by Emilee Klein
The STOCK Act, which requires all senior government officials to release their investments, has a loophole: politicians do not have to release their trades of “pooled investment funds”—including mutual funds and exchange traded funds (ETFs)—on a periodic basis. The public only receives a yearly disclosure of these assets.
Where is the Crack? All Congressional investments must be disclosed annually. When looking at a financial disclosure of a member of Congress, you will see a list of assets, including Pooled Investment Vehicles like Mutual Funds and Exchange Traded Funds. The STOCK Act requires that stocks must be disclosed within a 30 to 45 day period of the transaction, which is called a Periodic Transaction Report. However, Section 14 of the stock act declares that periodic reporting requirements do not apply to widely held investment funds, which emcompasses mutual funds and ETFs.
Why it Matters: On the surface, Section 14 of the STOCK Act seems to encourage politicians to place their portfolio’s assets into Pooled Investment Vehicles to avoid bias. This made sense when Pooled Investment Vehicles were broad and divsered, but now ETFs are as concentrated as stock positions. For example, 49 representatives in the House cosponsored the Marijuana Justice Act of 2019, which would legalize cannabis, and many of them could own the AdviserShares Pure Cannabis ETF, a pooled investment vehicle that would greatly benefit from the legalization of cannabis.
Mutual Fund v.s. ETF: Mutual Funds are actively managed by a fund manager and can only be purchased or sold at the end of each trading day. Exchange Traded Funds are passively managed and are traded at any time, making them more liquid. Early mutual funds and ETFs were indexed on the S&P 500 or similar passive indices, so investors could buy into the market as a whole.
ETFs and Mutual Funds used to be far more broad: ETFs in particular have become more specific thanks to automation lowering their transaction costs and the diversification of the market. For example, Wisdom Tree, a well regarded fund manager, offers an equity ETF for just Japanese companies among other country-specific Pooled Investment Vehicles. For people interested in energy, Vanguard offers a sector ETF just for natural gas, oil and coal. There are even a variety of Bitcoin ETFs.
Example of Specific ETFs Leading to Conflicts: For example, last year former Senator David Perdue bought more than $250,000 of the Alerian MLP ETF, an ETF that invests only in natural gas and oil pipeline companies, even after he divested from most of his individual stocks. This ETF is indexed to energy and infrastructure commodities, so Perdue perhaps anticipated that the winner of the 2020 election would finally have to make “infrastructure week” a reality (Perdue voluntarily disclosed his ETF purchase). The ETF has gone up $10 a share from when FinePrint Data reported on his investments in 2020 Perdue bought it back in 2020.
The Take-Away: Most Congressional representatives already publish periodic disclosure, but this is completely voluntary. It’s unclear why Section 14 was included at all and why Pooled Investment Vehicles are not given the same scrutiny as stocks. However, the hole in the STOCK Act allows politicians to periodically hide personal investment activity for up to a year, enough time to influence policy for their own interest, without letting anybody else in on the action. Given that Pooled Investment Vehicles are now as specialized as individual stocks, they present the same conflicts and should be subject to the same disclosure requirements.