A MARTÍNEZ, HOST:
Savvy investors are always trying to find a way to beat the market. Now there are new products on offer that follow the trades of members of Congress. They've emerged due to the 2012 Stock Act. It requires lawmakers to disclose when they buy or sell stocks. The funds tracking those trades are outperforming the market. Now, it's all legal, but is it undermining the purpose of the law to show that lawmakers are not profiting from their jobs? Here's NPR Congressional Correspondent, Deirdre Walsh.
DEIRDRE WALSH, BYLINE: The CEO of Unusual Whales, a financial startup that offers investors tools to track market activity, noticed his post flagging notable stock trades by members of Congress were going viral on social media.
UNUSUAL WHALES: I was just posting what the disclosures were telling me.
WALSH: When he started crunching these numbers about five years ago, most analysts believed Congress had no edge in trading. But his anonymous reports, under the name Unusual Whales, which is how he refers to himself, tracked sizable gains by lawmakers, happening around big policy changes or global events.
UNUSUAL WHALES: And those reports started really, really, really taking off, especially back in kind of 2020 and 2021, when COVID trading happened.
WALSH: He saw trades by lawmakers in both parties spiking and found roughly 15 senators making trades in February into April of 2020.
UNUSUAL WHALES: That's around, like, $100 million of stock being traded around that time, and around 40 members of the House made, like, 1,500 trades - almost $100 million.
WALSH: The data he uses comes from disclosure forms lawmakers are required to file. The STOCK Act, passed in 2012 after news reports of lawmakers making big profits around the financial crisis, requires these public forms for all transactions over a thousand dollars within 30 days. Unusual Whales saw value in this data.
UNUSUAL WHALES: When you're a trader or investor, you're looking for some sort of edge, and people believe this is a sort of edge.
WALSH: His data is the basis for two ETFs - exchange-traded funds - one called NANC that tracks how Democrats invest, named after former speaker Nancy Pelosi. The other is called KRUZ - named for Texas Senator Ted Cruz - that tracks how Republicans invest. The data on their performance shows they do have an edge.
UNUSUAL WHALES: I think KRUZ has outperformed the market over the last three months, both on an average and a risk-return basis, as NANC has done it since inception.
WALSH: Pelosi doesn't trade. But like a lot of other members, her spouse is an active investor. Pelosi's disclosures show those transactions and attract a lot of attention because of large gains. Financial services companies noticed the gains, too, and a cottage industry of firms selling these products sprung up based on what they call political trading. Kedric Payne, a lawyer with the Campaign Legal Center, says the growth of this industry in the last few years is an unintended consequence of the STOCK Act. The law was designed to tamp down on trading by lawmakers, but...
KEDRIC PAYNE: Instead, you have investors profiting off the traits, which also incentivizes the members of Congress to continue to make the trades because they, in fact, profit when other people invest.
WALSH: Payne worked at the Office of Congressional Ethics when some lawmakers trades triggered ethics investigations and the push for a new law. He says there's nothing illegal about ETFs, and both sides appear to benefit.
PAYNE: Investors who are following their trades end up giving the member of Congress almost this Midas touch where any stock pick they have turns to gold.
WALSH: Payne says it's because the current law's structure has fundamental flaws.
PAYNE: The STOCK Act never was going to completely get at the problem because it was more like an X-ray that would show where the issue is with the disclosure, but there was no treatment to actually get at the stock trades that the public does not like to see because it just appears to be a conflict of interest.
WALSH: There was momentum for bipartisan reforms to the STOCK Act around the 2022 midterms, but those efforts stalled. Some lawmakers in both parties say banning stock trading will be a disincentive for people to want to serve in Congress. RepresentUs, a nonprofit focused on anticorruption and democracy issues, saw the social media attention Unusual Whales was getting as it zeroed in on notable trades, so they decided to team up with the platform to make another push to overhaul the STOCK Act.
JOSHUA GRAHAM LYNN: To take the awareness work they were doing and put some real teeth behind it - we were happy to do so because it's going to take a lot of people power to create real change.
WALSH: That's Joshua Graham Lynn, the CEO of RepresentUs. He says members of Congress have information most investors don't have and write laws that could impact companies they're invested in.
LYNN: It would be like a member of an NBA team rewriting the rules of the game to favor their team and then the fans getting upset. Like, there's a reason that we don't allow players to bet on their own teams - 'cause it creates a huge conflict of interest.
WALSH: His group is pushing for the TRUST Act, a bill banning lawmakers, their spouses and dependent children from trading individual stocks. And he thinks the ETFs aren't a problem - they just underline the flaws in the current system.
LYNN: Let's go upstream a little bit. The problem is that members of Congress are able to make these trades. I don't think the problem is people calling attention to it and coming up with creative products to bring attention to it.
WALSH: The public attention on lawmakers' trading heightened back in 2020. North Carolina GOP Senator Richard Burr was investigated then by the Justice Department and Securities Exchange Commission. He chaired the Senate Intelligence Committee. He sold off a majority of his equity holdings in February 2020 after a classified briefing on the COVID-19 pandemic but before the public knew about the threat to the economy. Burr wasn't charged. Unusual Whales says a trading ban or even a new requirement saying lawmakers must disclose their trades just one day following their activity would bring more trust into Congress.
UNUSUAL WHALES: It may take another scandal, but I actually do think that it's going to be suggested by some member who will have enough people to kind of co-sponsor it onto the floor, and it'll have to be voted on.
WALSH: A ban on trading would wipe out the data used to market ETFs modeled on lawmakers' trading. So investors might lose an edge, but it could help build confidence in Congress as an institution.
Deirdre Walsh, NPR News, the Capitol.
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