Lawmaking & Insider Trading: An Overview
By Margaux Brutin 10/31/2024
Upon hearing about the 2020 pandemic announcement, most people called their loved ones; American Congressmen called their stockbrokers. Senator Richard Burr picked up his phone so quickly that he sold over $1.6 million of stocks a full month before the pandemic was publicly declared. His Jim Cramer-esque predictive abilities did not go unnoticed, however. In March of 2020, the Department of Justice launched an investigation into his financial exchanges. During this probe, they discovered two things:
- In 2018, Burr and his wife conspicuously sold approximately $47,000 of stocks in OCI (a fertilizer company) shortly before it lost 42% of its value.
- Senator Richard Burr didn’t make his million dollar exchange on any random day; He did it within a week after a private congressional briefing on the Coronavirus.
Even though these incriminating trades took the government 3 years to discuss, they were not enough for the DOJ to rule guilty. This decision attracted animadversion from both sides of the political spectrum. Both Alexandria Ocasio-Cortez and Tucker Carlson publicly demanded that the Senator step down from his role as Chairman of Senate Intelligence Committee, to temporary avail.
Senator Burr’s controversial stock exchange was no isolated incident. Congress members make anywhere from 10,000 to 20,000 trades every year, and they’re good at it. In fact, several outperformed the S&P 500 in 2023 –as well as 2020, 2021, and 2022–. How do they do this? Through cross comparison of stock exchanges by congressmen with the legislation they were actively working on, the answer is clear. Members of Congress utilize their inside knowledge on the future of certain businesses to make calculated moves.
House Speaker Nancy Pelosi is likely no stranger to this practice. Last year, she reportedly invested over $1 million into Tesla, just a month before Joe Biden officially stated that all federal vehicles will be made electric. It is because of strategic investments like this that she saw a 65% increase in her portfolio value in 2023. Her husband had a great fiscal year as well, largely due to his decisions regarding Nvidia, an AI computing company which he invested and divested in in conjunction with Congress passing a bill regarding large tech giants. Naturally, in the past few years Pelosi and other politicians have been criticized for their suspiciously timed stock exchanges. During this time, Pelosi has been extremely outspoken about her belief that government officials should be allowed to participate in the stock market. She claimed that “‘We are a free market economy. They should be able to participate in that,’” and received much scrutiny as a result.
All of this discourse has led to a major question of ethics: Should Congressmen —or collaterally, their spouses— be allowed to hold and engage in the trade of stocks? Well, according to the 2012 STOCK Act, no. Introduced by Senator Joe Lieberman and signed into law by Former President Obama, the Stop Trading on Congressional Knowledge (STOCK) Act, was intended to stop government officials from using non-public knowledge for financial gain, particularly in the stock market. By it, Congressmen are forced to publicly disclose their financial exchanges in 30 days as well as conform to certain ethical standards preventing insider trading. While the act was a nice thought, in practice it was more of a resolution than anything. Since 2012, members of Congress have abused it a countless number of times.
Motivated by STOCK’s failure, several senators have tried to rectify the situation with new legislation. Recently, Senators Jon Ossof, Mark Kelley, Gary Peters, Josh Hawley, and Jeff Merkley, created the Ending Trading and Holdings In Congressional Stocks (ETHICS) Act, which would prohibit members of Congress and their families from acquiring equities altogether. Purchases and ownership of new stocks past 90 days after the bill is enacted are set to incur a penalty of 10% of their value. These strict regulations as well as the bill’s primary sponsor, Jeff Merkley, have helped it gain support in Congress. In an official statement, the Senator claimed that “Congressional stock trading is deeply corrupt. We are elected to serve the public, not our portfolios. And no member should vote on bills biased by the character of their holdings,” which impressed representative AOC and Senators Kirsten Gillibrand, Angus King , Bernie Sanders , Debbie Stabenow , Jeanne Shaheen, and Tammy Duckworth.
While the ETHICS act seems to be the most promising piece of legislation currently in line for debate, other variations of the idea are in circulation. Representative Primla Jayapal’s Bipartisan Ban on Congressional Stock Ownership Act of 2023 aims to achieve the same goal, but with a divesting period of 180 days and exceptions for widely held and diversified investment funds. Senator Josh Hawley generously proposed the Banning Insider Trading in Congress Act with a 6 month divestiture window and an exclusion of dependent children.
Whether any of these pieces of legislation has a legitimate chance at being passed or not is unclear. On one hand, there seems to be a fair amount of support for the notion. Chairman Gary Peters of Homeland Security and Governmental Affairs even described the ETHICS Act as “a commonsense piece of legislation that helps maintain trust in this institution.” This is an important vow of support, as his approval is necessary before any official debate on the congress floor. On the other hand, such strong opposition, namely House Speaker Nancy Pelosi and presumably a portion of the other 97 STOCK Act violators.
Unfortunately, the average citizen doesn’t have much influence in Congress, especially when it comes to a topic sensitive and contested as this. Still, the future of the common person’s investments are not as bleak as they may seem. Many economists have caught wind of Congress’s success in the domain of exchange and created exchange-traded funds (ETFs) that are specifically modeled after equities traded by the House and Senate. The Subversive Unusual Whales Republican ETF (KRUZ), the Subversive Unusual Whales Democratic ETF (NANC), and the bipartisan Tuttle Capital Congressional Trading ETF (NPEL) are all advised by the investments of specific portions of Congress. By investing in these, the public –who are not privy to the same information as high ranking officials– could take advantage of the unlevel playing field, and invest like a congressman. .