The collection and use by financial firms of non-public information derived from Congress and federal agencies – commonly referred to as "political intelligence" - has been receiving some significant scrutiny from the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) lately. This type of information gathering is similar to lobbying, but does not currently trigger registration or disclosure requirements under the Lobbying Disclosure Act. Although Congress has defined political intelligence and is considering pending legislation to regulate and require disclosure of this activity, there are currently no federal laws or ethics rules that specifically govern the gathering of political intelligence. In general, political intelligence is a poorly understood and unregulated activity that can prove problematic for individuals and firms that provide it without an adequate understanding of insider trading laws.

The Stop Trading on Congressional Knowledge Act (STOCK Act) of 2012, which expressly applies insider trading laws to members of Congress and their staff, defined "political intelligence" as information:

  1. Derived by a person from direct communications with an executive branch employee, a Member of Congress, or an employee of Congress
  2. Provided in exchange for financial compensation to a client who intends, and who is known to intend, to use the information to inform investment decisions

Under certain circumstances, political intelligence may be considered material, non-public information.

GAO Report

The STOCK Act required the Government Accountability Office (GAO), with assistance from the Congressional Research Service (CRS), to prepare a 2013 report on political intelligence activities. This report identified current regulatory gaps and was widely viewed as a possible prelude to legislation to regulate and require disclosure of political intelligence activities.

Pending Legislation

In March 2016, Senator Grassley (R-IA) introduced S. 2738, the Political Intelligence Transparency Act of 2016 and Congresswoman Louise Slaughter (D-NY) introduced a House companion bill. It is unlikely either bill will be enacted prior to the end of the current Congress. Both bills would amend the LDA to require the disclosure of political intelligence activity and both bills define "political intelligence activities:"

(17) POLITICAL INTELLIGENCE ACTIVITIES.—The term 'political intelligence activities' means political intelligence contacts and efforts in support of such contacts, including preparation and planning activities, research, and other background work that is intended, at the time it is performed, for use in contacts, and coordination with such contacts and efforts of others.

(A) DEFINITION.— The term 'political intelligence contact' means any oral or written communication (including an electronic communication) to or from a covered executive branch official or a covered legislative branch official, the information derived from which is for use in analyzing the markets for securities, commodities for future delivery, swaps, or security-based swaps, and which is made on behalf of a client with regard to—

 

  1.  the formulation, modification, or adoption of Federal legislation (including legislative proposals);
  2.  the formulation, modification, or adoption of a Federal rule, regulation, Executive order, or any other program, policy, or position of the United States Government;
  3.  the administration or execution of a Federal program or policy (including the negotiation, award, or administration of a Federal contract, grant, loan, permit, or license); or
  4.  the nomination or confirmation of a person for a position subject to confirmation by the Senate.

Enforcement Activity

The DOJ and the SEC, for which insider trading remains a top priority, are not waiting for new authorities from Congress in order to pursue political intelligence cases. In June 2016, the U.S. Attorney for the Southern District of New York and the SEC announced insider trading charges involving non-public information obtained from the Food and Drug Administration. In November 2015, the SEC announced a $375,000 penalty from a political intelligence firm. In a separate case, also in November 2015, a federal judge ruled that the House Ways & Means Committee must cooperate with SEC investigators probing political intelligence activities. The Ways & Means Committee was granted a stay in December of 2015 order to pursue an appeal citing unresolved issues related to the Speech & Debate Clause of the U.S. Constitution.