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Why Are Politicians Allowed to Own Stocks?

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Susan Rice is not only the U.S. ambassador to the United Nations and a leading contender to take over the Secretary of State position from Hillary Clinton; she is also a rather successful investor. As is often the case when public officials get financially involved with the companies they oversee, the ambassador has recently attracted some criticism over the propriety of her investments. Some progressive Democrats and environmentalists are questioning whether Rice is fit to be the next Secretary of State after discovering some troubling financial positions in her surprisingly large portfolio.

At issue is the role of the State Department in approving energy infrastructure operator TransCanada's (NYSE: TRP  ) proposed Keystone XL project, an oil pipeline that would transport oil produced in Canada's Tar Sands to refineries and export terminals on the Gulf Coast. Keystone XL promoters claim the pipeline would generate good jobs and encourage North American energy independence, but the project is controversial.

Some of the proposed routes for the pipeline would traverse highly sensitive environments like Nebraska's Sandhills wetlands area and the watershed of the Ogallala aquifer, which provides drinking water for 2 million people and supports $20 billion in agriculture. A leak in these areas could contaminate water supplies and harm wildlife.

Since the project crosses national borders, TransCanada needs a permit from the State Department to proceed. Now, nobody wants to risk contaminating water supplies or miss out on a way to create thousands of jobs, so no matter what side of the issue you come down on, it's clear that the Secretary of State has an important decision to make. Ideally, that decision will be made as intelligently and transparently as possible, but if Susan Rice becomes the next Secretary of State, her judgment may well be unduly biased.

According to financial disclosure reports first highlighted by the environmentalist magazine OnEarth, Ambassador Rice has a good portion of her $23 million to $43 million net worth invested in companies that stand to directly benefit if the project goes forward. Besides a $300,000 to $600,000 investment directly in TransCanada, Rice and her husband have invested at least $5 million in Canadian oil companies including Enbridge (NYSE: ENB  ) that are working on the Tar Sands, with at least another $5 million in Canadian banks such as Toronto-Dominion (NYSE: TD  ) that are expected to finance the project and at least $2 million invested in infrastructure providers, among them railroad Canadian Pacific (NYSE: CP  ) and electric utilities that are expected to benefit from the project.

Rice's impressive investment portfolio is heavily tilted toward energy companies and Canadian companies, with as much as half of her net worth at least partially dependent on the success of the Keystone project. Even if the ambassador means well, it's difficult to ignore that approving the Keystone XL pipeline would provide an immediate and substantial payoff for Rice. Is a truly independent decision even possible in such a case?

Rice is not alone. There's an elite group of investors that has managed to produce spectacular returns for decades, outperforming not only the market, but also corporate insiders. They're not a private equity group, or a hedge fund, or even Motley Fool subscribers. They're members of Congress. Researchers have found that between 1985 and 2001, members of the House of Representatives outperformed the market by about 6% per year (PDF). Members of the Senate did even better, crushing market returns by more than 12% annually in the study period of 1993 to 1998 (PDF). Either our lawmakers just happen to be some of the best investors in the world, or they're using their position to gain information not available to regular investors and writing regulations to enrich themselves.

Example after example of public officials who were exploiting their insider knowledge for personal gain led to the passage of the STOCK Act in April, a bill meant to curb such behavior. However, the bill only bans using "inside information" to make a trade and doesn't prevent members of Congress from trading in industries that they personally regulate, a practice still alive and well.

When The Washington Post contacted more than a dozen lawmakers who had traded companies that would be affected by legislation they were working on, the nearly unanimous response was that the timing was "coincidental." Since the STOCK Act forbids only using non-public information to influence an investment decision, and proving that an official used non-public information is very difficult, citizens and regulators are left with little ability to police these trades.

Well, I suppose we could take their word for it. Politicians, after all, are known for their scrupulous devotion to being forthcoming and honest, and would certainly never gloss over the truth for personal gain.

Skepticism aside, one doesn't need to believe public officials are corrupt to think that their investments can bias their decisions. Something that all investors need to be wary of is the tendency to become emotionally attached to an investment. This can lead to blind spots, as that psychological commitment can lead investors to seek out or acknowledge only the information that confirms their preconceived notions, a phenomenon known as confirmation bias.

Going back to Ambassador Rice, even should she earnestly try to make an unbiased decision, the fact that she has several million dollars in companies backing the project leaves her predisposed to view the pipeline favorably. She is liable, therefore, to subconsciously give more weight to positive information and to downplay potential risks. Do we really want someone who can't be expected to be impartial about an issue to have final authority over it?

All this invites a simple question: Why do we let our public officials own stocks at all? There are plenty of privileges a private citizen enjoys that a politician gives up when taking public office, and in the interests of good governance, why shouldn't owning stocks be one of them? If voters demanded it, officials could be compelled to sell their stocks upon taking office, and invest instead in a blind trust or government pension system that they cannot influence. No matter where you land on the political spectrum, we should all expect our lawmakers and public officials to make decisions based on what's best for the people they represent, not what's best for their own portfolios.

Read/Post Comments (14) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 02, 2012, at 7:41 PM, jwlarson3 wrote:

    I'm glad the STOCK Act passed at least. The Fool did a great job of championing this bill, and one of the reasons I have been a member since 1999 is your fight for transparency and good corporate and political governance and ethics.

  • Report this Comment On December 02, 2012, at 8:53 PM, TMFCatoMinor wrote:

    It passed, but its progress since then might disappoint you. It still hasn't been fully implemented for certain members of the executive branch. Some sort of decision should be expected in the next week or so, but I'm not optimistic.

    Even the provisions that already cover Congress are pretty difficult to enforce. I feel like as investors and as voters, we can do better. But I'm an optimist.

  • Report this Comment On December 03, 2012, at 12:57 AM, matthewluke wrote:

    You sure you're an optimist, Mr. Ferry? You sound fairly pessimistic about the situation (which I don't blame you).


    "There are plenty of privileges a private citizen enjoys that a politician gives up when taking public office..."

    What exactly do they give up and private citizens can still enjoy? Unless I'm missing something incredibly obvious (which happens), I couldn't think of anything off the top of my head.

  • Report this Comment On December 03, 2012, at 12:07 PM, TMFCatoMinor wrote:

    Well, I'm optimistic about what's achievable in the future, not about what the present looks like now.

    High-level politicians typically don't enjoy the privilege of privacy, both by law and by convention. We know where Susan Rice is invested because, like other pols, she is required to issue personal financial disclosure reports every so often. Who politicians meet with and for how long is often a matter of public record, and politicians must operate under certain ethics rules which often prevents them from accepting gifts, accepting travel, or accepting certain employment positions during or after their tenure, or even earning more than a set amount of outside income.

    Beyond the laws, it's a social convention that entering public service entails sacrifices other professions don't make. High-level executives should expect to be on the clock at all times, and all prominent politicians should expect to have their personal lives put under a microscope. Adding "no stock ownership" to that list of restrictions and sacrifices doesn't strike me as particularly onerous.

  • Report this Comment On December 04, 2012, at 10:38 AM, TMFLomax wrote:

    This is a great piece, Daniel! I really enjoyed reading it. This is an important issue for investors -- and all Americans, really -- to think about.



  • Report this Comment On December 04, 2012, at 2:47 PM, TMFVelvetHammer wrote:

    Daniel, I agree with Alyce. Great article, and definitely something we all should get behind.

    Our elected officials are beholden to so many outside influences as it is, that allowing them to (tax free, even) move their investments into a blind trust is reasonable. I would even go so far as to allow them to be allowed to grow that wealth tax-free to make up for any potential missed earnings by sacrificing control. We wouldn't miss the tax revenue, and it's reasonable to give our elected officials something in return for their sacrifice.

  • Report this Comment On December 04, 2012, at 2:56 PM, TMFDarwood11 wrote:

    Four stars!

  • Report this Comment On December 04, 2012, at 3:00 PM, whereaminow wrote:

    ---> Why do we let our public officials own stocks at all? <----

    What do you mean "let"? Public officials are by and large, unelected. Even the elected ones get their position through means which can't be reasonably called representative democracy. (Gerrymandering is not representative democracy, and of course, that's just the start).

    They do what they want, because they are the State and we are not. If you understand this, then... yawn... this is just another example of their privilege at your expense.

    However, if you have a child like view of government as some kind of will of the people or social contract, yeah you'll get your panties all up in a bunch.

    Have fun with that.

    David in Liberty

  • Report this Comment On December 04, 2012, at 4:36 PM, TMFBlacknGold wrote:

    Dude, how did you make it out of Watertown? Doesn't it snow all year 'round there?

    And great article!

  • Report this Comment On December 04, 2012, at 7:07 PM, matthewluke wrote:

    "High-level politicians typically don't enjoy the privilege of privacy, both by law and by convention."

    And private citizens enjoy the privilege of privacy? Since when?

    "We know where Susan Rice is invested because, like other pols, she is required to issue personal financial disclosure reports every so often."

    As do us private citizens when we do our taxes every year. Not to the same level of disclosure, granted, but they IRS gets all that information eventually.

    "Who politicians meet with and for how long is often a matter of public record"

    Except when it is not a matter of public record. It is only a matter of public record when it is convenient (or at least not harmful) to the politician for it to be a matter of public record.

    "or accepting certain employment positions during or after their tenure"

    Like the FCC regulator who approved the Comcast-NBC merger being hired by Comcast just 4 months later? (Which actually happens quite often with the FCC and the companies they are suppose to oversee; just not usually at that high of a level.)

    Maybe you should be MORE pessimistic, haha.

  • Report this Comment On December 04, 2012, at 9:18 PM, TMFCatoMinor wrote:

    Thanks for the kind words all.

    David, we might agree a great deal, you and I. But people can't be disappointed by the conduct of their "representatives" if they don't know about it.

    BlacknGold, there are entire weeks every year when it isn't snowing in Watertown, thank you very much.

    WhichStocksWork, those are mostly problems of execution, and I agree that existing regulations need to be tightened and enforced more regularly. My point is simply that, from a statutory standpoint, it wouldn't be terribly out of the ordinary to ban stock ownership by pols.

  • Report this Comment On December 05, 2012, at 10:39 AM, XMFGortok wrote:

    I think government officials should be allowed to own stocks -- that's not the problem.

    The problem is we've created a system of professional politician, and right or wrong, those professional politicans have created a system where they regulate just about everything.

    *That's* the problem.

    If the Federal government respected the limits placed on it by the Constitution; we wouldn't be having most of the problems we complain about.

    If we had not passed the 16th and 17th amendments, we wouldn't have a large central government that had runaway spending and runaway legislation (the 16th amendment -- counter to the founders wishes -- allowed for the Income tax) and the 17th allowed for Direct Election of Senators, which has caused a whole host of problems (not the least of which is the "money in elections" problem).

    We can complain about the effects all we want to, but until we go to the cause of our problems, we're not going to solve them. Government officials engaging in insider trading is an effect that would not exist without the aforementioned causes.

  • Report this Comment On December 06, 2012, at 10:00 PM, cmbourne wrote:

    The ideal portfolio for a politician would be one third US Treasury bonds, one third broad based us stock index fund, and one third world stock index fund.

    He could say "Hell yes, I know what is in my best personal interest. I need a strong, prosperous America and world peace!"

  • Report this Comment On December 06, 2012, at 11:03 PM, matthewluke wrote:


    I absolutely love that idea. Instead of preventing them from owning stocks, their portfolio should match the best interest of America and the world (America first, followed closely by the world as a whole). Broad market, so there is little reward for them to picking an individual winner. Lets make that happen!

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