New York, NY – Last week, the Stop Trading on Congressional Knowledge (STOCK) Act passed in the Senate with a 96-3 vote. The bill would ban members of congress and the executive branch from insider trading based on information collected while on the job. In addition, the bill mandates that individuals or firms that collect political intelligence from political insiders for investment purposes must register the way that lobbyists do. This bill is likely to have a major impact on the firms that provide policy research and political intelligence services to investors.
The STOCK Act
While members of Congress are already subject to insider trading laws, it has historically been unclear whether this applies to non-public information obtained from pending legislation or other policy deliberations accessed by members of Congress, congressional staff, or other employees of the executive branch. The STOCK Act attempts to widen traditional insider trading rules to address this nonpublic information. The bill passed by the Senate last week includes the following:
- Members of Congress and their staffers are banned from trading stocks, futures, or swaps based on material non-public information relating to any pending or prospective legislation obtained as a result of that person being a member or employee of Congress, or information obtained from any member or employee of Congress.
- Members of Congress and their staff are required to report all trading activity above $1,000 in stocks, bonds, futures, or other securities within 30 days after the purchase, sale, or exchange of these securities.
The following are a few of the most noteworthy amendments to the original bill which were voted on and passed by the Senate.
- The 28,000 government workers in the executive branch were added to the bill, including the president, vice president and members of the Federal Reserve Board.
- All individuals or firms that collect and sell access to “political intelligence” intended for investment purposes must register as lobbyists.
- All members of the Senate would have to post their annual financial disclosure statements online instead of making only paper copies available on request.
- Representatives convicted of committing a felony while serving as elected officials will lose their pensions. In addition, all congressional pensions of former representatives convicted of corruption while serving in any elected capacity would be forfeited.
- Various loopholes in anticorruption laws would be closed, including increasing sentencing for corruption cases. In addition, investigators and prosecutors would be granted more time to go after corruption, and clears up language that could be ambiguous or create further loopholes.
- Congress and the Executive Branch would be required to disclose mortgage information on their residences, including the mortgage holder, date, range, and interest rate.
- All bonuses for senior executives at Fannie Mae and Freddie Mac while the agencies are in conservatorship would be prohibited.
- Trades in mutual funds would be removed from the STOCK Act requirements.
Registration of Political Intelligence Providers
One amendment to the STOCK Act bill passed by the Senate which we believe could have a significant impact on the research industry was proposed by Senator Chuck Grassley (R-Iowa). Initially, the Senate bill called for a GAO study on the political intelligence industry, whereas the House bill, H.R. 1148, required registration of these firms.
Grassley’s amendment requires that individuals or firms involved in contacting any covered executive branch or legislative branch employee to obtain information on pending federal legislation, regulations, policies, or other positions of the US Government that is intended to be used in analyzing securities or in informing investment decisions on behalf of clients must register as lobbyists.
In our opinion, this will mean that both independent and sell-side providers of policy research, and lobbyists, law firms and consulting firms that collect information from political insiders will be required to register as “political intelligence” firms. This is because all of these firms source information from covered executive or legislative branch employees, and they provide either the information, or analysis based on this information, to clients to inform their investment decisions.
“Political intelligence professionals aren’t considered lobbyists, so they don’t have to disclose that they’re seeking information and are paid for it” when they meet with elected officials or staffers, Grassley said in a statement. “As a result, members of Congress and congressional staff have no way of knowing whether such meetings result in information being sold to firms that trade based on that information. My amendment would shed sunshine on this kind of political intelligence gathering.”
According to research conducted by Integrity Research Associates, the global market for policy research and political intelligence services totaled $402 million in 2009. This includes an estimated $120 million that buy-side investors spent on policy research produced by independent research firms; $246 million that investors paid for sell-side generated policy research (typically bundled in equity commissions); and $36 million that institutional investors paid to lobbyists, law firms, consultants, and others for political intelligence services.
“You have a growing industry with no transparency,” Sen. Grassley said in a statement. “If a lobbyist has to register in order to advocate for a school or church, shouldn’t that same lobbyist have to register if they are seeking and getting inside information to make a profit on? This is especially true if that information would make millions for a hedge fund or a private equity firm.”
Consequences of this bill
It is our view that the STOCK Act could have a significant impact on providers of policy research and political intelligence services for a number of reasons. A few of these reasons include:
The STOCK Act passed by the Senate clearly establishes a duty of “trust and confidence” for members of Congress, their staffers, and employees of the Executive Branch regarding non-public information about pending federal legislation, regulations, policies, or other positions of the US Government. Consequently, individuals or firms that provide nonpublic information from these sources to investors that is deemed to be material could be found guilty of tipping material non-public information. Investors who trade on this information could be seen to be guilty of insider trading.
We suspect that the passage of the STOCK Act will decrease buy-side investors’ interest in collecting potential MNPI from political insiders. As a result, we would not be surprised if “political intelligence” services provided by lobbyists, law firms, and consulting firms will decline in importance. However, we believe investors will continue to value policy research firms which provide an objective analysis of legislative, regulatory, treasury, and monetary policy developments and what sectors or industries they are likely to impact.
We also would not be surprised if the passage of the STOCK Act will force all policy related research firms to implement more stringent compliance policies to control the way they collect information, and institute procedures to keep MNPI from being passed on to their clients.
The registration of firms that are involved in political intelligence activities will also exacerbate investors’ concerns about hiring lobbyists, law firms, or consulting firms to find out what is likely to take place in Washington DC. We don’t think hedge funds will want to share who they have hired and how much they are paying to collect information from political insiders.
Consequently, we believe that the eventual passage of the STOCK Act could have a significant impact on firms that provide policy research and political intelligence services. Not only will this bill reduce clients’ interest in receiving potential MNPI from political insiders, we think it will also force traditional policy research firms to adopt more rigorous compliance policies to protect their clients.