A Member, officer, or employee of the Senate shall not receive any compensation, nor shall he permit any compensation to accrue to his beneficial interest from any source, the receipt or accrual of which would occur by virtue of influence improperly exerted from his position as a Member, officer, or employee.
This passage is from page 15 of the Senate Code of Official Conduct prepared in 2015 and prompted by the 2012 passing of the Stop Trading on Congressional Knowledge Act of 2012, otherwise known as the Stock Act. The Stock Act even goes as far as to spell out that members of Congress are not exempt from insider-trading laws, just like the rest of us.
While these rules ban the use of insider information by congressional employees, executive branch employees, and judicial branch employees, it does not establish an outright ban on trading for any of these government workers. The good news here is that while the act doesn't ban trading, it does establish a reporting framework, giving government traders a 30- to 45-day window, depending on the situation, to report trades.
Because of this mandated transparency, there are now sites like Capitol Trades, and House Stock Watcher, which tracks these trades. ETF issuer Subversive ETFs teamed up with Twitter user Unusual Whales who tracks and catalogs these trades and they are currently launching two new ETFs that will do that for you.
NANC & KRUZ
Because folks across the political spectrum seem to love money, The Unusual Whales Subversive Democratic Trading ETF (NANC) and the Unusual Whales Subversive Republican Trading ETF (KRUZ) are slated to start trading Tuesday. Both funds sport a 75-basis point expense ratio, meaning that a shareholder with $1,000 invested in either fund over a calendar year would pay $7.50 in fees over that period.
The approach is fairly straightforward. The portfolio for each of these funds is based on reported trades by either registered Democrat or Republican members of Congress or their family members. The issuer spells out that it is not tracking any unregistered, Independent, Libertarian, Green, or other party member trades. Looking through the holdings for each fund, NANC has 782 equity positions and KRUZ has 526. The funds have 302 positions in common meaning that holding NANC would give you exposure to roughly 40% of KRUZ and holding KRUZ gives you about 58% exposure to NANC.
You might be thinking that getting in 30 or 45 days after the initial trade means that the bulk of the juice has been squeezed out of these trades. I can't blame you for thinking that given that there have been a number of studies that point to the ineffectiveness of tracking hedge fund 13F reporting like this paper, or this Harvard Law School study. I would say that the difference here is that oftentimes, hedge funds perform what is known as "window dressing" around these reports, which means they essentially rework their portfolio so that it looks different on the reporting day than it does any other day. Further, 13F reporting is required only for long positions, not anything held short, or currency or commodity positions, long or short.
What I like about this approach is that members of Congress are required to report everything, and frankly, given the speed of government, the odds that these trades are popping within 30 days are pretty slim. If they are working that quickly then we have some serious issues, which I think can be alleviated by my closing, below.
Wrap it Up
Considering that members of Congress just can't seem to stop themselves from insider trading, as evidenced by this recent article discussing 78 lawmakers who were found with their collective hands in the proverbial cookie jar. I don't see why we don't just ban trading by these individuals outright. Assets in a blind trust? Fine. Any other situation that gives them a direct or indirect fiduciary duty over their own assets? Nope. All I know is that when I worked a Morgan Stanley as product manager for their closed-end funds in the mid-aughts, I, and all of my co-workers were prohibited from trading any name that was on the firm's research list.
Did I have access to any material, non-public information on these companies? No. Would my being able to trade these names create even a whiff of impropriety? Maybe, and that was enough to justify this prohibition. Given the 7-, 8- and 9-figure net worth tallies of many of these public officials, perhaps we can all agree that enough is enough, especially if they're jumping the information access line. In the meanwhile, if you can't beat 'em, join 'em with NANC and KRUZ.
