Steve Daines, a Republican from Montana, spoke at an hearing of the Senate Banking Committee in March of last year about the increasing role of India. He urged the US Trade Representative to begin negotiating a deal with New Delhi, and cited his recent visit in order to encourage exports as well as meet “leading technology firms”.
He did not disclose that on that same trip to India in November 2021, the day that he met with the country’s Commerce Minister, he had also invested at least $65,000 in funds that specialize in Indian stocks. He added another $50,000 to at least one of them early in February 2022.
Daines, a former executive of consumer goods giant Procter & Gamble, is the leader of the committee charged with regaining the Senate majority for the party. Daines has been a vocal voice when it comes to trying to regulate the way politicians manage their investments.
was considered a watershed event when he joined forces with Democratic Senator Elizabeth Warren, a well-known opponent of the financial industry, to cosponsor in February 2012 a bill that would ban legislators from trading stocks.
Daines stated at the time, “members should not be able make legislative decisions or to use their platform to benefit themselves personally”, a rhetoric that helped move the issue of the congressional investing rules to the forefront. But within a week he was discussing rulemaking that could potentially affect tens of thousands of dollars’ worth of his personal investments. In a meeting of the Senate banking committee, he advocated a “light-touch approach to regulation” of stablecoins — a type of digital asset used to facilitate trading in cryptocurrencies. In March 2022, during a hearing about the role of digital assets in illicit financing, he defended the standards of “legitimate crypto intermediaries such as Coinbase”.
Daines’ family owned six different cryptocurrency and blockchain investment funds at the time. They had invested at least $23,000 in each of them, according to public records. Coinbase held in 3 of them.
Daines’ spokesperson says that he is a “leading advocate” of trading reforms. However, his investments do not cause conflicts of interest as he doesn’t control the companies owned by these funds. His investments are mainly exchange traded funds. This type of investment vehicle has seen a surge in popularity in recent years. Most mainstream ETFs are designed to track an existing stock market index. This means that the index compiler rather than the fund manager determines what stocks the fund will buy.
Some ethics experts do not agree with this description. Funds that are country or industry-specific can create conflicts of interest, and insider trading is criminal.
He claims that Congress’ failure to update outdated legislation to reflect the seismic changes in investment has created a “huge loophole” which allows lawmakers to achieve the same results by using investment funds, as they can when trading individual shares of companies — with much less stringent disclosure rules.
After a series scandals, the public is now very interested in financial conflicts of interests. The most recent allegations are that several congressmen made money from stock trading based on confidential briefings given to them during the early days the Covid-19 Pandemic. No one was accused of any wrongdoing.
The issue of using investment funds instead of stocks has been largely ignored. Reforming rules is challenging, especially because there are so many different types of investment funds, from those that track the US stock market, to vehicles that focus on a particular country, sector, or theme.
Delaney Marsco is a senior legal counsel for ethics at the Campaign Legal Center. This non-partisan watchdog says that “we need to be reasonable.” “We [want] to find ways that people can still grow and invest their money so they don’t need to abandon all their financial options in order to become a government servant.”
Members of Congress are required to disclose any stock transactions within 45 days. These individual transaction reports, however, leave out the vast bulk of legislators’ investment portfolios, because of a 45-year exemption that means purchases of collective funds, like those made by Daines only need to revealed once a yearly in more complex and difficult-to-access documents.
The scale of the stock market is dwarfed by investments in funds. Around half of senators held individual stocks worth more than $60 million at the end of 2021. Nearly 90% of senators owned investment funds worth more than $260mn.
Many senators still hand-fill in their reports, which makes them difficult to track. Last year, a third of senators failed to meet the deadline for filing their annual reports. Corrections can take even longer – Ron Wyden, chair of the Senate Finance Committee, updated his 2015 report five years after it was originally due.
Over the last decade, hundreds of annual reports and additions have been filed. Documents show that senators used “excepted investments funds” for trading with little oversight, despite the potential conflict of interest. The analysis was focused on the senators’ portfolios, but reporting requirements and potential conflicts of interest also apply to 435 House of Representatives members.
It is believed that the diversified nature of these funds makes them harder to exploit. However, lawmakers shouldn’t be barred from participating in market gains.
But while few object to lawmakers investing in funds that hold a diversified portfolio or track broad market indices, many excepted funds are highly concentrated.
Democratic senator John Hickenlooper, for example, sold over $100,000 worth of shares in oil major Chevron in October 2021, a few months after he was appointed to the Senate energy committee. Hickenlooper has supported efforts to restrict congressional stock trading, and has not personally bought any stocks since joining the Senate in 2021.However, on the same day as the Chevron sale, he put over $100,000 into State Street’s energy select sector fund, which describes its mission as providing “ precise exposure ” to companies in the oil sector and related areas. The ETF has just 23 holdings and around 20 per cent of its assets are invested in Chevron, with an even greater amount in ExxonMobil.
“When senators are making decisions directly impacting the oil industry, both owning individual stocks and owning a sectoral fund creates the appearance . . . of a conflict of interest,” says Norman Eisen, a former ethics adviser to the Obama administration who is now a senior fellow at the Brookings Institution. “To me, as an ethics expert, there is no material difference between the two.”
He says that while some congressional decision-making has an impact on individual companies, “the more common situation is to affect a whole sector”.
At least 45 senators owned investment funds that focused on a specific sector at the end of 2021. Country-focused funds like Daines’ India ETFs were rarer, but he was not alone. Delaware senator Tom Carper, for example, had over $15,000 invested in large Chinese companies through Invesco’s Greater China Fund. Virginia’s Mark Warner, who has previously described China as “the greatest national security threat to the United States”, owned over $1mn worth of units in an Asia-focused fund that invests around half of its assets in China and Hong Kong.
“We have had arguments about trade . . . since the foundation of the United States,” says Painter. “Do we want members of Congress investing their own funds heavily in countries that are trading with the US when their principal job is to grow the economy of the United States?”
A spokesperson for Carper says his investments “are handled separately by a financial adviser who makes decisions and transactions independently”. A spokesperson for Warner says his investments “are managed by an independent trustee . . . and never have and never will have any impact whatsoever on his policy positions.”
Part of the difficulty of policing lawmakers’ investments for potential conflicts of interest, according to experts, is that rules on Capitol Hill have failed to keep up with a complete transformation in the investment world over the past five decades.
Those who work for the White House and its departments are already subject to tighter restrictions on funds that focus on specific sectors or countries, but members of Congress can invest freely in non-diversified funds so long as they are publicly traded or available.
When transaction reporting was first introduced in 1978, in response to the Watergate Scandal, members of Congress could choose from 505 mutual funds, according to the Investment Company Institute. By the end of 2021, there were 7,500 such vehicles, plus around 2,600 ETFs.Dylan Hedtler-Gaudette , senior government affairs manager at the Project on Government Oversight non-profit, says: “This is part of a problem that Congress has across the board — they’re always operating a couple of decades behind industry . . . They’re either not willing or not able to keep abreast of the latest developments.”
Although most investor money has poured into low-cost ETFs that track major indices such as MSCI All World or the S&P 500, there has also been an explosion in the number of highly specialist funds tracking specific trends, ranging from the growth of electric vehicles to the costs of breakfast ingredients or even what stocks congressmen from each party are buying and selling.
They have been popularised by high-profile investors such as Cathie Wood, whose Ark Invest firm has become famous for its high-conviction plays on technology, biotech and financial technology companies. At the end of 2021, five senators’ families owned funds run by Ark, including Sheldon Whitehouse, who sits on the Senate finance committee. He is an investor in its fintech fund, which has 10 per cent of its assets in crypto exchange Coinbase and a similar amount in Canadian ecommerce and payments group Shopify. It was one of several finance-focused funds held by Whitehouse and his family, who in total had more than $78,000 in funds that exclusively invest in the sector.
At the height of the coronavirus pandemic in summer 2020, meanwhile, the wife of Oregon senator Ron Wyden invested over $100,000 in Direxion’s “work from home” ETF, a thematic fund that trades under the mnemonic “WFH” and invests in companies set to benefit from the remote working that was being encouraged by government during the pandemic.
Whitehouse and Wyden did not respond to multiple requests for comment.
The Stop Trading on Congressional Knowledge (Stock) Act, passed in 2012 after insider trading scandals in the wake of the global financial crisis, made it illegal for lawmakers to trade on the basis of “material, non-public information” derived from their positions or gained as part of their job — regardless of whether they use stocks, investment funds or other routes.
But lawyers say it is extremely difficult to enforce insider trading laws against members of Congress, as the US Constitution protects them from judicial questioning over information gained in the course of their political work. Only one congressman has been convicted of insider trading and that case rested on information he had gained through a separate, non-political appointment.
There is also a difference between insider trading and holding investments in companies that might benefit from changes in government policy.
Some lawmakers have acknowledged the potential conflicts of interest and have taken individual action. Alex Padilla, a Democratic senator for California, owned several energy- and commodity-focused funds while sitting on the Senate’s environment and public works committee.
After being contacted by the , a spokesperson for Padilla said the funds had been bought by an independent adviser and were “a fraction of his investments” that did not impact his policy work — but added Padilla would work with his adviser to redirect the investments.
There is also little consensus on where to draw the line for acceptable investments, even among those who agree on the need for some sort of change. More than a dozen different bills and resolutions to change congressional trading rules have been put forward since the start of the coronavirus pandemic. The volume is further proof of how mainstream the issue has become — but also highlights the lack of unity over the best fixes.Most of the proposals put forward to date would also not have any impact on trading in excepted investment funds, an omission that some fear could defang any legislation before it comes into effect. One bill, put forward by Democrats Jon Ossoff and Mark Kelly in January, would require members of Congress to place most assets — including sector- or country-focused funds — into a qualified blind trust which they have no control over. But blind trusts are expensive, and critics say they are not truly “blind” unless all existing assets are sold before being placed into the trust.
“They sound good, but they also require a lot of tending and care to stay blind,” says Robert Walker, of counsel at Wiley Rein and a former chief counsel to the Senate and House ethics committees.
Walker adds he does not advocate for a particular solution, but that Congress needed to at least show it had considered how much the industry and public opinion had changed, rather than relying on decades-old exemptions for investment funds.
“Whatever the outcome [of the discussion] . . . policymakers should examine it and make a [conscious] decision,” he says.
Eisen, the former adviser to the Obama administration, says there is “a self-regulatory problem” that makes it hard to force change upon members of Congress, but remains confident it will come eventually, just as the Stock Act did.
“I expect [the rules] will be changed,” Eisen adds. “It is just a matter of how much time will need to pass and how many scandals will need to ensue before they act.”