What are the insider-trading rules for federal employees?
Sep 26, 2022
Last year, a court sentenced an orthotist at Walter Reed Medical Center who lent his credentials to a company who used them to file fraudulent insurance claims, affecting more than 200 patients.
The year before that, the government nabbed a Department of Veterans Affairs employee for manipulating bids on federal projects and accepting money from an undercover FBI agent, who posed as the owner of a service-disabled, veteran-owned small business.
And before that, a Food and Drug Administration employee was charged after receiving Australian sheepskin seat covers, among other gifts, from a janitorial and maintenance company in return for selecting it as a federal vendor.
All of these true stories, culled from Office of Government Ethics reports, have in common a violation of Title 18, section 208 of the U.S. Code: a criminal statute prohibiting employees in the executive branch from participating in a government matter that will have a direct and predictable effect on their financial interests.
Such conflict-of-interests can include insider trading, a hot-button issue that the U.S. House of Representatives said it might finally take up this week in reforming the Stop Trading on Congressional Knowledge Act before members return to their home districts in early October.
The STOCK Act, by some experts’ estimation, is the closest the government has come thus far in targeting Congressional stock trading. Then-President Barack Obama signed it into law in 2012, thereby amending the Securities Exchange Act of 1934 and making explicit that the prohibition against insider trading would apply to members of Congress.
Equally important was that it barred executive branch employees from using nonpublic information derived from their position as a means for making a private profit.
A slew of reports have since been released accusing members of Congress of allegedly doing just that.
With less fanfare, the Office of Government Ethics has also been tracking conflicts-of-interest within federal agencies.
In 2021, two-thirds of disciplinary actions by agencies were taken for violations of the primary conflict-of-interest statute. A total of 55 referrals to the Department of Justice were made concerning potential criminal violations.
Consider a notable example reported that same year: two high ranking Federal Reserve officials traded funds while the central bank used monetary policy to influence markets, The New York Times reported. The ethics scandal prompted the Fed to set updated rules prohibiting officials from purchasing stocks and holding investments in cryptocurrencies.
What actions are agencies taking?
Each agency is responsible for investigating and taking action against an employee who has broken an ethics law. However, most designated officials reported they spent less than a quarter of their work time actually pursuing ethics, citing a lack of staff and technology.
Consider one of the worst examples in a 2021 report: at the time, the Department of Education said it employed only only one ethics officer for every 5,000 USDA employees.
Concerns of loose or simply inefficient enforcement has pushed Republicans and Democrats to coalesce on a host of bills that would further rein in stockholding or ban it completely. One bill was introduced in August that would prohibit holding stocks for the Senior Executive Service.
“No matter what party is in power, we should have no doubt that our government officials are working for the American people, not trying to make a quick buck for themselves,” said Rep. Jared Golden (D-ME), a cosponsor of the bill.
In the meantime, the president, vice president and their network of non-elected agency leaders follow similar rules as Congress, though there are branch-specific rules that pad existing securities laws.
For example, the Department of Agriculture prohibits employees of its Rural Development program from owning or holding stock in insurance companies, commercial real estate sales, building supply companies and lumberyards.
The Department of the Treasury’s Alcohol and Tobacco Tax and Trade Bureau bans holding a financial interest in its namesake industries or in firearms and explosives.
More than half of all executive federal agencies have similar supplemental ethics rules.
General rules to know
The House and Senate committees on ethics have rules that generally forbid conflicts of interest and emphasize credibility in the lawmaking process.
So, too, does OGE for executive employees, which says no one can hold “financial interests that conflict with the conscientious performance of duty” or “engage in financial transactions using nonpublic government information or allow the improper use of such information to further any private interest.”
The Standards of Conduct, though lacking mention of insider training explicitly, add another layer of restriction in forbidding the use of nonpublic information for private financial gain.
While less formal than a statute, the rules of conduct still hold penalties. Violations could result in anything from a reprimand to termination.
Truly nonpublic information may also be more easily discernible within the Oval Office, a cabinet meeting or federal department. In Congress, where so much of its routine business is either conducted or broadcast publicly, privacy can be a tougher test to prove in a case of potential insider trading.
As the rules currently stand, however, there is no restriction that singlehandedly applies to all of government and bans stockholding.
Filing requirements after Watergate
The STOCK Act also amended the Ethics in Government Act of 1978 to require a government-wide shift to electronic reporting and online availability of public financial disclosure information.
The Ethics in Government Act, passed on the heels of the Watergate scandal, mandated that senior employees of the executive branch submit public financial disclosures.
In addition to new entrant, annual, and termination reports, public filers must also report transactions of certain securities as they occur so that ethics officials can evaluate potential red flags.
Notably, not every member of the executive branch is a public filer. Most that are hold high-level leadership positions.
Of those, OGE reviews on a secondary basis only about 4% of the 27,000 executive branch public filers as the remainder and vast majority are handled by employing agencies themselves.
More than 99% of those required to file public financial disclosures did so in 2021.
President Joe Biden also issued an executive order in January 2021 that required certain executive employees to sign an ethics pledge to additional recusal obligations, post-employment restrictions and a ban on accepting gifts from lobbyists or lobbying organizations.
[Federal Times]
