To Rein in Big Tech, First Check Congress

Published by PolisPandit on January 3, 2022January 3, 2022

It is easy to criticize the monopolistic power wielded by Big Tech and the social ills that it causes. What may not be as readily apparent, however, are the actual and perceived conflicts many Congressmen and their staffs have with the industry.

I could write at length about the power of special interest groups and the need for campaign finance reform, but this is an article, not a treatise. The first step to reining in the power of Big Tech is to check Congress. And it starts with something simple.

Trading in their personal brokerage accounts.

That’s right, Congressmen and their staffs — despite being privy to nonpublic information — are generally permitted to trade in the stocks of companies they directly oversee.

Although the STOCK Act restricts them from using “any nonpublic information derived from the individual’s position … or gained from performance of the individual’s duties, for personal benefit”, proving a violation is another story. Many Congressmen have failed to comply with the law, and have been permitted to act with impunity. They often successfully claim ignorance or clerical errors. Or my personal favorite: “it was my spouse’s or accountant’s fault.”

Many cannot even report their trades on time, which is a basic requirement under the law. The fine is generally small (usually $200), but oftentimes it’s waived by House or Senate ethics officials (for some of the excuses stated above). If only those excuses worked for me and you if the SEC or IRS should knock on our door. Needless to say, there is little to no enforcement of the current STOCK Act.

Enforcement aside, the larger problem is proving that a House or Senate member (or their staff) used their position for the benefit of their personal brokerage account. It would be a far cleaner approach to simply ban single name stock trading for all Congressmen. No need for further inquiry or analysis. A lawmaker either traded a restricted security or they didn’t.

A complete ban also addresses the primary issue here — removing any actual or perceived conflict a lawmaker or their staff might have. By banning single name stock trading, we would remove the potential for conflicts. No longer would we have to worry that a chair or member of a subcommittee charged with Big Tech oversight might be conflicted because they own — in their personal brokerage account — shares of Alphabet, Facebook, Amazon, or the like.

But what about the “free market?”

Initially I was surprised to read Nancy Pelosi’s objection to this proposed ban.

“We are free-market economy. They should be able to participate in that.”

— Nancy Pelosi

I was less surprised when I learned that her husband, investor Paul Pelosi, frequently trades significant numbers of stocks. His assets make her one of the wealthiest members of Congress.

Pelosi arrives at #15 on the list for the top-25 wealthiest members of Congress (with approximately $46 million in total assets). Take a look at how many of the wealthiest members have significant holdings in Big Tech firms (hint: it’s almost all of them).

Not every member of Congress, however, agrees with Pelosi’s “free market” position.

AOC also wrote on Instagram: “Because we have access to sensitive information and upcoming policy, I do not believe members of Congress should hold/trade individual stock and I choose not to hold any so I can remain impartial about policy marking.”

Senator Elizabeth Warren introduced legislation in 2018 that that would have implemented a single name stock trading ban for members of Congress. It was reintroduced in late 2020 in the wake of numerous Congressmen (on both sides of the aisle) trading ahead of COVID-19 announcements to the public.

In March 2021, a bipartisan bill was introduced, which contains many of the same features as Warren’s previous bills. More than a dozen members of both House and Senate Democrats and Republicans support the effort. It has stalled, however, in recent months. Similar to issues related to Congressional pay, it is often difficult to convince Congress to further restrict themselves.

The Federal Reserve decided the market isn’t “free” for its policymakers and senior staff.

Following a similar personal trading controversy to the one in Congress ahead of pandemic announcements, the Federal Reserve announced in October 2021 broad restrictions for its policymakers and senior staff. Many Fed decisions have significant impacts on equity, bond, and derivative markets. A couple senior policymakers who have since resignedarguably took advantage of nonpublic information to enrich themselves in their personal accounts.

The new Federal Reserve rules “prohibit the purchase of individual securities, restrict active trading, and increase the timeliness of reporting and public disclosure by Federal Reserve policymakers and senior staff. As a result of the new policies, senior Federal Reserve officials will be limited to purchasing diversified investment vehicles, like mutual funds.”

These new rules strike a happy balance between allowing Federal Reserve employees to have exposure to financial markets, while significantly mitigating any actual or perceived conflicts of interest. Diversified investment vehicles like mutual funds shield investors from conflicts because the decision making power rests with someone else (i.e., the fund manager).

Most Wall Street employees have personal trading restrictions.

When I worked on Wall Street I had to disclose and receive pre-approval for almost everything (except assets like mutual funds). And I was not a front office employee making execution decisions or marketing to clients. While all firms have different policies, they generally place restrictions on anyone who might be privy to nonpublic or inside information. Restrictions may include outright bans on trading in certain products (e.g., if the firm is doing a M&A deal with that name) and/or pre-approval processes that often require approval from a senior supervisor.

Wall Street employees may be exposed to more nonpublic and inside information on a daily basis than members of Congress, but that should not dictate the level of restriction or justify Pelosi’s “free market” reasoning. The fact is that many Congressmen and their staffs are privy to information that has the ability to move markets before it’s made public. Not only does this put them in an unfair advantage to the investing public, it also conflicts them in one of their main jobs — overseeing and checking industries like Big Tech.

Check Congress.

We cannot act seriously when it comes to regulating industries like Big Tech if the folks charged with regulating have direct financial interests in the industry. We cannot expect them to act with independence and appropriate scrutiny if those decisions could be to their financial detriment.

Business Insider conducted a five-month-long investigation into STOCK Act violations and found that 52 members of Congress and 182 senior congressional staffers violated certain provisions. Here are some highlights:

• Democratic Senator Dianne Feinstein was months late disclosing a five-figure investment her husband made into a private, youth-focused polling company.
• Republican Senator Tommy Tuberville was weeks or months late in disclosing nearly 130 separate stock tradesfrom January to May.
• Republican Senator Rand Paul was 16 months late in disclosing that his wife bought stock in a biopharmaceutical company that manufactures an antiviral COVID-19 treatment.
• Republican Representative Diana Harshbarger failed to properly disclose more than 700 stock trades that together are worth as much as $10.9 million.
• Democratic Representative Susie Lee failed to properly disclose more than 200 stock trades between early-2020 and mid-2021. In sum, the trades are worth as much as $3.3 million.
• Republican Senator Richard Burr lost his position as the chairman of the Senate Intelligence Committee and is currently under investigation by the Securities and Exchange Commission.
• Republican Representative Brian Mast was late disclosing that he had purchased up to $100,000 in stock in an aerospace company. The president of the company had just testified before a congressional subcommittee on which Mast sits.

The list goes on. As you can see, it affects both sides of the aisle, although Republicans are the more frequent fliers.

We haven’t even covered the staffers either. Many of these employees attend sensitive meetings on a Congressman’s behalf or play the proverbial role of “fly on the wall.” With salaries that barely reach livable wages, especially in an expensive city like D.C., they could be even more incentivized to use inside information inappropriately.

If we want to get serious about holding Big Tech and other industries accountable, it starts with the incentive structure for the lawmakers and their staffs. Any “connected persons” (e.g., spouses, dependent children, etc.) must be in scope as well. Pelosi should not be able to claim ignorance solely because her husband executes the trades. It does not work that way elsewhere, even on Wall Street.

A blanket ban on single name stock trading may sound too simple and too good to be true. But it’s a practical reality that has proven to reduce conflicts elsewhere, from the Federal Reserve to Wall Street. It is time for Congress to check themselves so they can effectively do their job of checking others, from Big Tech to Big Banks.