What is Legislative risk?

One of the objectives of government is to protect its citizens from harm, both financial and physical. Legislative risk is the chance that the government will pass a law making the activities of a corporation you have an investment in illegal or very expensive to conduct.

How this risk plays out in the real world

Oct 03, 2021: Powell said the Fed has no plans to ban crypto
Sep 24, 2021: China’s central bank says all cryptocurrency-related activities are illegal, vows harsh crackdown
Sep 11, 2021: NY state to ban the sale of new gas-powered cars and trucks by 2035
Sep 23, 2020: California bans new internal combustion engines, starting in 2035
Oct 11, 2019: California bans private prisons and immigration detention centers
Sep 26, 2019: Juul accepts proposed ban on flavored vaping products as its CEO plans to step down
Apr 18, 2019: McConnell and Kaine unveil bill to raise tobacco age to 21
Apr 17, 2019: Health Stocks Crumble as Fears of ‘Medicare for All’ Snowball
Oct 12, 2018: FDA threatens to ban sales of some new e-cigarette products
Sep 15, 2017: Bitcoin value plummets after China orders trading in currency to cease
Oct 21, 2016: Cuomo signs bill that deals huge blow to Airbnb
Aug 22, 2016: FanDuel, DraftKings allowed to resume operations in New York
Nov 17, 2015: NY attorney general seeks halt to daily fantasy sports in state
Feb 10, 2015: The $46 billion payday lending industry is in for a big blow
Aug 27, 2014: Senate Dems call for powdered caffeine ban
Jul 01, 2014: New York State Court Rules That Towns Can Ban Fracking
Apr 29, 2014: Users upset over e-cigarette bans in New York City, Chicago
Dec 01, 2013: CFPB Reaches $14 Million Settlement With Payday Lender
Oct 23, 2012: Monster Beverage Under Fire As Reports Link Deaths To Its Energy Drinks
Apr 15, 2011: U.S. Government Moves To Shut Down World’s Biggest Online Poker Companies
Aug 11, 2010: Arizona becomes 17th state to end payday loans

Connection to other risks

This risk relates to Country risk.  Governments in some countries believe that they don’t have any limits. At least in the U.S. we believe that government actions to restrict certain activities will be reasonable and justified.

How investors can manage Legislative risk

  1. Don’t invest in corporations whose activities are shady and which are already under criticism from consumer advocates because of what they do.

A final word

With the recent push to legalize marijuana and online gambling, it appears that governments are welcoming products and services that can cause physical and financial harm! A great exercise would be to explore why governments are loosening the reigns in these areas.