CREW and a broad coalition of good government organizations have developed a series of policy proposals for any legislation aiming to address the problem of Congressional stock ownership. Below we provide answers to the most commonly asked questions about our coalition’s policy proposals, divided into categories for ease of use.
Blind trusts and divestment
Answer: Divestment. Divestment is when a member sells all their individual financial assets and reinvests them in non-conflicting assets, like diversified mutual funds, index funds, or U.S. Treasury bonds. Divestment is relatively cheap, simple, and is the only way that the public can be certain that a member of Congress has no financial conflicts of interest.
Answer: No. True blind trusts, as we have proposed, are simply another way to invest money following divestment. Divestment means selling assets to avoid conflicts of interest. To create a true blind trust, you first have to sell (divest) your original assets, and then the trustee can reinvest as they see fit. By selling the original assets and reinvesting the proceeds in new trust assets, which are screened off or “blind” to the member, the conflict of interest is considered resolved.
Answer: The Qualified Blind Trust (QBT) proposals don’t create truly blind trusts. Ours does. There are a number of bills that allow members to place their individual assets in a QBT to avoid conflicts of interest. However, these trust structures do not require the trustee to divest the original assets that are placed into the trust, and so the beneficiary will have a conflict of interest as long as they know what assets the trust holds. Our proposal creates a truly blind trust by requiring divestment of the original assets.
Answer: Including a truly blind trust option does not benefit any group over another. We recognize that some of the expenses associated with establishing a trust and the risk inherent in the trust’s rate of return may make the blind trust investment structure an impractical option for many members of Congress to address conflicts of interest arising from their ownership of individual stocks and similar assets. However, allowing members the option of reinvesting their money via a blind trust after divestment does not prejudice other members who feel that that option doesn’t make sense for their specific financial profiles.
Answer: No. The STOCK Act does not require the filer to disclose the underlying assets of the trust. Members are required to report the trust as an asset on their financial disclosure reports, including the overall broad numerical range of the value of the trust and the broad range of the aggregate amount of the income attributed to the trust, but the member would not be made aware of the underlying assets the trust holds. With respect to tax returns, the member would only need to report income reported to them from the independent trustee, who is prohibited from providing the member or their interested parties the identities of the individual assets in the trust.
Answer: We support the deferral of capital gains via certificate of divestiture (CD). A CD would defer capital gains treatment resulting from a member’s sale of stock undertaken to avoid a conflict of interest. The CD would be issued to offset the tax burden of complying with Congress’s conflict of interest requirements. If the sale proceeds are reinvested in diversified mutual funds, treasuries or other permitted property, the capital gains tax treatment will be deferred until the permitted property is sold at the member’s discretion at some future date. Congress has already given officials in the executive and judicial branches who divest to avoid conflicts in their jobs a similar option, and we’ve found it works well. Therefore, there would be no immediate tax implications for members.
Answer: We believe that members should have at most 180 days to divest. While we would support proposals that would further limit the time, we also believe that divestiture shouldn’t be a penalty and members should be allowed a reasonable amount of time to avoid selling their assets at a loss. We would also support granting the supervising ethics office the ability to grant members extensions should they demonstrate actual hardship.
Answer: We would support limiting the use of extensions similar to the limits placed on executive branch employees. In general, executive branch employees are given 90 days to divest, but for more complicated assets the divestiture period can be extended to 180 days. We are also open to other options, including making delay requests public.
Answer: Executive Branch officials appointed by the President and confirmed by the Senate are required to divest assets that give rise to conflicts of interest as soon as practicable but not later than 90 days after their confirmation. In cases of unusual hardship, the deadline can be extended. If a deadline extension is granted, it usually does not exceed six months in total. This standard has worked for the Executive Branch for decades and it can work for Congress as well.
Spouses and kids
Answer: In general members and their spouses mutually benefit from each other’s assets, and it is assumed that they communicate with each other frequently about all aspects of their lives. Additionally, the public assumes that members and their spouses are inseparable. Therefore, the spousal relationship creates both the likelihood of actual conflicts of interest and the appearance of conflicts of interest. More than 50 years ago, Congress passed a federal conflict of interest statute for the Executive Branch that covers the financial interests of spouses. If this standard was important enough for Congress to include regarding Executive Branch employees, Congress should apply at least the same standard to itself.
Answer: In general, members’ dependent children present similar risks of actual and apparent conflicts of interest as members’ spouses. The public assumes that the financial interests of members and their dependent children are inseparable. The parent-dependent child relationship therefore creates both the potential for actual conflicts of interest and the appearance of conflicts of interest. More than 50 years ago, Congress passed a federal conflict of interest statute for the Executive Branch that covers the financial interests of minor children. If this standard was important enough for Congress to include regarding Executive Branch employees, Congress should apply at least the same standard to itself.
Answer: In general, a Congressional spouse’s primary occupation would not be affected, and we support a carve-out for income from a spouse’s primary occupation. We do not believe that any potential conflict concerns arising from a member’s spouse’s primary occupation outweigh the importance of allowing the member’s spouse to pursue their own, separate career. This includes situations where a member’s spouse is employed as a broker, an investment adviser, or any similar profession. However, the stock ownership prohibitions would prevent Congressional spouses from trading stocks for their own account in connection with their primary occupation or otherwise.
Answer: While such arrangements are not ideal, we support a carve-out for this type of compensation. While there are some conflict concerns inherent in these arrangements, we do not believe that those concerns outweigh the importance of allowing a member’s spouse to pursue—and earn compensation from—their own career.
Answer: In general, privately held assets are treated identically to any publicly held assets. For example, most of the bills cover “any stock, bond, commodity, future, or other form of security, including an interest in a hedge fund, a derivative, option, or other complex investment vehicle.” This definition does not differentiate between publicly and privately held economic interests, which is consistent with the broad definition of “security” under the ‘34 Act.
The following, for example, would constitute a covered interest (unless the small business carve-out applies): a stock ownership interest in a limited liability corporation that operates a local convenience store; or, a privately held stock interest in a family farm.
Answer: Yes. Individual commodities present the same conflict of interest risk as individual securities. Members who own or plan to trade commodities like gold or corn may be tempted to trade on information that may move the market for those commodities—or they may be tempted to vote for legislation that would increase the value of their commodities. These assets create the same actual and apparent conflicts of interests as individual stocks and must be treated the same by any legislative proposals.
Answer: Yes. The CFTC has determined that cryptocurrencies are commodities regulated under the Commodities Exchange Act. Additionally, the SEC has determined that certain digital assets that market themselves as cryptocurrencies are securities under the Securities Exchange Act. The ban covers both individual commodities and individual securities.
Answer: No. Members are allowed to have interests in diversified mutual funds, index funds, and other types of investments that don’t pose a meaningful conflict risk. There are certain categories of funds that do present conflict of interest risk and would thus not be allowed, including sector funds or other similar specialty funds. The key is that the fund must be appropriately diversified so as to avoid a meaningful conflict risk. A fund is considered widely diversified if it does not have a stated policy of concentrating its investments in any industry, business, single country other than the United States, or bonds of a single State within the United States.
Answer: In some circumstances the member would be required to sell their shares in a closely held corporation or business concern, though we would support a carve-out for certain truly small businesses. Many business interests present a host of serious conflicts that must be addressed. There could be some circumstances where a truly small business concern would not present a conflict risk, and we would support a carve out for those interests.
Answer: Members would be required to sell those assets. Assets that members or their spouses or dependent children receive while the member is serving in Congress present the same conflicts of interest risk as assets that members owned prior to joining Congress.
Answer: No. Our proposal requires members to divest their individual stocks, bonds, commodities, swaps, futures, derivatives, or other similar financial instruments.
Answer: Yes. Generally, 529 plans are managed like 401(k) or similar retirement plans, which are typically invested in diversified mutual or index funds, or in US treasury bonds. However, if your 529 plan is actively managed, you may need to direct your broker to invest your money in investment options that don’t present a meaningful conflict risk.
Answer: Our proposal has a few main categories of exemptions: (1) exceptions related to the member’s spouse’s primary occupation; (2) exceptions related to the type of asset; and (3) exceptions related to the location of the asset. With respect to the second category, we make an exception for diversified mutual funds, for example. And with respect to third, in addition to the blind trust option, we make exceptions for assets in a government employee retirement plan, for example.
Answer: Yes. In general, we’re in favor of a de minimis exception, which is in line with executive branch ethics rules, as we don’t believe that de minimis holdings in a company creates a significant conflict risk. In general we would set the threshold somewhere in the $1000 – $10,000 range per investment.
Answer: Unlike members of Congress, Executive Branch officials are subject to a criminal conflict of interest law that bars them from participating in particular matters that would have a direct and predictable effect on their financial interests. It is important to remember that while recusal is an option for most Executive Branch employees to avoid conflicts of interest, recusal is not a viable option for Members of Congress because it would deny their constituents of effective representation on key issues before the House or Senate. When recusal is not a viable option for certain cabinet members and senior White House staff, these officials usually divest their individual stock holdings and rollover the proceeds into diversified mutual funds and exchange traded funds as their primary means for addressing their financial conflicts of interest.