What Is the Stock Act?
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Whether you’re new to Capitol Trades or you’ve been using the platform for quite some time, you know that the stock activity of US Congress members is our bread and butter. The transparency of Congressional investment activity is part and parcel of the Stop Trading on Congressional Knowledge (STOCK) Act, which was enacted in April 2012.
What is the STOCK Act?
Before the STOCK Act in 2012, Congress members’ securities transactions (buying and selling stocks) were a grey area. There was no legislation in place that governed Congress’ use of non-public information to invest in the stock market.
The STOCK Act was designed to increase transparency and ensure Congress members weren’t making trades using non-public information. This legislation implemented mandatory reporting for transactions over $1,000 within 30 days of receiving notice and within 45 days of the transaction date.
Part of this legislation was implementing an SEC online filing procedure akin to Form 4 to notify the public of Congress securities transactions, including transactions by their close family members.
The STOCK Act addressed Congress members’ conflicts of interest surrounding trading by government officials by making these transactions public knowledge. In essence, Capitol Trades has harnessed the reporting requirement, making it easier for investors to track and use this activity to make data-based decisions.
What government officials are included under the STOCK Act?
When it comes to confidential information, Congress members aren’t the only people privy to that knowledge. Under the STOCK Act, the following individuals are required to report their securities transactions and the knowledge behind their actions:
Members of Congress – House of Representatives and Senate
Senior Executive Branch Officers
Judicial Officers
Judicial Employees
What triggered the STOCK Act?
Interest in federal government employees’ stock market activity began well before President Barack Obama signed the STOCK Act into law in 2012. Prior to the introduction of this law, federal officials were only subject to the standard Securities and Exchange Commission (SEC) laws governing insider trading.
These laws did not cover the use of confidential information to make transactions, however as members of government Congress members are privy to insight not granted to common investors – giving them a unique advantage – so a change in law was decided.
Before the introduction of the STOCK Act, there were instances where federal officials used confidential information to make trades. These trades didn’t go unnoticed, and questions arose around their use of confidential data to make trades and their skyrocketing wealth from these trades.
These questions subsequently led to two studies in 2004 and 2011 which examined the portfolios of House and Senate members. In addition to these studies, additional pressure came from an investigation into Congressional insider trading featured in a CBS 60 Minutes program.
What did the studies find?
The studies indicated that over the last 20 years, House members’ stock portfolios performed better than the market average by 6%. During the same timeframe, Senate members’ portfolios beat the market average by approximately 10%. These findings and the pressure from 60 Minutes forced Congress members to re-evaluate their stance on trades using non-public knowledge.
How did Congress respond to investigations into federal insider trading?
Following the studies and investigation, Congress needed to act – and it did. In 2011, Republican Senator Scott Brown (MA) put forward the Congressional Knowledge (STOCK) Act of 2011 to Congress. It wasn’t the first time a bill like this had been introduced, but following the revelations of the previous decade, it garnered far more support than previous bills.
How does the STOCK Act work?
On April 4, 2012, the Office of the Press Secretary sent a press release outlining the STOCK Act and its focus on preventing Congressional trades based on confidential information learned on Capitol Hill. It provided assurances that federal employees aren’t exempt from SEC insider trading laws and put forth additional ethics rules around Congressional insider trading.
The STOCK Act does a few things:
Enhances financial disclosure and Congressional securities reporting.
Congressional securities filing moved online and filings became publicly accessible.
Introduced additional ethics guidelines for Congress members and government officials, including:
Mortgage terms disclosure
Implemented a Government Accountability Office (GAO) report on political intelligence in financial markets
Limited Congress members’ to only publicly available IPOs
Provided additional transparency through the 1984 Electronic Data Gathering Analysis and Retrieval (EDGAR) platform
Are there consequences for STOCK Act violations?
If we go by the press release indicated above, the stated penalties for instances where Congress members committed corruption offenses, including insider trading on confidential information, would require forfeiture of federal pensions. The STOCK Act added this type of insider trading to the government’s comprehensive federal crimes.
With such comprehensive guidelines within the STOCK Act, you would think that there would be consequences to the violations – but this isn’t exactly accurate. Unfortunately, while the primary goal of the STOCK Act is to provide transparency into this type of insider trading, the clarity around what penalties, if any, exist and who has received such penalties is nearly impossible to find.
What is the future for Congressional trading?
While the STOCK Act has good intentions, it isn’t working as intended. In fact, there have been several instances since its inception where Congress members have used non-public knowledge to continue filling their coffers. The most recent example occurred at the onset of the COVID-19 pandemic.
In January 2020, several Congress members attended a confidential briefing about the virus and afterwards were involved in securities transactions involving companies that manufacture products that would be used during such events. The trades stemming from this non-public information are highly debated and have sparked calls for additional reform.
Several bills have been initiated in Congress seeking to ban members from trading individual stocks altogether. Though they all have a common goal, each has subtle differences, including using a Blind Trust for investment activities. In addition, on April 8, 2022, the ‘Examining Stock Trading Reforms for Congress’ hearing took place in the House of Representatives, highlighting all current proposals to limit Congressional stock activities.
The above link lists all current bills and resolutions that seek to clarify Congressional stock market activities, limit their participation or ban Congressional trading completely. These include:
HUMBLE Act – proposed in the House of Representatives by Representative Angie Craig [D-MN] and seeks to prohibit Congress members from owning individual stocks.
TRUST in Congress Act – proposed in the House by Senator Abigail Davis Spanberger [D-VA], requiring investments to be placed in a Blind Trust.
No Option for Stock Trading and Ownership as a Check to Keep Congress Clean Resolution – sponsored by Representative Angie Craig [D-MN] to prohibit members, residents and commissioners from owning common stock.
STOCK Act 2.0 – sponsored by Representative Katie Porter [D-CA-45], this resolution seeks to prohibit the purchase or sale of covered financial instruments but would allow investment through a Blind Trust. Additionally, it would amend the current STOCK Act to provide further transparency into Congressional member finances and require periodic reporting.
Why is the STOCK Act important for investors?
The online filing requirements of the STOCK Act make it easy for investors to see what Congress members are doing on the stock market. It provides access to a searchable database that offers valuable information investors can use to make data-based judgements on the purchase or sale of securities. This isn’t just theoretical. There have been several studies indicating there’s a link between insider transaction activities and positive stock returns.
Before jumping straight into making decisions based on Congressional stock activities, it’s important to note:
Buying patterns of government officials can indicate that they expect share prices to rise
Selling patterns of government officials are harder to discern. It could mean they expect the share price to fall, but at the same time, it could indicate they are simply diversifying their portfolio and should be handled with caution.
How does Capitol Trades help investors?
CapitolTrades.com was designed to provide investors with access to Congressional trading data. Its insight and intuition are invaluable for analyzing securities activities to help make educated buying and selling decisions.
With over two decades’ expertise in insider transaction data, 2iQ, the experienced team behind Capitol Trades, provides cutting-edge data that helps monitor Congressional stock market activity. Its comprehensive data is built on an established and proven process combining next-level automation and manual record collection.
