New York, NY – Two weeks ago we wrote the first in a series of articles on the political intelligence industry (click here to access) which resulted from a breakfast panel held in Washington DC on the topic sponsored by First Street and Women in Government Relations. Today’s blog continues the discussion by addressing a number of important issues which were raised by the panel.
Users of Political Intelligence Services
One question that came up at the breakfast was “Who are the primary users of “political intelligence” services?” The obvious answer (at least in the eyes of Congress), is hedge funds, mutual funds, and other asset managers. However, this is only partially correct.
Institutional investors, like hedge funds, have become heavy users of political intelligence services over the past decade or so as they have come to the realization that legislative and regulatory developments can have a significant impact on the value of security prices and asset values.
One major catalyst that prompted a number of hedge funds to focus on political intelligence services was the asbestos trust regulation five or six years ago which hedge funds found to be a great way to play a handful of stocks such as USG Corp., W.R. Grace & Co. and Crown Holdings Inc. Every change in prospects for the bill had a direct impact on the stocks of these companies, giving an advantage to the hedge funds that got the information soonest.
Hedge funds such as Elliott & Associates, D.E. Shaw & Co. and Angelo Gordon & Co. joined lobbyists’ meetings with lawmakers starting in late 2003. They paid about $80,000 in annual membership fees to join a lobbying coalition, the Financial Institutions for Asbestos Reform, which advocated on behalf of financial institutions that owned large stakes in firms with asbestos liabilities.
Since then, hedge funds have used political intelligence services to successfully research other topics such as Internet gaming, Medicaid reimbursement, foreign ownership of U.S. ports, financial regulation, and corporate tax legislation.
However, most commentators have ignored the fact that public and private corporations have long relied on information provided by Washington policy research providers, lobbyists, consultants, and law firms to help them research and collect information on topics of importance to their businesses – whether this information is for their firms’ investments, strategic planning, or to inform other corporate decisions.
The Value of Political Intelligence
Clearly, the value of political intelligence services are extremely high, as measured by the profits made by investors or corporations that make decisions based on this information. Heather Podesta, of lobbying firm Podesta Pertners explained, “political intelligence has real value, being the first to know is hugely important and can mean hundreds of millions of dollars in one day.”
This value is also reflected in the general cost of political intelligence services, which can easily exceed $100,000 per annum for one provider. In the past, a few users of political intelligence services have been known to have budgeted more than $1.0 mln annually for both internal and external resources to collect and analyze this type of information.
The STOCK Act and Political Intelligence
The political intelligence industry came into the national spotlight late last year in the wake of the 60 Minutes expose on how some members of Congress from both sides of the aisle had profited by using privileged information without directly breaking any congressional rules. The national outcry to this broadcast led both the US House and Senate to push their own versions of the Stop Trading on Congressional Knowledge (STOCK) Act which would limit this type of activity.
However, both the original House and Senate versions of this bill also contained a provision requiring political intelligence firms to register with the House and Senate, much like lobbyists. Some in Congress, including Senator Chuck Grassley and Representative Louise Slaughter were extremely troubled by the fact that unregistered firms might be using Congressional nonpublic information to make financial transactions at the expense of the average investor. They added the registration language in their respective versions of the STOCK Act because they felt that enhanced disclosure of this industry was required.
Eventually, the final version of the bill that was signed into law eliminated the registration requirement for political intelligence firms, replacing this with a year-long study by the Government Accounting Office on the industry.
Even though the STOCK Act does not require political intelligence firms to register, the final bill will have an impact on providers and users of these services. Patrick J. Cave, the founder of lobbying firm and political intelligence provider the Cypress Group acknowledged that, “Congress got it right. The irony of it is that it’s a law that confirms a law — but that’s important.”
The STOCK Act confirmed that political insiders, including employees of the legislative and executive branches, have a duty of trust and confidence to the US Government and are therefore subject to all insider trading laws.
While some in Washington DC argue that this has always been the case, the STOCK Act clarified this issue, making it abundantly clear that passing on (tipping) or trading on material nonpublic information collected from legislators, regulators, or their staffs could give rise to charges of insider trading. This raises the stakes for political intelligence firms and their customers.
Should the Media Register as Political Intelligence?
One topic which was raise at the First Street panel was whether the media should be required to register as political intelligence providers if this were ever required. This issue elicited the most disagreement among the panelists.
Robert Walker of Wiley Rein LLP, indicated that registering media would have a “chilling effect” on sources and kill the news media’s best friend: the leak. “It would be too big of a price to pay.” However, others, including Pat Cave felt that many specialized media services that provide insight on regulatory and legislative developments in Washington specifically for professional investors like hedge funds and mutual funds “should not be exempt” from registering like lobbyists.
It is important that Congress be careful not to “pick winners and losers” in the political intelligence industry by forcing some firms to register (like lobbyists, law firms or boutique policy research firms), while allowing other firms that functionally do the same things (like specialist media services or sell-side brokerage firms) to escape any future requirements to register as political intelligence firms.
It is clear from the panel discussion held a few weeks ago that participants in the political intelligence industry need to take an active role in accurately defining the industry, as well as cogently spell out the benefits of the business to corporations, investors, political insiders, and average Americans. In addition, industry players need to be involved in informing and shaping the public dialogue about important issues that could impact their business including the potential need to register. While the political intelligence industry is, in many ways, an immature sector, it is obvious that the firms that will survive and thrive in the future, are those that are most committed to professionalizing their businesses.