When What You Don't Know Can Help You: The Political Optics of Managing Personal Investments While Serving in Office
For decades, presidents, lawmakers, and other public officials have sought to avoid the appearance of using their official positions to enrich themselves by placing their assets, including stock portfolios, in instruments such as blind trusts, which allow individuals to retain ownership (but not control) over their investments. The first-known such use of a blind trust by a US elected official dates back to 1963, when President Lyndon B. Johnson sought to quell public concerns about Lady Bird Johnson's ownership of a Texas television and radio station. Arnold & Porter was there to craft a creative solution for the Johnsons, and the firm has continued to do so for public officials ever since.
These blind trusts can take a variety of forms but generally are structured to meet the requirements of all laws and rules applicable to the public official (which can vary dramatically between federal and state office and from jurisdiction to jurisdiction). By using a blind trust, a public official can effectively hand over investment authority to an independent party and minimize any potential risk for a conflict of interest between the public official's policy positions and his or her personal investments.
The impetus for public officials to implement those structures is clear. Public officials, like anyone else with the means to invest in the stock market, have an interest in growing their investment portfolios and managing their wealth. While certain constituents and watchdog groups may grouse, the sacrifice of public service should not include a commitment to forego lawful and ethical economic opportunities when they present themselves.
At the same time, the law, ethical rules, and public opinion have erected guardrails against public officials improperly benefitting from their official duties. In certain circumstances, of course, the link between private benefit and official conduct can be so great that it violates the criminal law. But even when the conduct is not so egregious, public officials—including members of Congress and even the President—should take care to manage their finances while avoiding the prospect of making official decisions or supporting policies that could end up benefiting themselves financially.
Recent events clearly demonstrate the advantages of being careful, and the perils of not doing so. In March 2020, media reports suggested that certain US senators had sold stocks based on information about COVID-19 that they had received in classified briefings. The story quickly gained traction as members of the media and public expressed indignation that elected officials may have used public office for personal gain during a deadly global pandemic.
While some analysts initially questioned whether the conduct of any or all of the identified senators actually violated the law, the Department of Justice (DOJ) reportedly opened an investigation into the propriety of the trades. On May 14, the FBI reportedly executed a search warrant at the residence of Senator Richard Burr (R-NC), seizing his cellphone. According to the press, Senator Burr, who was then the Chair of the Senate Intelligence Committee, had sold a significant share of his stocks in February, just before US financial markets nosedived as government health officials openly warned that COVID-19 would likely spread within the United States. The FBI's search and seizure came on the heels of reports that Senator Burr's brother-in-law also sold stocks on the same day as Senator Burr.
In contrast, on May 26, DOJ reportedly notified three Senators—Kelly Loeffler (R-GA), James Inhofe (R-OK), and Diane Feinstein (D-CA)—that it was closing the investigations into their trades. Under the circumstances, that resolution was not surprising: all three lawmakers had stated publicly that their investment advisors had executed the transactions without their knowledge and that they learned about the trades only after the fact. On June 16, the Senate Select Committee on Ethics also informed Senator Loeffler that it found no evidence that her trades violated Senate rules or standards of conduct.
Arnold & Porter previously discussed the government's focus on political intelligence-based insider trading and the legal obstacles agencies face pursuing such cases. Despite those challenges, the DOJ's investigation is ongoing so it remains unclear whether Senator Burr's trading activities will lead to any charges. However, two points are clear:
First, Congress seems unlikely to take any significant steps to further regulate insider trading based on political intelligence. It could have done so in 2012 when it passed the Stop Trading on Congressional Knowledge (STOCK) Act, but the final version of the legislation lacked several provisions that critics argued were key to addressing congressional insider trading seriously. For example, one provision dropped prior to enactment would have required so-called "political intelligence consultants" to register and disclose their activities in a manner similar to lobbyists. A second provision that was excluded from the final law would have given prosecutors expanded tools to pursue public corruption charges. Congress even reversed some of the law's measures shortly thereafter, including eliminating the requirement that financial disclosure forms for certain executive and legislative employees be published online, and it is unlikely to act differently now.
Second, even if elected officials avoid legal liability for the manner in which they manage their personal finances while in office, they still face potential political fallout. Voters may ultimately decide that a legislator who uses sensitive or classified information for personal gain should not represent them in Congress.
To avoid these significant consequences, members of Congress, their staffs, and other government officials should strongly consider limiting their direct involvement in the management of their investment portfolios, including through the use of blind trusts. The failure of officials to curtail active trading, especially in individual securities, can be the difference between one news cycle of bad press and the FBI knocking on the front door.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.