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
Sep 26, 2019: Juul accepts proposed ban on flavored vaping products as its CEO plans to step down
Apr 18, 2019: Tobacco stocks move lower after Mitch McConnell unveils bill to raise legal age to 21 vs. 18
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: Daily fantasy sports permitted to operate in New York again
Nov 17, 2015: NY attorney general seeks halt to daily fantasy sports in state
Sep 23, 2015: Hotel workers in D.C. propose some of the strictest Airbnb regulations in the country
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
Jun 30, 2014: New York Towns Can Prohibit Fracking, State’s Top Court Rules
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
- 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.