New York, NY – According to an article published in the Financial Times last week, US lawmakers have started to pressure the financial services industry to disclose how much they use political intelligence firms to access nonpublic information about developments in Washington DC.
Senator’s Request Info from SIFMA
Senators Chuck Grassley (R-Iowa) and Mark Udall (D-Colorado) wrote a letter last week to Securities Industry and Financial Markets Association (SIFMA) President, Timothy Ryan, asking him to provide a list of all members that have retained Political Intelligence firms, the names of those firms, and how much they have spent on Political Intelligence services since 2007.
Grassley and Udall have also asked SIFMA whether the trade association plans to support requiring registration for political intelligence firms. The two senators are asking for a response by July 25th.
“Leveraging ‘personal relationships’ for ‘confidential’ clients damages public trust in the political process and raises questions about the relationships political intelligence agents attempt to cultivate in Congress,” the senators wrote. “It is essential that we learn more about the gathering and dissemination of political intelligence.”
Industry / Legislative Background
The political intelligence industry, in which firms collect information and insight about what is going on with regulatory and legislative developments in Washington from political insiders for the purposes of helping clients make investment decisions, was an area of severe disagreement between the House and Senate during the negotiations about the Stop Trading on Congressional Knowledge (STOCK) Act.
The Senate version of the bill, which was narrowly passed, included language by Senator Grassley requiring political intelligence firms or consultants to register in a fashion similar to what lobbyists are required to do under the Lobbying Disclosure Act. This language, however, was removed from the House version of the bill by House by Majority Leader Eric Cantor (R-Va.), who described the measure as potentially overbroad. Instead, the House version of the bill, which was eventually passed by both chambers of Congress, included a study on the industry by the Government Accountability Office. At the time Grassley vowed to revisit the issue of registration for political intelligence firms.
A memo distributed by SIFMA the day after the Senate version of the STOCK Act passed characterized Grassley’s language as being “expansive” and “potentially extremely broad”. Certainly, it was clear to the team at Integrity Research that SIFMA (and its members) were worried that Grassley’s language would require sell-side investment banks to register as political intelligence firms — a development that would also require them to list the clients they provide this information or research to.
The Senator’s Rationale
Senator Udall explained the rationale for their letter, saying “Political intelligence firms use information normal taxpayers and investors do not have to benefit their clients on Wall Street. When it comes to betting on government policy, Wall Street should not be able to secretly buy insider information.”
Grassley added: “We’re inviting the financial services industry to explain its position on registration. Our country is stronger when information is public.”
While Integrity Research doesn’t have any real issues with registration in theory, we have a few main concerns with this push regarding transparency over political intelligence and potential registration.
The first is obviously the chill that these discussions have already had, and are likely to continue to have, over the demand for political intelligence services. Hedge funds, mutual funds, pension funds, sell-side investment banks, and other participants in the financial services industry have started reducing their use of political intelligence services as they perceive the threat increases that their names will show up in the newspaper in a negative light as users of these services. Consequently, boutique political intelligence or policy research firms have seen their businesses decline in recent months.
Readers should also know that political intelligence has become an extremely valuable part of the investment process as the US government becomes a larger and larger part of the US economy. It therefore seems rather strange to take steps to reduce or even eliminate this type of research as the individual investor whose pensions and other retirement assets are managed either directly or indirectly by these institutional investors will be directly impacted.
The third reason we are concerned with the current direction of the debate regarding political intelligence is that we see market participants potentially creating an unlevel playing field where some firms will be required to register while others, which do the exact same activities, will not be required to register. Both journalists and politicians have highlighted lobbyists, law firms, and other boutique research providers as the primary culprits who provide nonpublic information about upcoming regulations or legislation to hedge funds and other large investors.
However, most sell-side investment banks, regional brokerage firms, specialized media providers, and even many institutional investors themselves speak regularly with political insiders to collect information and insight which can then be used, either directly or indirectly, for investment purposes. Most of these firms even go so far as to set up face-to-face calls and meetings between investors and political insiders to discuss topics of mutual interest.
We think it is critical if registration is required of one group, then it should be required of all firms that are regularly engaged in the activity that is called political intelligence.
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