US Congress: how investment funds became the new insider trading risk


In March last year, Steve Daines, a Republican politician from Montana, discussed the growing role of India at a hearing of the Senate banking committee. He encouraged the US trade representative to start negotiating a trade deal with New Delhi and cited a recent visit to encourage exports and meet “leading technology companies”. 

What he did not mention is that during that trip in November 2021, on the day he met the country’s commerce minister, he also put at least $65,000 into funds that specialise in Indian stocks. He added at least another $50,000 to one of them in early February 2022.

A former executive at consumer goods giant Procter & Gamble who leads the committee in charge of regaining the party’s Senate majority, Daines has actually been an outspoken voice in trying to police the way that politicians handle their investments.

When he teamed up in February last year with Democratic senator Elizabeth Warren — a well-known critic of the finance industry — to co-sponsor a bill to ban lawmakers from trading stocks, it was treated as a watershed moment.

Daines said at the time that “members shouldn’t be able to make legislative decisions or use their platform and influence to benefit themselves personally”, rhetoric that helped shift the issue of congressional investing rules from the sidelines to the mainstream.

Republican senator Steve Daines, left, put at least $65,000 into funds that specialise in Indian stocks at a time when he was encouraging the US trade representative to start negotiating a trade deal with the country © Steve Daines

But within a week he was discussing rulemaking that could potentially impact 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”.

At the time, Daines and his family-owned six separate cryptocurrency and blockchain-focused investment funds, in which they had invested at least $23,000, according to public filings. Coinbase was a substantial holding in three of them.

A spokesperson for Daines says he is “a leading advocate” for trading reforms, but that his investments did not create conflicts of interest because he does not control which companies the funds own. Most of his investments are in exchange traded funds, a type of investment vehicle whose popularity has soared in recent years. Many mainstream ETFs aim to track the performance of an existing stock index, meaning the index compiler, rather than the fund’s own manager, in effect dictates which stocks the fund buys.

But some ethics experts disagree with this characterisation. “Funds which are industry or country-specific create the same issues with respect to conflicts of interest and criminal insider trading that individual stocks do,” says Richard Painter, former chief ethics lawyer for the George W Bush administration and now a professor of corporate law at the University of Minnesota.

In numbers

The floor of the US Senate


Number of mutual funds that members of Congress could choose from in the 1970s


Number of mutual funds they could use by end-2021, not including 2,600 ETFs


Minimum value of what US senators hold in investment funds

He argues that the failure of Congress to update decades-old legislation in the light of seismic changes in the investment industry has created “a huge loophole” allowing lawmakers to “accomplish all the same things” using investment funds as they could by trading shares in individual companies — but with far less stringent disclosure requirements.

Public interest in the issue of financial conflicts of interest is intense following a series of scandals, most recently allegations that a number of congressmen profited from trading stocks on the back of confidential briefings they were given during the early days of the Covid-19 pandemic. None was charged with any wrongdoing.

But the issue of investment funds being used, instead of stocks, has remained largely under the radar. Reforming the rules is difficult, not least because investment funds range from products that track the entire US stock market to specialist vehicles that are a play on a specific country, industry sector or investment theme.

“We need to be reasonable,” says Delaney Marsco, senior legal counsel on ethics at the Campaign Legal Center, a non-partisan watchdog. “We [want to] find the ways where people can still invest and grow their money, so they don’t have to totally abandon all of their financial options to become a public servant.”

‘Excepted investments’

Members of Congress who buy or sell a stock are required to report the transaction within 45 days. But these individual transaction reports leave out the vast majority of lawmakers’ investment portfolios because a 45-year-old exemption means purchases of collective investment funds, such as those made by Daines, only need to be revealed once a year in complex and harder-to-access reports.

Investments in funds dwarf the scale of stock trading. At the end of 2021, the most recent year for which data is available, around half of senators owned individual stocks with a cumulative value of over $60mn. But almost 90 per cent of them owned investment funds, worth over $260mn.

Many senators still fill in their reports by hand, making them harder to automatically track. A third of senators missed last year’s filing deadline, and corrections can be subject to even longer delays — Ron Wyden, the chair of the Senate finance committee, updated his 2015 annual report five years after the initial deadline.

The Financial Times has analysed hundreds of annual reports and addenda filed over the past decade. The documents show how senators have used “excepted investment funds” to trade with little scrutiny, despite widespread potential conflicts of interest. The analysis focused on senators’ portfolios but the reporting requirements — and the potential for conflicts of interest — also apply to the 435 members of the House of Representatives.

The exemption from reporting rules is based on a belief that their diversified nature means such funds are harder to exploit, and lawmakers should not be completely barred from sharing in broader 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.

Democratic senator John Hickenlooper, right, with fellow senator Joe Manchin
Democratic senator John Hickenlooper, right, with fellow senator Joe Manchin, put over $100,000 into State Street’s energy select sector fund a few months after he was appointed to the Senate energy committee © Tom Williams/CQ-Roll Call, Inc via Getty Images

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 impacts 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.”

A changed industry

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.

Oregon senator Ron Wyden in the Senate
Oregon senator Ron Wyden’s wife invested over $100,000 in Direxion’s ‘work from home’ ETF, which invested in companies that would benefit from the remote working that was encouraged by government during the pandemic © Al Drago/Bloomberg

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.

Why reform is difficult

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 FT, 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.

Democratic senator Elizabeth Warren talks to reporters
Democratic senator Elizabeth Warren co-sponsored a bill to ban lawmakers from trading stocks © Chip Somodevilla/Getty Images

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.”