I have worked in the financial industry for over 15 years. My first job out of college was with a large bond fund manager. I later moved to a boutique private credit manager, and I now work for a large asset manager with a significant private credit platform. In every job I have had, compliance has been deadly serious. “Compliance” covers everything from the firm’s own compliance with regulatory requirements to employee compliance with respect to personal trading. Today I’ll be addressing the personal trading side of things.
In every investment institution in the country, there are rules governing personal trades. In every firm I have worked for, employees are required to obtain “pre-clearance” to conduct a trade in a personal investment account. This gives the compliance department a chance to ensure that your trade is not based on non-public information that you may have access to, and that your trade would not even have the appearance of negatively impacting your firm’s clients (such as front running a client’s trade). Some firms only require pre-clearance of trades in individual stocks and bonds, others more stringently require pre-clearance for mutual fund and ETF transactions as well. It also bears mentioning that these rules apply to my wife’s transactions as well as my own.
Employees who violate the personal trading policy are subject to various sanctions, from disgorging any profits from a personal trade to a company-designated charity, up to the loss of one’s job. Regardless of how minor the transaction, personal trading is taken extremely seriously at every investment firm on the Street.
And so, it was with keen interest, and a growing sense of outrage that I listed to a story on NPR the other day about members of Congress and their trading activity. Technically, members of Congress are subject to disclosure rules under the cutely-named 2012 “Stock Act,” but as the story made clear, the Act is basically useless and is mostly ignored by the politicians it is intended to police. Today, I saw a different story about how TikTok users are following Congressional disclosures as a guide to their own investing.
Why would TikTokers think that emulating the publicly-disclosed trades of members of Congress would be a winning personal investment strategy? They could probably do worse. Members of Congress are intimately involved in shaping regulations that govern industries and the publicly traded companies operating in those industries. Given some of the very profitable trades that Senators and Representatives have made, emulating their winning strategy can be a smart play. Of course, by the time those trades are publicly disclosed, the easy money has already been made, as they say.
There are a few different online tools that let people track lawmakers’ trading activity. The extent of it is too much to go into detail here, but let’s take a look at just a few examples:
Rep Josh Gottheimer (D-NJ) has a total trade volume (buys and sells) of $44 million. 88% of his trade volume was in Microsoft stock. Interestingly, Gottheimer previously worked at Microsoft as a strategist.
Not to be outdone on the MSFT front, Nancy Pelosi has been an active trader of the company’s options.
Rep Greg Gianforte (R-MT), who is best remembered as the guy who was convicted of assault in state court for body-slamming Guardian reporter Ben Jacobs in 2017, has total transactions of $25mm.
Former Senator Kelly Loeffler (R-GA) last year was cleared by an ethics committee investigating stock trades she made prior to the 35% market decline in Feb-March 2020. Loeffler had participated in a private hearing on the coronavirus in the weeks prior to the market selloff.
I could go on and on, looking through lawmakers’ personal trades, but I have a day job. Putting aside for a minute the fact that no lawmaker has been charged with insider trading, let’s sit for minute and contemplate how deeply corrupt it is for people who have knowledge not available to the general public, and have the power to shape how companies and industries will be regulated, are actively trading in the securities of those same companies.
The Chief Compliance Officer at the first company I worked for once said in one of our annual trainings that the appearance of insider trading was almost as important as actual insider trading. The strong personal trading policies signified to our clients that we always put their interests first, and that the firm took insider trading seriously enough to impose rapidly escalating penalties on people who violated company policies. How are Americans supposed to feel about lawmakers, some of whom are worth many millions of dollars, who actively trade stocks, and sometimes make highly sophisticated options transactions? Can we really believe that they have our best interest at heart? How can it be that the thousands of employees of banks and asset managers (such as myself) are held to a stricter standard than elected officials?
Trust in American public institutions has been declining for a long time. The personal trading practices of our elected representatives makes clear that our general cynicism and mistrust is justified, and maybe doesn’t go far enough.
It actually really ticks me off.