After U.S. Congress members’ stock activity was made public following the 2008 financial crisis and Affordable Care Act debate in 2009/10, the Stop Trading on Congressional Knowledge (STOCK) Act was enacted in April 2012.
The STOCK Act essentially solidified two things. It magnified reporting requirements for U.S. Congress member’s securities transactions, introduced monthly reporting procedures and defined the law around trading on material non-public information. It essentially addresses conflicts of interest surrounding stock trading by federal officials and Congress members by making securities transactions over $1,000 public knowledge.
Through the STOCK Act, securities transactions over the threshold are required to be made public knowledge within 30 days of receiving notice and 45 days of the transaction date. Additionally, it mandates online filing of a Securities and Exchange Commission’s (SEC) form akin to Form 4 for notifications and extends to close family members, i.e. children and spouses.
Essentially, the STOCK ACT is about transparency – the main driver behind the creation of Capitol Trades.
Why was the STOCK Act introduced?
While members of Congress are subject to standard insider trading laws, those laws do not apply to confidential information. While Congress members are privy to non-public information, there is no obligation to keep the information confidential. Subsequently, there were instances where members privy to non-public information used this insight to their advantage. Questions around this non-public information and the wealth of Congress members began to arise.
Before the introduction of the STOCK Act, two studies were performed in 2004 and 2011, respectively, examining the portfolios of House and Senate members. These studies indicated that over the last two decades, House members’ stock portfolios, in general, beat the market average by around 6%, while the portfolios of Senate members during the same timeframe beat the market average by approximately 10%. Additional pressure came from a CBS “60 Minutes” investigation into Congressional insider trading.
Following these reports and CBS’s investigative reporting, Senator Scott Brown [R-MA] put forward the Congressional Knowledge (STOCK) Act of 2011 to Congress. While this wasn’t the first time a bill on Congressional and executive branch employee insider trading was introduced, it garnered more support, with another a similar bill introduced by Senator Kirsten Gillibrand [D-NY] at the same time.
What does the STOCK Act do?
Per the press release from the Office of the Press Secretary on April 4, 2012, the STOCK Act seeks to prevent members of Congress from making securities transactions based on confidential information they learn on Capitol Hill. It reaffirms that Congress members aren’t exempt from insider trading laws and provides House and Senate ethics committees with authority to implement further ethics rules around Congress members’ insider trading.
In practice, the STOCK Act enhances financial disclosure and reporting around Congress members’ securities activities. As part of the STOCK Act, fillings moved to electronic reporting, expanding the online availability of public disclosure information. Whilst the Electronic Data Gathering Analysis and Retrieval (EDGAR) program was launched in 1984, it plays a substantial role in the transparency of Capitol Hill securities trading activities today.
The additional ethics requirements outlined in the STOCK Act include:
Disclosure of mortgage terms for Congress members and government officials
Limits participation in IPOs to those publicly available
Requires a Government Accountability Office (GAO) report on political intelligence in financial markets
What are the consequences of violating the STOCK Act?
This is where the water gets muddy and might be a big proponent of why insider trading through non-public information takes place. Transparency into what the penalties are and, in fact, who has received penalties is nearly non-existent.
According to President Obama’s press release in 2012 around the implementation of the STOCK Act, any member of Congress who commits corruption offenses while serving as an elected official will require forfeiture of their federal pension. The STOCK Act added insider trading to the long list of federal crimes for which this would be a consequence.
What are the potential proposals around congressional trading?
Since 2012, there has been a long list of examples where Congress members have used insider knowledge to line their pockets. The most recent and highly debated trades happened after a confidential briefing on COVID-19 in January 2020. After, several Congress members were involved in the acquisition and sale of securities around the ‘pandemic market’.
As of March 2022, four proposals have been sent before Congress seeking to bar members from trading individual stocks. Whilst each has subtle differences, most of them include the use of Blind Trusts for securities investments.
Ban Conflicted Trading Act – proposed in the House by Representative Raja Krishnamoorthi [D-IL], with bipartisan support.
TRUST in Congress Act – proposed in the House by Representative Abigail Davis Spanberger [D-VA], with a long list of bipartisan support.
Ban Congressional Stock Trading Act – proposed in the Senate by Senator John Ossoff [D-GA], co-sponsored by over a dozen Democrat Senators.
Bipartisan Ban on Congressional Stock Ownership Act – proposed in the Senate by Senator Elizabeth Warren [D-MA], with bipartisan support.
How can investors use the transparency the STOCK Act provides?
The STOCK Act mandated the online filing of congressional securities transactions which could be searched and sorted in online databases. The result is comprehensive reporting on Congressional investment activities, providing valuable insight into genuine information. Several studies have linked insider transaction activities and future stock returns. Thus, investors can use insight from Congressional investment activities to generate future ideas.
Whilst the STOCK Act is meant to keep Congressman from making trades based on non-public information some trades are still based on things not known to the public. It’s important to note a few things when analysing the data:
If reports show Congress members buying stock, insiders should have peace of mind that they are confident about the future of this business and expect share prices to rise.
If reports show Congress members are selling stock, this is harder to read. They may be wishing to diversify investments, but it can also signify that they are offloading stock in preparation for stock prices to fall.
2iQ’s Capitol Trades – What does it do?
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