New York, NY – Last week, the Wall Street Journal broke a story about how the investment advice provided by a well-connected research firm specializing in Washington political developments, the Marwood Group, is being scrutinized by government regulators.
Background to the Story
According to the WSJ, Marwood recently received a subpoena from the SEC to provide e-mails and other documents regarding its call that the FDA would delay its approval of Amylin Pharmaceutical’s diabetes drug called Bydureon in the fall of 2010.
It is important to note that the SEC’s subpoena of Marwood is not an indication that the firm did anything wrong, but rather that it is part of the regulator’s broader investigation into whether there was improper trading surrounding the shares of Amylin Pharmaceuticals Inc. in 2010.
The consensus view on Wall Street at the time was that Amylin would easily receive FDA approval, and that the financial opportunity for Bydureon was huge. However, analysts at Marwood felt that FDA approval might be more difficult to obtain given various insights they had collected from their study of past FDA decisions, various public records, discussions with former FDA staff, and an analysis of the political pressure faced by the officials involved.
This led Marwood to issue a “Regulatory Update” on September 23, 2010 where they concluded that the FDA “may have a more difficult decision to make on Bydureon than is widely anticipated.” They added that an “internal debate at the FDA” could “impact the ongoing review” of Bydureon.
Over three weeks later, after the close of the market on Oct. 19, 2010, Amylin disclosed that instead of granting approval for Bydureon, the FDA had asked it to conduct further testing on the drug. As a result, Amylin shares plunged 46% in one day from $20.49 to just over $11.
Clearly, the clients who heeded Marwood’s research on Amylin either profited handsomely or limited their losses, while those who did not found themselves on the wrong side of this trade.
Concern about Political Intelligence Firms
This story did not make the news because of one firm’s rather fortuitous call on a healthcare stock. Rather, the SEC investigation into Marwood’s research reflects the public’s general concern over hedge funds’ use of rather secretive political intelligence providers.
As we have written in the past, political intelligence firms provide information or analysis about fiscal or monetary policy decisions, legislative developments, or regulatory actions to clients including hedge funds, mutual funds, pension funds, or corporate executives — all whose businesses are affected by what happens in Washington DC.
Many political intelligence firms are not regulated like broker-dealers or investment banks, nor do these research providers have to disclose their activities clients or fees like traditional lobbyists. This lack of transparency has prompted some in Washington, including Senator Chuck Grassley (R., Iowa) to seek to change the laws governing political intelligence providers.
Language seeking to require registration by political intelligence firms was eventually eliminated from last year’s STOCK Act due to complaints from many Republican lawmakers. The topic is currently being studied by the GAO in a report due to Congress in the spring.
Bigger Deal than You Might Think
Some, however, wonder what all the fuss is about as they conclude that the political intelligence industry is comprised of a small group of lobbyists and boutique research providers who specialize in setting up meetings in Washington DC, and collecting data and information from political insiders.
This, however, this really depends on how you define political intelligence. Certainly, political intelligence could be defined by the type of information or research the firm produces. We see this is an overly narrow view of the business. Rather, we define political intelligence as a type of research activity – one that can be conducted by any number of types of firms.
This is also why we argue that any new registration requirement for purveyors of political intelligence should apply to any firm that engages in political intelligence activities – including lobbyists, law firms, macro and policy research specialists, sell-side investment banks, and perhaps even some news agencies.
Of course, this broader definition for the political intelligence industry is not very popular as some would rather promote the unlevel playing field that would result if only lobbyists or boutique policy research specialists are required to be subject to any new law or regulation that might ensue.
While it is too early to tell what the SEC’s investigation into the Marwood Group’s extremely prescient call about the FDA’s approval of Amylin’s diabetes drug, Bydureon will reveal, it is clear that some feel extremely uncomfortable with the activities of political intelligence providers. Ultimately, this fact could eventually lead to new regulation of this industry.
However, we also wonder whether the current investigation also reveals a larger interest on the part of regulators to see whether hedge funds are investing on material nonpublic information that they are potentially obtaining from historically secretive political intelligence providers. We will have to wait and see if other investigations arise in this space.