Political intelligence poses a challenge for regulators because it doesn’t necessarily meet the “material nonpublic” standard for insider-trading claims, the Government Accountability Office said in a report today.
“The extent to which investment decisions are based on a single piece of political intelligence would be extremely difficult to measure,” the GAO said in the review mandated by the 2012 Stop Trading on Congressional Knowledge Act.
Lawmakers sought input from the GAO after removing a registration requirement for political-intelligence gatherers from the Stock Act, which banned lawmakers, their staffs and much of the executive branch from trading on confidential information they learn on the job. Scrutiny of such trading intensified after the 2008 credit crisis, when decisions in Washington moved share prices of banks and insurers.
The report shows “the dire need for transparency” in the political intelligence industry, Senator Charles Grassley, an Iowa Republican, and Representative Louise Slaughter, a New York Democrat, said in a joint statement.
“When a political intelligence professional is paid to gather inside information from congressional or agency sources that can be used to make investment decisions, that professional should have to register and disclose his or her activities to the public,” Grassley and Slaughter said in the statement. The two lawmakers said they plan to reintroduce their disclosure requirement proposal.
Insider-trading cases typically involve confidential information about a company, such as earnings or a planned merger, rather than policy information about an industry. Political-intelligence firms instead often bundle information with industry research and policy analysis, making it difficult to prove that a specific piece spurred an illegal trade.
“Even when a connection can be established between discrete pieces of government information and investment decisions, it is not always clear whether such information could be definitively categorized as material,” the GAO said. “Investors typically use multiple sources of information to influence their investment and business decisions.”
Such information may include conversations with lawmakers, staff or other government officials about the future of bills or regulations that haven’t been made public.
To conduct the study, the GAO conducted 34 interviews with entities including political intelligence firms, law firms and trade associations, as well as regulators including the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority.
SEC officials interviewed for the report said that such disclosure could help the agency police markets, according to the GAO. The SEC officials suggested political intelligence disclosure legislation could include the name of the filer’s former employer, dates of prior employment, and the dates of contact between the filer and government source.
The Stock Act defined political intelligence as information derived from direct communication with an executive branch employee, lawmaker or congressional staffer, and provided to a client who is using the information for investment decisions. Insider-trading laws also prohibit members of the executive and legislative branches from disclosing material nonpublic information derived from their positions for personal benefit.