The Wall Street Journal published an exhaustive piece of investigatory journalism this week about stock trading by senior officials and employees of federal regulatory agencies, You can see the full WSJ article here, and a summary of six “takeaways” from the reporting here. It’s a classic example of old-fashioned shoe leather reporting, but on a big scale. One of the six takeaways describes what the Journal team did:
“The Journal obtained and analyzed more than 31,000 financial-disclosure forms for about 12,000 senior career employees, political staff and presidential appointees. The review spans 2016 through 2021 and includes data on about 850,000 financial assets and more than 315,000 trades reported in stocks, bonds and funds by the officials, their spouses or dependent children.”
The fruits of the investigation justify this enormous amount of work by the reporting team, because the analysis found that thousands of federal administrative officials trade stocks in companies their agencies are actively regulating. The full article is worth reading, but let’s focus today on five of the takeaways.
First, more than 2,600 federal agency officials owned millions of dollars in stocks in companies that were lobbying their agencies. Second, officials directly owned stocks in companies whose businesses obviously would be affected by decisions made by their regulatory agencies, including Defense Department officials owning stocks in aerospace and defense companies, an EPA official owning stock in an oil and gas company, and an FDA official investing in food and drug company stocks that were supposed to be off limits. Even more amazing, some Defense Department officials owned stocks in Chinese companies that the U.S. was considering for blacklisting.
Third, The Journal investigation found dozens of examples of officials trading in stocks of companies shortly before their agencies announced enforcement actions against those companies. Fourth, 1,800 officials owned stock in Facebook, Amazon, Apple, or Google. And fifth, about 70 officials engaged in trading that most normal investors don’t even consider, like options trading or short selling, including some individual trades of between $5 million and $25 million.
The ability of regulatory officials to buy or sell stocks in companies that are under the oversight of their agencies is obviously a gaping hole in federal law. Administrative officials are supposed to be objective and dispassionate in their decisionmaking. When such officials are directly investing in companies they are regulating, often under circumstances–like trades made shortly before regulatory actions are to be announced–such conduct gives rise to reasonable suspicions that insider information might have influenced the buy or sell decision. The potential conflicts of interest are even greater when regulatory officials engage in especially risky trading tactics, such as short selling, or large-money trades. And, perhaps most concerning, the agencies in question apparently had rules prohibiting much of this conduct, but waived the rules so the trades could be made.
It’s time for members of Congress to get off their duffs, stop the constant fundraising, skip another appearance on CNN, MSNBC, or Fox News, and take a good look at the conflict of interest and stock trading rules applicable to the administrative state. A statute that requires officials to avoid any direct ownership of stocks during their service in regulatory agencies–and instead participate solely in mutual funds managed by others–seems like a good start. Given the increasing role of federal agencies in making decisions that affect our lives in countless ways, we’re entitled to some meaningful assurance that those decisions aren’t influenced by the regulators’ personal financial interests.