In the past few weeks, news stories have highlighted that regulators are continuing to scrutinize the leaking of valuable information regarding health care policy on Capitol Hill – a development that could have had a bearish impact on the political intelligence business.
House Staff Under Investigation
Recently the SEC and federal law-enforcement officials have been reportedly trying to obtain records from the House Ways and Means Committee and a top congressional health-care aide about whether congressional staff tipped off hedge funds about an April 2013 change in healthcare policy.
Separately, the Justice Department issued a subpoena to Brian Sutter, staff director of the committee’s health-care subpanel, to compel him to testify before a federal grand jury at the U.S. District Court for the Southern District of New York related to criminal and civil investigations into this matter.
Late last week, the SEC took the unusual step of going to federal court in an effort to enforce the subpoenas it issued to the House Ways and Means Committee and Mr. Sutter to turn over documents and information in the case. In its court filing, the SEC said the healthcare aide “may have been” the source for the information at the heart of its long-running insider-trading investigation.
So far the house has refused to comply with the subpoenas, arguing that they “run seriously afoul of the Constitution’s Speech or Debate Clause”, and that they were vague and overly broad. The SEC disagreed with the House’s objections. U.S. District Judge Paul Gardephe ordered representatives of the House committee and Mr. Sutter to explain why they refused to comply with the subpoenas by June 26th and to appear at hearing on July 1st on the matter.
While federal agencies have occasionally subpoenaed Congress in the past, it is highly unusual for an agency to actually sue Congress to comply with their subpoenas.
Hedge Funds Scale Back Washington Info Gathering
The most recent tussle between the SEC, DOJ and Congress is reflective of broader regulatory scrutiny into how hedge funds obtain nonpublic information about Washington policy moves to enhance their trading profits.
The most recent case has taken place in response to the passage of the 2012 STOCK Act, which clarified that employees of the government are barred from providing nonpublic information obtained as a result of their jobs to others who can benefit by trading on this information.
Rob Walker, an ethics lawyer and former congressional-ethics attorney, explained the reason why many asset managers have become nervous by these developments, “The SEC is trying to make a test case, and you don’t want to be it.”
In response, many hedge funds and other asset managers have either eliminated or dramatically reduced their use of Washington policy research, lobbying firms, or other sources of potentially risky “political intelligence” information.
As a result, many lobbying firms or traditional research providers that have historically provided this type of information and analysis have found that demand for their services have decline sharply in the last few years – prompting some of them to scale back or shutter their operations altogether.
Some Research Firms Transform
However, a few research firms have responded to these market pressures by changing the way they collect information in Washington. One such firm is VogelHood Research which has developed a data-driven quantitative approach to analyze how potential legislative and regulatory actions might impact investment decisions.
Alex Vogel, one of the founders of the new research firm, was formerly a lobbyist who had built a successful business providing investors with insight about Washington policy developments which could have a significant market impact.
Vogel explained the reason for making the shift, “The market has been demanding the change. The combination of dramatically increased access to data via growth in transparency, and the increased compliance burden on the old access model made the change obvious to us.”
Instead of collecting information from conversations with congressional aides, agency officials, or other lobbyists, VogelHood Research has developed quantitative models which produce policy predictions based on the growing availability of public data, such as campaign donations, lobbying expenditures, congressional voting records, and polling data.
We expect that the fight between regulators and Congress will continue in the months to come as the SEC continues its investigation into government leaks of a change in healthcare policy which led to significant investment gains by a number of well-heeled investors.
In addition, we suspect that many hedge funds will limit their use of lobbyists and policy research firms to collect information on potential market moving policy changes for fear that they could get caught up in a “test case” brought by federal law enforcement officials.
Consequently, we would not be surprised if some lobbying firms or research providers that collect traditional political intelligence information either scale back their businesses, or like VogelResearch, change the way they collect information and produce their research insights.