New York, NY – Last week, the Government Accounting Office released its long awaited report on the political intelligence industry. Unfortunately, the lack of clarity and insight in the report prompted some politicians to conclude that more disclosure is warranted from this industry, while a few regulators felt that increased transparency in the political intelligence business could help with government insider trading cases.
GAO Report’s Findings
The 34 page GAO Report on the Political Intelligence Industry that was released on Thursday, April 4th, 2013 did little to produce clarity about the political intelligence industry, but rather left the readers of the report more uncertain about how political intelligence is used, and just how prevalent it is in the US financial markets. The following two paragraphs from the report’s introduction do a good job of summarizing its key findings.
“The prevalence of the sale of political intelligence is not known and therefore difficult to quantify. The extent to which investment decisions are based on a single piece of political intelligence would be extremely difficult to measure. This is in part because a firm’s information is often bundled with other information such as industry research and policy analysis, and because the flow of information does not readily lend itself to quantification or ongoing documentation for the purpose of measuring industry activity. Investors typically use multiple sources of information to influence their investment and business decisions.
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 (would a reasonable investor find the information important in making an investment decision) and whether such information stemmed from public or nonpublic sources at the time of the information exchange (information has a higher value at a time when it is not widely known and thus has the potential to inform a profitable transaction). It is also difficult to determine the extent to which nonpublic government information is being sold as political intelligence. Specifically, it is not always possible to determine the timing of when nonpublic information becomes public. Representatives of most political intelligence firms interviewed said they have policies in place to ensure they do not knowingly sell material nonpublic information and potentially violate insider trading laws.”
Some Interested in More Transparency
A few felt that more transparency was clearly required from this rather opaque industry. Members of the Securities and Exchange Commission who were surveyed for this report felt that increased disclosure from political-intelligence firms of their activities would make it easier for the agency to enforce insider-trading rules.
“SEC officials told us that disclosure of more information could allow enforcement staff to identify relationships or make connections between the various individuals involved in an investigation of potential insider trading,” the report said.
In addition, two prominent lawmakers, Senators Charles Grassley (R., Iowa) and Rep. Louise Slaughter (D., N.Y.) felt that the report’s lack of insight was evidence that more disclosure of political intelligence firms’ activities was required.
“This report shows the dire need for transparency in the political intelligence industry, which profits from the cozy relationship between Washington, D.C., and Wall Street,” Grassley and Slaughter said in a joint statement.
Staffers of the two lawmakers say that they hope to introduce legislation shortly that would require political-intelligence firms to make more information public about their activities, including the possibility that these firms register much like lobbyists are required to do.
One version of the Stock Act, which was passed into law last year, required the political intelligence industry to report their activities to federal regulators. The House stripped these provisions from the bill due to arguments from House Majority Leader Eric Cantor (R-Va.) who said the disclosure requirement was written so broadly that it would have significant unintended consequences.
Biggest Hurdles for Meaningful Disclosure
The 34 page GAO report points out that even if Congress decided to require increased transparency for the political intelligence industry, a number of critical issues need to be addressed before such a regime could become a reality.
“Finally, if Congress chose to supplement existing guidance and laws with required disclosure of political intelligence information, the benefits (such as greater transparency) and costs (such as resources to administer) of disclosure would have to be balanced along with consideration of related practical and legal issues. For example, Congress would need to address the lack of consensus on the meaning of the terms “direct communication” and “investment decision” to provide clarity regarding the definition of political intelligence as well as guidance to specify the purpose of disclosure, who would be required to file, how often disclosures would be required, and who would manage the disclosure process.”
Robert Walker, a former chief counsel and staff director of the U.S. Senate and U.S. House of Representatives ethics committees, said the definition of political intelligence is “problematic” and “overly broad,” making regulation difficult. “The devil is in the definition,” he said.
Recent Fuel for the Disclosure Fire
However recent events could fuel for the fire to require increased disclosure from firms that provide political intelligence to investors.
On the afternoon of Monday, April 1st, 2013 independent policy research firm, Height Analytics LLC, sent an e-mail to institutional investor clients saying that Medicare rates, scheduled to be cut by 2.2% under an initial decision, would be unexpectedly raised by 3.3% instead. The e-mail led to a surge in the stocks of insurers such as Humana Inc. that participate in the Medicare program. Humana gets 66% of its revenue and 58% of its profit from Medicare Advantage.
In response to this development, Senator Charles Grassley wrote to the head of the U.S. Centers for Medicare and Medicaid Services demanding to be provided with a timeline of their decision to reverse the planned cut to rates Medicare pays insurance companies. Grassley asked the agency about anybody who might have been told of the news early, including the administration and members of Congress.
“This raises questions regarding political intelligence brokers’ ability to gather information from CMS in order to predict market moving events,” Grassley said in the letter. Past inquiries to Medicare have found the agency had “loose procedures for dealing with outside firms,” Grassley said in the letter.
Senator Grassley has asked for answers to his questions be provided by Tuesday, April 9, 2013, which is the same day that the Centers for Medicare and Medicaid Services’ acting commissioner, Marilyn Tavenner, is scheduled to appear before the Senate Finance Committee for a hearing on her nomination to permanently head the CMS.
Management at Height Analytics wrote in an e-mail response asking about its research note to clients regarding Medicare rates, “We are confident our April 1 report was based on good research, conducted in accordance with the laws, rules and regulations governing the securities industry.”
So in some senses, the 34 page GAO report released last week, didn’t really add much substantive knowledge to the debate about whether political intelligence firms should be registered like lobbying firms. Ultimately, the report made the case that the industry is extremely difficult to quantify and almost impossible to attribute specific investment returns to information provided by political intelligence firms.
However, this really won’t alter the debate as a few politicians planned to push for legislation regardless of the outcome of the report. What is particularly interesting is that the reason these politicians give for wanting this disclosure is that “We have a right to know who’s in the business of political information intelligence gathering like we have the right to know who lobbies Congress.”
The question we have is why are we discussing a disclosure requirement specifically for firms that provide information to people who professionally invest on it like hedge funds? Many corporations make extremely important decisions based on the information they collect about what is going on in Washington DC (including major financial and capital investments). Shouldn’t we track this type of activity? Also, any person who speaks to a political insider can also invest on the information they receive – even individual investors. These individuals can also become “tippers” of this information. Shouldn’t we be concerned about their activities? Requiring transparency of political intelligence can easily become a slippery slope.
In fact, we think the most important issue IS NOT the firms that collect political and legislative insight and who they provide this information to, but rather the people who provide this important or material information to the political intelligence firms in the first place. These sources need to learn to keep important material information confidential regardless of who they might be speaking to.
Ultimately, we think the primary motivation for requiring political intelligence firms to register is because politicians feel that professional investors, like hedge funds, are making unfair profits from material information about legislative and policy developments that regular investors don’t have access to. And while no one can quite put their hands on who is providing this information, or how investors are actually benefiting from this information, they feel that registration will enable them to better understand and manage this process in the future.