporting are at the same time?
You don't at least have two disclosures. That is something we
could do by adjusting the disclosure time for Members to
coincide with tax time. Would that help some?
Mr. Sherman. My understanding is that the reason why the FD
date is a month out is so that Members can file their taxes
without having that butt up against the deadline for FDs.
I think, frankly, taking a poll of Members and figuring out
if the intent behind that accommodation makes sense would be a
reasonable approach to figure out if it is just running in
place.
The Chairperson. Let me ask a couple of questions that have
been asked to me by various Members, and I won't go into any
names, but people wonder about this.
A Member of Congress is estranged from a spouse, not
divorced, but it is obviously heading that way. The non-Member
spouse is engaging in rampant stock trading and will not comply
with requests of the Member spouse.
I mean, should we have a provision where you could say,
This is out of control, we are estranged? I mean, you are going
to hold a Member accountable for something they can't control.
What do we do with that?
Ms. Hempowicz. Yeah. I think one thing to consider, or two
things to consider with any exemption or potential exemption
would be--well, one good roadmap is to look how the executive
branch has handled it. Again, you know, they have had these
similar restrictions for over sixty years.
I think kind of the bigger, broader principles for Congress
to consider when thinking about this or any kind of exemption
to this rule is that any exemption takes you further away from
what the American people are asking for. And so, I think, as a
threshold matter, Congress should ask itself could this
exemption undermine public trust? And if the answer to that is
yes, I think Congress should then ask, Is it absolutely
necessary that we figure it out in this legislation, or is it
something that we could do in regulation?
I also think if it has the potential to undermine public
trust and is not absolutely necessary, I urge Congress to
resist the urge to address every individual instance that may
come up, because I think it just further complicates a system
that really benefits from simplicity.
The Chairperson. That may be the answer that people have
for the other specific questions I have been asked. People have
asked about, is it 527, these education accounts? Is that the
right code section? Would that be covered? Because Members
contribute for their children and for their grandchildren so
they can go to college. And people are worried that, you know,
most of the Members of Congress could earn a lot more money in
the private sector than they are earning here. We are not
asking for a pay raise. We are just noting that if you can't
support your kid's college, you know, endeavors, and you have
to quit----
Ms. Nagy. So, I think you are referencing 529, a saving
plan for tuition.
The Chairperson. Yes.
Ms. Nagy. And the way those usually work is that you put in
your monthly contributions, or annual contributions, and it is
typically directed into a diversified fund, sometimes an index
fund, sometimes----
The Chairperson. So it is because you don't control it, it
would not be covered.
Ms. Nagy. Correct. You do not control the individual stocks
in the portfolio, in the basket of stocks that the fund would
own.
The Chairperson. And that would be true for retirement
funds as well, I would assume?
Ms. Nagy. Correct.
Ms. Hempowicz. It is in addition to because you don't
control them, but also, they meet definitions of being
diversified. And so, you are not having--that you don't have
that same impact on any one sector, or any one particular
company as you would with individual stock ownership.
The Chairperson. Okay. Let me ask a question that has come
up. You inherit stock. I will give you an example. We no longer
have the stock, but my husband's Aunt Mary was married to an
oil field worker, and it turned out that she had stocks in an
oil company that Ed has received and he had died. And she never
had kids, so her nieces and nephews inherited it, which we
didn't want.
But what do you do when that happens, either for you or
your minor children, you have acquired it, but not
intentionally?
Mr. Sherman. Well, I would go back to what my colleague,
Ms. Hempowicz, said. I think we are designing an ethics regime
for the Legislative Branch. We should start from the principle
that public service is a public trust and establish as
stringent and clear a rule as possible. There are always going
to be unique family situations as unique as the 535 Members of
the House and the Senate, but we can't develop an ethics regime
like that.
Certainly, the Ethics Committees, if they are given
authority to enforce these rules, can come up with some
reasonable regulations that account for very specific and
likely to occur exceptions, but I think we need to start from a
general rule----
The Chairperson. So we would leave that to we are going to
have to check with the Ethics Committee on their capacity to do
that. I mean, for example, one of the questions I have been
asked is what if your spouse is employed in a company and their
compensation is stock options. Do they have to work for free?
Mr. Sherman. I think most of the proposals under
consideration right now would allow for the spouses to be
compensated in the way that their employers decide.
I know you didn't ask this, but I will also just say
explicitly, I think Members of Congress should get a raise. It
is important for government ethics. It is important----
The Chairperson. Well, I appreciate that, but that is not
going to happen. So----
Mr. Sherman. Fair enough.
The Chairperson [continuing]. I will just make that very
clear.
You know, there are many, many other questions, but I have
taken more time than really is fair. I thought about this a
lot, and I appreciate the testimony, because you all have a
high level of expertise in this area.
I see the gentlelady from New Mexico has arrived, so we
will turn to her for her questions.
Ms. Leger Fernandez. Thank you, Chairperson Lofgren. And
this line of questioning really highlights the fact that it is
not easy, right? It is an area where we are trying to deal with
multiple Members of Congress who each have their own unique
histories of why and how they came here.
I will say that over the last few months, one of the top
reasons why my constituents have been reaching out to me is
that they want to urge a ban on individual stock ownership for
Members. So, it is not something that is in a vacuum. We are
dealing with--our constituents are asking us to make sure that
we have that separation, that we have that independence, and
that our best interests in what we do financially is not at all
tainted by what we do here.
You know, and I agree with that. I don't think Members
should be in the business of owning or trading individual
stocks. When I first got elected, soon after it was brought to
my attention that my retirement portfolio had--my 401(k) had a
very modest amount in an individual stock. So, I had to go in
and actually take the extra effort to actually say, no, get rid
of that. I do not want to have there be any question at all. As
the Chairperson noted, I was not aware of that until it was
brought to my attention, and I immediately asked them to turn
it into something else. I don't know what you can do with it,
just turn it into something else.
The other thing that strikes me is that we are talking
about choice. I love the fact that that word came up a lot,
because when we run, when we ask voters to elect us, which we
have to do every two years, we are making a choice at that
time. So, if we know that we have a large portfolio of stocks,
and if it is known in advance that once you get elected, you
are going to have to divest yourself of those stocks or put it
in a blind trust if you have enough to make sure that you can
pay the cost and deal with the complexity. That is a choice you
are making. When you are asking--you are asking voters to trust
you. So, we need to return that trust. As long as we know that
is what we need to do, then that becomes part of the decision-
making process.
But there is an issue of timing, and so, like how long
would you recommend that a Member of Congress, once elected, be
allowed before they must engage in that divestment? If they
inherit something, what is reasonable then? I mean, because we
want to be able to provide a period of reasonableness that
everybody knows about.
And I will ask that of the panel. So, I see several of you
shaking your heads up and down. So, what would you answer to
that?
Ms. Hempowicz. I will be faster than I usually am. You
know, I think the important thing, again, to consider and look
and see how things have been handled in the executive branch,
and so, I think the timelines that are given there might be a
good indicator.
I think also, you know, some people have suggested that
maybe any additional restrictions shouldn't go into place until
a Member wins reelection, and I think that may also be--that
may also be reasonable.
You know, I think we are certainly not trying to create an
ethics program that is impossible to comply with. We are trying
to do the opposite. And it should be as simple to comply with
as possible.
Ms. Leger Fernandez. Right. And waiting until reelection
allows that Member to make the choice as to whether they will
continue to ask for that.
Mr. Sherman.
Mr. Sherman. Agreed. I think the Executive Branch provides
some examples. I also think that the time period should be with
all deliberate speed, particularly relative to the two-year
term of service that Members are elected to.
So I have seen some proposals which are ninety days, 120
days. That seems not unreasonable, but I think with all
deliberate speed is advisable.
Ms. Leger Fernandez. And Professor Nagy, as you answer
that, I have another one and since I don't have a lot of time I
will just see if you want to answer that. And also, I mean, we
keep pointing to the executive branch and its models.
Are there instances of something that is in the Executive
Branch that doesn't quite fit within a congressional setting,
and what are some of those examples?
Ms. Nagy. So, on the timing issue, I would say that I think
a number of the bills actually, particularly for inheritance,
raise 180 days as the time that someone would have to divest. I
think the consideration there is that sometimes the stock
market is not doing what one wants it to do, and that gives a
little bit of time there.
I would also say for any divestment that is required under
legislation that Congress enacts, I would also recommend the
same type of rollover of capital gains tax that is currently in
force, that Congress has currently put in the statute for the
Executive Branch.
I think that if someone sells assets, sells stock and other
securities because they are ordered to do so, and they move
that into a diversified mutual fund, the law should be written
so that capital gains is deferred.
Going to the Executive Branch, that is the rule in the
Executive Branch. I think what the Executive Branch has,
because in most instances in the agency, it is not an outright
prohibition, although there are exceptions. The FCC is one
exception. Don't own telecommunication stock. The disclosure
forms that Executive Branch officials complete allows the
ethics agency to determine whether there is a conflict of
interest or is not. And then that then triggers the need for
recusal or divestiture. And clearly, that is not the instance
here. Mr. Sherman before referenced the sort of brewery example
that is codified in the manuals there. The House and Senate
Ethics Manual reference stock ownership, and explicitly say
that divestment is not required even if Members own stock in
companies that directly and substantially affect the
legislation.
So, the problem is greater than the current law allows
this. It is that the problem is that the current rules in the
House and Senate safe harbor this.
Ms. Leger Fernandez. Thank you. My time is expired, Madam
Chairperson.
The Chairperson. The gentlelady yields back. The Ranking
Member is recognized for our second round.
Mr. Davis. Thank you, Madam Chairperson. Again, this is a
great hearing. I do truly appreciate the witnesses.
Going back to our previous conversation, I just--I think
what we are hearing from our witnesses is that Members have a
choice. You can either go into a qualified blind trust that I
have already established, I and most Members of Congress would
never qualify for, for one company, LPL's minimum investment of
$500,000. Don't have it. Most Members don't. Or divest. Divest
individual stocks that then we will get accused of getting a
special privilege of deferred capital gains.
So those types of--you must take into consideration what
the perception is when you all come up with what you think
might be a great idea for Congress, but we are in a different
perception. CREW might call us corrupt if we take that tax
break. Who knows?
I am focused on the middle-class Member, and I just don't
believe that forcing middle class Members to divest an
ownership portion of a family farm, or to divest ownership in a
business that their spouse may be a part of, their dependent
children, I just think it is untenable.
Would you all agree that your proposals are mainly geared
toward the wealthiest Members of Congress?
Ms. Hempowicz. I wouldn't. No, I wouldn't say so.
Mr. Davis. Okay. All right.
Ms. Nagy, you testified earlier you don't believe the
ballot box is sufficient to be a check on Members of Congress,
drawing analogies to different rules with different branches of
government. I want to point out that only two people in the
Executive Branch are elected, zero in the Judicial Branch. We
have had no discussion on the Judicial Branch right now.
I don't think that analogy compares apples to apples. I
mean, we are accountable to 800,000 people every two years. We
have a job interview called an election.
Ms. Nagy. So, my testimony before was that the ballot box
is not a sufficient remedy to ethics, because ethics affect the
Nation, affect everybody. And so, if a Member has conflicted
investments, and is generating a public perception that the
reason he or she is advocating for legislation is to juice the
value of their portfolio, that is a national problem. And the
fact that a small----
Mr. Davis. That is a corruption problem. That is, again,
those corrupt Members. But most----
Ms. Nagy. That is not corrupt. It is allowed. If I may just
respond. It is not corruption. It is currently completely
within--the House and Senate rules do not prohibit a Member
from owning stock or owning an investment and advocating for
the direct benefit of that investment unless--and there is an
unless--unless they are the sole beneficiary of that
legislation.
Mr. Davis. Do you have a number that your research has put
forth that would determine how many Members of Congress are
doing that?
Ms. Nagy. How many are doing it? How many people are
advocating for legislation because it benefits their own
portfolio?
Mr. Davis. Yes.
Ms. Nagy. I am not sure how that can be quantified.
Mr. Davis. I agree.
Mr. Sherman. If I may.
Mr. Davis. Hold tight. I appreciate it, I would be glad to
get to you. I have a limited amount of time. I don't control
the Committee. But this is a great time to be able to ask a lot
of different questions.
So, as we look ahead--all right, let's look back. We were
coming into a pandemic, right? We, in a bipartisan way,
virtually unanimously created the Paycheck Protection Program.
It benefited a lot of small businesses that are attached to
stocks, maybe Members own.
Should every Member of Congress, because they may have
voted for that program, was that a corrupt thing because we
tried to save the economy? Is that something that you can go
back and say Members of Congress benefited?
I mean, in my particular case, I was accused, because my
family Members got PPP loans, of trying to benefit my own
family when I have no financial interest. But that is settled
in the election.
I mean, I think you can try to find a connection to
everything we do, but again, most Members of Congress I truly
believe, Republicans and Democrats, want to do the right thing.
I don't trade stocks because I don't want to have to fall into
some gray area of a reporting issue, but I think there is an
issue that we don't start with what we have. We follow
transparency rules. We file ethics disclosures that most people
in the American public don't.
So, with that in mind, one last question. And I know, Mr.
Sherman, you have probably more experience with this than most.
Knowing the ethics disclosures that all of us file, and they
are easily available, did any of you go research mine while we
were on break? Darn it. I was hoping you would. You could get
it easily.
And then we have the STOCK Act transaction paperwork that I
have never used, but others have. So, I don't know anything
about that. But I file my own ethics disclosure because I want
to go talk to the Ethics Committee staff to make sure I am
doing everything right.
But is there anything in our current disclosure
requirements that is lacking, that you would say needs to be
more transparent and, if so, what is it?
Mr. Sherman. Yes. So, I appreciate the question. One, I
would note that the only way to really know if a Member is
acting on a financial conflict of interest is to see their
communications about that policy, but Congress is exempt from
the FOIA, right?
So, when you talk about true transparency, I think there is
some transparency, but the transparency with respect to Members
of Congress, how laws are made and their financial conflicts of
interest pales in comparison to the executive branch.
I would also note that with respect to financial
disclosures and periodic transaction reports, they are
accessible to I think the folks on this side----
Mr. Davis. What are they missing?
Mr. Sherman. I think they are not easily accessible to the
public. They are not machine readable. You can only view one
document at a time. So, if, for example, one of your
constituents wanted to review all of your transactions over the
course of your tenure----
Mr. Davis. And so you have an accessibility----
Mr. Sherman [continuing]. They cannot easily do that.
Mr. Davis. You have an accessibility based on something
that can be fixed. Make it more searchable and sortable on the
Clerk of the House website. But I am talking about the
disclosure itself.
Mr. Sherman. Sure. Disclosure does not correct conflict.
Mr. Davis. The disclosure itself is our ability, as Members
of Congress, it is our ability to tell our voters and tell
every person in America here is our financial picture for our
entire household. Here it is.
Chairperson Lofgren, you know, she laid out how her
personal situation is. Each time that ethics disclosure comes,
I know what mine is because I do it, but what on that
disclosure, what are we not doing that gives corrupt Members of
Congress the ability to hide wealth, or hide trades, or hide
something that you, as a former Ethics Committee attorney, you
used to see these corrupt cases, right?
Mr. Sherman. Yes.
Mr. Davis. What is it that you would recommend we do to fix
the current transparent process, because I think that is a key
point that in a lot of recommendations, we start from where we
are today rather than where we were before this transparency
existed?
And we start at a point rather than looking back and
saying, what can we correct to make the periodic transaction
report better? What can we correct to make the ethics
disclosure PFD better?
Mr. Sherman. I think, you know, as I said, making them more
easily accessible to the public, machine readable. But also, we
have had, as you mentioned, 59 Members of Congress violate the
STOCK Act since 2019. So whatever enforcement mechanisms are in
place clearly aren't working.
Maybe there is education----
Mr. Davis. Education.
Mr. Sherman [continuing]. As you mentioned, which I think
is incredibly important, but the penalties aren't high enough
to promote the compliance that I assume that Members want and
that the public is demanding.
Mr. Davis. I am going to ask you guys one more time, and
anybody else can answer this. This is my last question. I am
sorry, Madam Chairperson.
The Chairperson. That is all right. I was going to ask if
you would yield for a follow-up----
Mr. Davis. I will yield.
The Chairperson. [continuing]. On that, because we have had
a lack of compliance. And one of the things I am thinking
about, you know, it could be somebody trying to hide something
or, more likely, somebody just messed up, and that the
penalties--you know, it is the same amount of penalty whether
it is $100 trade, or $1 billion trade, and maybe we ought to
stagger/phase the penalties based on the dollar amount.
Mr. Davis. And that is something as we develop what would
be a final piece of legislation to address these issues, I
would love to work with you on that, Madam Chairperson.
But where we are right now, I mean, Congress today versus
25 years ago is much more transparent. I actually led a group
when we were in the majority that made every MRA expense
searchable and sortable. I mean, even the most liberal good
government groups said nice things about me. I know it was
tough, but they did. I know.
But there has got to be within the existing system--I mean,
is there anything that we can do within the existing disclosure
system that can be more transparent about what Members of
Congress, what we do, because, I mean, we want to follow the
rules.
And just immediately changing the rules, telling people you
got to divest in your family farm, you have got to divest in
your family business, you have got to divest in a stock that
you may have inherited--and I will tell the chairperson I will
gladly take ownership of any fossil fuel stock she inherits. I
will hold that for you.
The Chairperson. My husband sold it.
Mr. Davis. I will take care of it for you.
But in the end, we want to do the right thing. We all try
to do that right thing. What is it that we have in place today
that can be better and could show what is happening in our
financial picture that may not be shown today?
Ms. Hempowicz. Ranking Member Davis, to your question, the
transparency requirements currently on Congress have been
enormously helpful in highlighting to the public that Members
of Congress own and trade individual stocks.
And that is the issue that the public keeps rising up about
and wants to be--and wants their voice heard on. It is not that
they care about missed filing deadlines, or that they are
concerned that Members aren't aware of the current rules. It is
that every step of the way when the public becomes aware of
what those current rules are, they are outraged that Members of
Congress are allowed to engage in this behavior.
And so, I think just focusing on additional disclosure
requirements or the existing nonprohibitions in the STOCK Act
would be a tragically missed opportunity to engage with the
American people on something they care a lot about and have
told Congress they would like to see you act on.
Mr. Davis. I would argue that both Republicans and
Democrats here, we engage with the American people on a regular
basis.
Ms. Nagy, did you have a response to that?
Ms. Nagy. I did. I will just echo my colleague's statement.
Assuming timely reporting, the problem is not what is hidden.
The problem is what is in the sunshine. And the sunshine is
causing individual constituents to question not only their
Member's decision-making, but the entire Congress, or at least
the large group that doesn't already have their assets
diversified into widely held funds.
Constituents are questioning and members of the public are
questioning what was the motivation that prompted the push for
this legislation. And that is in the sunshine. It is not
hidden, it is in the sunshine, and that is troubling.
Mr. Davis. Ms. Schulp, did you have any comment on that?
Ms. Schulp. Yes, I have two comments to that. And one we
keep coming back to the question of diversified funds. And I
think it is an interesting, good question that we keep coming
back to, but keep in mind that some of the questionable trading
that happened during the COVID pandemic was in diversified
funds. So the problems that we are discussing, and the
conflicts that exist, are not nonexistent in diversified funds
as well. It doesn't magically take care of the question of a
conflict.
On the question that you pose directly with respect to what
could be better in the disclosure now, I think the long lag
between the time that trades happen and that periodic
transaction reports are required to be filed is something to
take a look at. And where I have had interactions with the
public, I have heard calls for more timely and quicker
disclosure on that front.
Corporate insiders are required to disclose within two
days. That too, is not a completely comparable situation to
Congress, but having 30 or 45 days after a trade takes place is
an exceptionally long period of time after that trade takes
place for disclosure to happen.
Mr. Davis. I will end by this--and, again, thank you for
giving me so much extra time. I do believe this discussion is
extremely important. I look forward to working with each of you
individually as we move forward.
But I will tell you, and I certainly hope this hearing
allows my constituents more of an opportunity to think about
this process. And I can tell you it is--I travel a lot when I
am home. I haven't had a lot of constituents bring this up. I
hope they do, because I want to explain to them the processes
we have in place and get their opinions and their ideas.
I certainly hope those of you who have already put
proposals together for divestment and qualified blind trusts
that we cannot afford, that most Members cannot afford to
participate in, I hope you are willing to listen to how we can
make the process better, and do it in a way that doesn't just
encourage the ultra-wealthy to be the only ones to run for
Congress.
So with that, I yield back.
The Chairperson. The gentleman yields back. Mr. Aguilar,
you are recognized for five minutes.
Mr. Aguilar. Thank you, Madam Chairperson. And I am happy
to continue down the path and the conversation specific to kind
of education and compliance. Mr. Straus, we have been talking
about the, you know, PTRs, the periodic transaction reports,
and the thirty days of covered financial transactions.
What remedial measures does the Ethics Committee have in
place in the event that a Member or a staffer files a PTR
incorrectly.
Mr. Straus. So thank you for the question. And my
colleague, Mr. Sherman, may know more specifics on the details
of some of this stuff, but, in general, when a filing happens,
whether it is a PTR or a financial disclosure report, and there
is an error on the form, which I am led to believe is not
uncommon, right--they are complicated forms to fill out--the
committee reviews the forms, notifies the filer, and the filer
has time to correct that filing.
Most errors that occur on financial disclosure forms are de
minimus errors. Things are put on the wrong line, you know,
just mistakes that happen. And once that filing is identified
as being wrong, an amendment can be filed.
The Ethics Committee is very clear that filing an amendment
in and of itself does not have anything to do with potential
wrongdoing, that most of the time--and a Member or a staff
member can file an amendment on their own, too, if they realize
that they have made an error, without prompting.
It is only after the potential that, you know, an error can
be fixed, if someone chooses not to comply, that is when the
committee might get involved in working with that person,
either directly or indirectly, to figure out what is going on
and whether a potential recourse might be necessary or not.
Mr. Aguilar. Mr. Sherman.
Mr. Sherman. I think every staffer on the Ethics Committee
remembers getting that one call from a Member about a question
about the form that they submitted. Mr. Straus is exactly
right. You know, Members file their FDs and PTRs, and there is
a process to work with them to make sure that the information
is accurate, and if there are questions they are asked, there
is an opportunity to amend.
I think even on the investigative side, particularly with
financial disclosures, you know, I think there is a presumption
that we need to make sure that this form was filled out
accurately and correctly. There is sort of a lean towards
presuming that Members sometimes make honest mistakes, which we
all do.
Mr. Aguilar. Mr. Straus, with respect to the remediation
process, how does that differ within the Executive Branch?
Mr. Straus. So a Designated Agency Ethics Officer in the
Executive Branch has prescribed tools that are potentially
available to them, depending on individual circumstances. So
when a filer puts a financial disclosure form into their DAEO,
their Designated Agency Ethics Officer, and it is reviewed, the
ethics officer is going to work with that individual on a case-
by-case basis to choose the best remedy available, which could
be divestiture. It could be recusal, as we have talked about.
It could be the creation of a blind trust. But it also could be
a voluntary transfer, right, to another job within an agency,
depending upon what the circumstances is.
And so, those agency DAEOs have a lot of flexibility to
work with that individual to come up with a solution that works
for a particular case, depending on their financial situation,
based on what is in the disclosure.
Mr. Aguilar. I appreciate it.
Mr. Straus, CRS is known for their education, for helping
us at every step of the way. The Ranking Member talked about
opportunities for new Members to receive information.
What would you envision? What does a training session, you
know, on this look like? You know, how should we think about
scaling up the Member educational pieces of this process? No
matter what road we pick, what should that look like?
Mr. Straus. Well, first I would say that I don't nor CRS
presumes that education is not already occurring, and that
there are requirements for that educational process to take
place.
In the executive branch, the Office of Government Ethics
works very closely with the Designated Agency Ethics Officers
in each agency to train them so that they can then train the
staff within each agency.
So ultimately, the Ethics Committee is the one responsible
for holding those ethics trainings and for deciding the type of
educational content, right, that might be included within that
process, both for Members and for staff. I have never taken the
training, certainly not the Member training on that particular
topic, but to Mr. Davis' point earlier, more education is
almost always preferable in these types of situations.
And probably the advice I give offices that call more often
than anything else is, when in doubt in this space, ask for
permission, don't ask for forgiveness. Call the Ethics
Committee's advice and education staff and ask them rather than
presuming to know what the answer is, even if you have gone
through that training, just to make sure you are on the
compliance side of whatever the circumstance might be.
Mr. Aguilar. My situation is similar to the Ranking
Member's in that, I handle this document, because it is about,
you know, me, and it is about my circumstance and my household.
I want to make sure that I do this right. But that often means
I am reaching out to the committee directly and filing this as
well.
I do think that there is a lot of space on the education
side. The policy piece is why we are here, and it is something
that we have to do, but I know that the chair, you know, feels
strongly about giving Members the tools to do this job
successfully, and I think that there is some space to do some
more on the Member side.
Thank you. I yield back.
The Chairperson. The gentleman yields back.
We have had another vote called on the Floor. So I will
just make a couple of comments. I think--I don't remember which
witness expressed concern, but I know it has been expressed
among certain Members that we not hold up whatever we are going
to do relative to the Legislative Branch for changes in the
Judicial Branch or the Executive Branch.
I don't think we should hold this up for that. On the other
hand, I don't think we should hold up reforms in those areas
too. So the obvious answer is not to put them all in one bill,
but to let the processes move forward. And I think there is
very strong evidence that we need additional measures in the
Judicial Branch. I don't think it should be combined in one
bill with this, but I don't think we should hold it up while we
are working on this.
A real simple question, and, you know, the ranges on
disclosure, I have never understood that. It is like, okay,
between zero and $10,000. Well, if it is five bucks, it means
one thing, and if it is $10,000, it means something else. And
you really can't tell what is going on. And then for people who
are very wealthy, it is over $50,000. Well, maybe it is $1
billion. That would be something we would like to know.
What is wrong with just doing the actual dollar amount in
the disclosure? Is there a reason for this?
Mr. Sherman. I think sometimes it is hard to be accurate,
and Members definitely don't want to be inaccurate. But I agree
with you. I think the demarcations could probably use a little
bit of work.
The Chairperson. Okay. I am going to close out and just say
that, without objection, the following items will be included
in the record of today's hearing: The February 17, 2022, CRS
report; a letter sent on March 28 to House leadership and this
Committee from 19good government organizations; an April 7,
2022, letter to this committee from the National Taxpayers
Union; an April 7, 2022, letter to me from Representatives
Krishnamoorthi, Ocasio-Cortez, and Neguse; and a March 17,
2022, Wall Street Journal article, ``Dozens of Federal Judges
Had Conflicts: What You Need to Know''; a December 10, 2007,
Kansas Law Review article by Professor Megan J. Ballard, ``The
Shortsightedness of Blind Trusts.''
The Chairperson. I would note, and we have had a lot of
discussion about education for Members. As you know, this
Committee is tasked with having a new Member orientation, which
we take very seriously. We had significant training and
information sessions on this and many other things over a two-
week period.
Among other things, we had the Ethics Committee come in and
discuss all their obligations and a discussion of the
disclosure forms and the PTR reports and the like. However, as
our only freshman on the committee said, it is like a firehose
at a freshman orientation. So, the Ranking Member and I have
been gossiping that maybe we should do a separate webinar or
something of that nature on this, similar to what we have done
with the Congressional Accountability Act that every Member has
to do once a Congress or something of that nature. We can on
work on that without legislation, obviously.
I will note that we very much appreciate our witnesses'
time. I know it has been a little disjointed because of floor
votes. We will ask if you would remain open to additional
questions that we may send to you. The hearing record will be
open for your responses.
And I don't know--Mr. Davis, we have got a vote on the
floor. Anything you want to add before we adjourn?
Mr. Davis. Thank you very much. I certainly do look forward
to sitting down with each of you individually and talking about
how we can make the processes better.
The Chairperson. Thank you very much. Again, appreciation
for the witnesses and, without objection, the Committee on
House Administration is adjourned.
[Whereupon, at 12:29 p.m., the Committee was adjourned.]
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