How would you feel if you learned that your elected officials were profiting off information that wasn’t available to you? What if the politicians in question were in charge of upholding ethics? Evidence suggests some policymakers aren’t playing by the rules. But who’s supposed to be enforcing them?
In December 2023, market research platform Quiver Quantitative announced that four lawmakers had violated the STOCK Act. The politicians in question are Rep. John Rutherford (R-FL), Rep. David Joyce (R-OH), Rep. Michael Gust (R-MS) and Rep. Deborah Ross (D-NC). Quiver Quant tracks the trading habits of sitting politicians. Its data revealed that these four House members have almost 300 violations between them.
That sounds egregious enough on its own, especially as all four representatives sit on the House Ethics Committee, a group in charge of investigating violations of House rules. But a deeper dive into Quiver Quantitative’s data reveals that these incidents are by no means isolated.
On the contrary, elected officials violating the Stop Trading on Congressional Knowledge (STOCK) Act is a continuous event. But somehow, the American people don’t seem concerned by it. And as Quiver Quant co-founder and CEO James Kardatzke points out, it isn’t the only trend that should be concerning to investors. His company has also found patterns of Congressional representatives actively trading stocks whose sectors are covered by committees they are part of.
As Kardatzke sees it, this trend has the potential to impact trust both in public markets and elected officials. The data his firm has produced shows a pattern of sitting politicians disregarding the laws for disclosing their trading habits. But more than that, it shows that they profit as they do… with little consequence. It’s hard to ignore the edge this gives them over retail traders who already feel the playing field is far from level.
Numerous Politicians Have Violated the STOCK Act
What is the STOCK Act? In the wake of the 2008 financial crisis, media outlets began reporting that members of Congress were trading stocks based on privileged information. A few years later, in 2012, the STOCK ACT emerged and passed with little opposition, receiving a 417-2 vote from the House and a 96-3 vote from the Senate.
Under the STOCK Act, sitting politicians are required to “make public all securities transactions with a value above $1,000 within 30 days of receiving notice of the transaction and within 45 days of the transaction date.” The policymakers behind this bill intended for it to stop members of Congress from trading on inside information.
“In the decade since it was passed, it has provided greater transparency into the stock trading activities of our elected officials,” stated a report from the Campaign Legal Center, a government watchdog group. “Yet it has also highlighted why transparency alone is not enough to prevent the appearance of corruption – or the actual occurrence of corruption.”
Indeed, as Quiver Quantitative shows, many politicians aren’t abiding by the STOCK Act. Laws don’t mean much when the people they impact blatantly disregard them.
The four House Ethics Committee members are far from the only elected officials who have violated this law. In January 2023, Business Insider reported that 78 members of Congress had failed to comply with it over the span of just a few months. These leaders employed excuses such as simple oversights on their part as well as clerical errors, while others blamed their accountants. But the more likely reason is that the fine for such violations is quite low, at only $200.
As experts such as Ben Michael, founding attorney at Michael & Associates, have noted, the immense wealth that many politicians incur from stock trading can make $200 fines seem insignificant, thus compelling them to disregard the policies they helped write.
Implications for Investors
Unusual Whales, a popular social media account that provides options flow data, recently reported that many politicians have beaten the market — and not for the first time. In response, one X user suggested that the government should pass legislation that forces lawmakers to report all trades in real time, stating, “It’s honestly painful seeing their returns.”
It’s not as if there hasn’t been pressure to pass such a bill. Experts have long advocated for a ban on congressional stock trading. Politicians from both sides of the aisle have supported such a ban, such as Senators Kristin Gillibrand (D-NY) and Josh Hawley (R-MO), who introduced the Ban Stock Trading for Government Officials Act in July 2023. But since the passing of the STOCK Act in 2012, not much action has been taken. That’s likely a driving force behind this disconnect between politicians and the real investors they represent, who feel that nothing will be done.
Part of Quiver Quantitative’s mission is to provide retail investors with the information they need to make informed trading decisions. While speaking with InvestorPlace about recent STOCK Act violations, Kardatzke highlighted why these violations should matter to retail investors, illustrating the magnitude of this phenomenon. As he sees it, these trends have the potential to significantly undermine trust in public markets, particularly among retail investors.
“Members of Congress have access to information themselves that you can’t really find anywhere else in terms of these confidential briefings that they read,” Kardatzke told InvestorPlace.
He also notes officials’ advantage “just in terms of being very highly networked individuals who have good connections in D.C. and good connections with businesses. [In] a lot of cases, a lot of information passes through their eyes that just isn’t available through the general public.”
It’s hard not to be upset by this type of double standard. When other investors trade off knowledge that isn’t public information, it’s labeled insider trading and usually results in criminal charges. Yet when politicians profit off their connections and status, it’s business as usual. As Quiver Quant’s data makes clear, even when they do violate these laws, the repercussions are mild at best.
This comes at a time when investor trust in public markets is already highly compromised. A 2022 study from Bank of America found that 75% of American adults under 42 doubt that traditional stock and bond investments can net them above-average returns. If elected officials are profiting unfairly, it gives potential investors even less reason to trust their public markets. As Kardatzke states:
“On one hand [the system] feels unfair because if you’re just a retail investor and going out and buying stock in a company, [it] turns out that that stock is being sold by someone who’s sitting in Congress who has access to all this information that you don’t. They’re trying to profit and trade off that information. … So if they’re profiting off this, there’s also people who are losing out based on being on the other end of those trades.”
Does Anyone Care?
In September 2023, Senators Jon Ossoff (D-GA) and Mark Kelly (D-AZ) introduced the Ban Congressional Stock Trading Act. This bill would prevent sitting lawmakers from using inside information to profit from trading, as well as their spouses. Both Ossoff and Kelly have already placed their portfolios in blind trusts to show that they would comply with such legislation. This bill was read before the Committee on Homeland Security and Governmental Affairs. According to a poll cited by Ossoff and Kelly, a Congressional stock trading ban garnered the support of 88% of Democrats and 87% of Republicans.
However, according to experts, passing such legislation could be complicated and would likely be met with opposition from politicians who have profited significantly from trading.
Even so, there is still a strong incentive for leaders to pass stricter legislation around Congressional stock trading. America’s trust in public markets isn’t the only thing on a steady decline. Data shows that trust in the U.S. government has been on a downward trajectory for decades. Leaders such as Ossoff and Kelly have recognized an opportunity to help restore trust among voters by helping level the playing field and eliminating an advantage that can enrich politicians while leaving retail investors behind.
While parts of the retail community have been paying attention to the growing trend of STOCK Act violations, it’s clear that many feel protesting violations seems futile.
To help restore trust in public markets and government institutions, it is crucial to take concrete steps and prohibit elected officials from engaging in securities trading.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
