More than a decade after Congress passed laws cracking down on insider trading among members, lawmakers are still beating the market and inspiring new money based on their trades.
Mark Lennyhan/AP
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Mark Lennyhan/AP
Polls show that most Americans think little of Congress. But some investors think lawmakers got one thing right — picking stocks — which prompted an entirely new class of products to copy their trades.
Traders and market observers are using public data to track which lawmakers are reporting big gains in stocks. They believe information provides a market advantage, and companies are selling tools to track the lucrative deals of lawmakers.
This dynamic suggests that the trend may be fueled by the STOCK Act, enacted more than a decade ago to crack down on congressional deals. Financial services firms market funds that mimic the practices of congressional “political traders.” Reports from industry analysts over the past few years have shown that these investment strategies are outperforming the market. The law requires public disclosure of all transactions over $1,000, creating unexpected product categories.
These funds are legal. But the products underscore that the problem the law was designed to address — eliminating the impression that lawmakers profited from information they received in their official capacity — remains a problem.
The CEO of Unusual Whales, a financial startup that provides investors with tools to track market activity, noticed that his post tagging important stock trades by members of Congress was going viral on social media. “I’m just posting what the disclosures tell me,” he told NPR.
He started looking at the numbers about five years ago and said the academic literature essentially concluded that Congress had no advantage on trade. But his anonymous reports — published under the name “Unusual Whales,” as he calls himself — track notable developments among lawmakers surrounding major policy changes or global events.
“These reports started to really take off during 2020, 2021, which is when the COVID trade happened.”
He found a spike in dealmaking by lawmakers from both parties at the start of the COVID-19 pandemic, and found that about 15 senators traded from February to April 2020.
“The value of the shares traded at the time was about $100 million,” he said. “About 40 House members made approximately 1,500 transactions worth nearly $100 million.”
He used data from disclosure forms lawmakers are required to submit. The STOCK Act — passed in 2012 after news reports of huge profits made by lawmakers during the 2008 financial crisis — requires these disclosure forms to be filed within 30 to 45 days. fine The penalty for failing to file the form is $200, a figure reform advocates say is insufficient to incentivize full compliance.
Unusual whales see value in this data beyond the scope of public responsibility that the law is intended to provide.
“When you’re a trader or an investor, you’re looking for some kind of edge, and people believe that’s an edge,” he said.
Cottage industry rises from Stock Act
Unusual Whales’ data is the basis for two ETFs (exchange-traded funds). One, called NANC, formerly named after House Speaker Nancy Pelosi, tracks how Democrats invest. Another, called KRUZ, tracks Republican investment patterns. Their performance data shows they do have an edge.
“I think KRUZ has outperformed the market both on average and on a risk-reward basis over the past three months, just as NANC has done since its inception,” he said.
Pelosi does not trade stocks, but like many other members of Congress, her husband is an active investor. Pelosi’s disclosure revealed the transactions and attracted a lot of attention because of the large gains.
Financial services firms have also taken note of the gains, and a cottage industry has sprung up selling these products – based on what they call political deals.
Kedric Payne, an attorney with the Campaign Legal Center, said the industry’s growth over the past few years was an unintended consequence of the STOCK Act. The law was designed to suppress trading by lawmakers, but “instead, investors profited from the trading, which also incentivized members of Congress to continue trading because, in effect, they were profiting when others invested,” he said.
Payne worked in the Office of Congressional Ethics when the financial activities of some lawmakers sparked ethics investigations and public pressure to pass reforms.
He said the growth of ETFs was not illegal and that both parties seemed to benefit. “Investors following the trades ended up giving members of Congress an almost Midas touch, and any stock they picked turned to gold.”
Payne blamed fundamental flaws in the way the law was written.
“The STOCK Act is never going to completely solve the problem because it’s more like an X-ray showing what the problem is through disclosures,” Payne told NPR. “But the stock trades that the public doesn’t like to see don’t get. Really deal with it because it just seems like a conflict of interest.”
Bipartisan push to ban lawmakers from trading individual stocks
There is strong momentum for bipartisan reform of the STOCK Act around the time of the 2022 midterm elections. But those efforts stalled. Lawmakers from both parties have said banning stock trading could discourage people from serving in Congress and staffers building careers on Capitol Hill.
RepresentUS, a nonprofit focused on anti-corruption and democracy issues, has seen the social media attention Unusual Whales receives when spotlighting noteworthy transactions.
“We’re watching the internet closely because making government work for people requires more attention than it currently has,” said Joshua Graham Lynn, CEO of RepresentUS. The nonprofit decided to work with financial platforms to once again push for changes to the Stock Act.
Members of Congress have information that most investors do not, and they create laws that may affect the companies in which they invest.
“It’s like a member of an NBA team rewrites the rules of the game to favor their team, and then the fans get upset,” Lynn told NPR. “Like, we don’t allow players to be on and off their team. There’s a reason for that, because it creates a huge conflict of interest.”
He said polls showed support across the political spectrum and the issue deserved wider scrutiny. “I think this should actually be a much bigger scandal than it is.”
His group is advocating for Congress to pass a new ethics reform. The Trust Bill would prohibit MPs, their spouses and their dependent children from trading in individual stocks.
Lynn said ETFs themselves are not the problem — they simply highlight flaws in the current system.
“The problem is that Congress, members of Congress, are able to make these deals,” he said. “I don’t think the problem is people getting people’s attention and coming up with creative products to get people’s attention.”
Public attention to lawmakers’ stock activity increased in 2020. He chairs the Senate Intelligence Committee. In February 2020, he sold most of his holdings after confidential briefings on the COVID-19 outbreak but before the public understood the threat to the economy.
Burr was not charged.
Reforms can build trust but stifle profits
Unusual Whales said a trading ban — or even a new requirement that lawmakers disclose their transactions a day after their events — would bring more trust in Congress. “It might take another scandal, but I do think it will be brought forward by some members who have enough people to co-sponsor it and there has to be a vote.”
He added that the reforms would have wider benefits for both government and the private sector. “These institutions want to be able to benefit people, because if people can’t trust their institutions, how can they trust larger institutions — like the U.S. market or their state legislation? Or the judges who decide the rules?”
“If Congress does nothing on this issue, you’re going to see more unintended consequences,” Payne warned.
Lynn agrees that a political coalition exists, but it just needs more public pressure to get off the ground.
“We’re bringing conservatives and progressives together because while Congress is divided, the American people are not,” Lynn said. “So asking Congress to pass a law that puts a shackle on itself is always going to be a tall order. mission. But as long as there’s enough voice and enough momentum from the states, I think we have a chance.”
House Speaker Mike Johnson, R-Louisiana, has yet to take a position on the issue. Senate Majority Leader Chuck Schumer, D-N.Y., did not mention any action on the issue in his list of bipartisan bills to introduce this year.
Any ban on congressional trading would clear out data used to market ETFs modeled on lawmakers’ trades, so investors could lose an advantage.
But there is bipartisan agreement that reforming lawmakers’ stock trading could help rebuild confidence in Congress as an institution.
