In February of 2020, Richard Burr, Republican Senator out of North Carolina, sold in excess of $1.6 million in pharmaceutical company AbbVie stock. A savvy investor or a member of Burr’s constituency may have been surprised or even bewildered by that decision. Panic regarding the COVID-19 pandemic had not yet become widespread in the US and many Republicans such as Burr specifically had been responsible for assuring the public that the state of the nation and its impending health crisis was not to worry about. However, while he had been outwardly displaying a resolute and confident demeanor, internally Burr was panicking and simultaneously benefiting off of the insider information he was privy to as an elected US official. Senator Burr had been receiving classified briefings on COVID-19, its risks, and possible large scale-implications.
Unfortunately, the good Senator from North Carolina wasn’t an anomaly in his unscrupulous actions–he was far from it. Bob Gibbs, an Ohio Congressman, bought shares in the same pharmaceutical company, AbbVie, while the House Oversight Committee (which he sat on) was investigating, along with 5 competitors for unreasonably high drug prices. In fact, the New York Times determined after analysis that an astonishing 97 Congressional representatives between 2019 and 2021 had traded in industries related to the committees they sat on, many in multiple instances.
The Stock Act and Criticisms
It’s not as if no system exists to regulate the financial transactions and disclosures of government officials. In the hopes of promoting fairness and transparency, the Stop Trading on Congressional Knowledge Act (or STOCK Act) was passed in 2012. Coming to light specifically in the wake of the 2008 financial crisis, the STOCK Act essentially bars Congress, other high ranking executive officials, and their spouses and dependents from trading on non-public information. In a sense the law extends our country’s prohibition of insider trading, to government officials with similarly obtained knowledge. Which seems like it should have been intuitive. Interestingly enough, the overwhelmingly bipartisan effort passed 96-3 in the Senate, with one of the three “No” votes being Senator Richard Burr.
Another key facet to the STOCK Act was that it shortened the mandatory window to disclose any stock, bond, option, or commodity purchase. Officials must now file Periodic Transaction Reports (or PTRs) within 45 days of a transaction occurring or after 30 days of becoming aware of the trade in the case of spouses and dependents.This stands in contrast to the 1 year allowance period that previously stood.
While the STOCK Act initially placated the public and all those invested in reform, its weaknesses were quickly unearthed. A late disclosure of purchase or sale only carried a $200 fine, and later investigation by Insider suggested that there was little oversight or enforcement over collection of said fines. Members constantly reported transactions late, and were not penalized for their extended tardiness when disclosures came in dozens of months after they were due. Under the tenor of the STOCK Act, not a single member of Congress has been charged or removed from office for an action directly related to the STOCK Act.
Public Outrage and New Trading Strategies
While it is apparent to most experts and seasoned investors that the vast majority of late disclosures and trading within industries of oversight are more due to ignorance, incompetence, or disorganization than anything else, it still inspires public distrust of elected officials and undermines the Legislative body.
As the public sentiment has been overrun by paranoia, cynicism, and conscientiousness, niche sides of social media on platforms such as TikTok have begun trying to unearth some of these unsavory trade practices and weaponize them for their advantage.
ETFs such as the Subversive Unusual Whales Democratic ETF ($NANC) and the Subversive Unusual Whales Republican ETF ($KRUZ) have been devised to mimic unusual transactions by politicians from their ETF’s respective party. These funds operate on data provided by the Unusual Whales engine and are managed by Subversive Capital Advisors.
Proposed Bipartisan Legislation
Notably, calls for reform have recently been met by a bipartisan proposition to ban the trading of individual stocks, bonds, and commodities all together for Congress, the President, and other high ranking Executive Officials. Surprisingly enough, this bill was introduced and co-sponsored by New York Democratic Senator Kirsten Gillibrand and Missouri Republican Senator Josh Hawley. In such a divisive and polarized political climate, the occurrence of a Liberal Democrat and staunch Republican co-sponsoring a bill together is rare at best, which speaks to the nature of this bill’s popularity.
Introduced in July of 2023, the “Ban Stock Trading for Government Officials Act” would not only ban the direct purchase of individual securities by the officials themselves, but would also disallow the acquisition and holding of securities through blind trust arrangements, where the beneficiaries have no direct decision making power over their assets.
When introducing the bill, Gillibrand cited that in 2022 Congress’ stock portfolios outperformed the S&P 500 (the benchmark index for the US stock market) by a whopping 17.5% along with a figure that from 2019 to 2021 alone, more than 3,700 trades made by Congressional members had been flagged for potential conflicts of interest.
Congress members would still be allowed to partake in the buying and selling of Index funds, Mutual funds, and ETFs under the bill, and the penalty for not filing their PTR within the 45 day window would be raised modestly from $200 to $500.
The public has roared a deafening enclave of support in response to this bill with a reported 68% of registered voters supporting the ban of stock trading for members of Congress according to Politico, and the University of Maryland finding an 87% approval among the general public for the banning of Presidential and Supreme Court trading as well.
While it is wildly popular with the public, criticism surrounding this bill remains. The prescribed penalty for trading individual stocks would be 10% of the underlying asset, which may seem hefty, but can still leave room for unsavory profits when trading on insider information.
While it’s easy to get behind such a practical and seemingly necessary bill, there are counterarguments to this proposition.
With slogans such as “Drain the swamp!” and “Lock them up!” being fired around the country haphazardly, it’s important to remember that some of the anger and contentiousness may be misguided.
Not all politicians are corrupt, and in fact, while the neigh sayers and conspiracy theorists may not want to admit it, most if not all members of Congress could be earning a lot more than the respectable $174,000 they rake in annually in the private sector, even if you factor in the alleged advantage they appear to enjoy in the stock picking arena.
Whether you want to believe that they serve out of altruism and want to change the world for the better or merely are there to ferociously seize all the power they can, it’s hard to dispute that they’re not just in it for the money.
Only time will tell if Congress decides to heed the public’s advice, and pick up the so-called “trading tab” they’ve been running up under our noses, but given the widespread support and bipartisan nature of this bill, they’d better get their affairs in order and say their last goodbyes to the realm of stock picking and trading.