Overview
Firms engaged in “political intelligence” activities may soon face new requirements, following a recent announcement by Senator Charles Grassley (R-IA) that he will once again push for legislation that requires disclosure of these activities. This is an issue that Senator Grassley has advocated for in the past, but now, as the chairman of the Judiciary Committee, he is seeking to breathe new life into the measure. The push for a legislative proposal will also call increased attention to allegations that the use of political intelligence may in certain cases amount to insider trading. As discussed in more detail below, those who utilize political intelligence firms, especially those in the financial services industry, should: (i) ensure their compliance policies and procedures address political intelligence activities; and (ii) prepare for possible investigatory letters from Senator Grassley. We expect Senator Grassley to move this proposal once introduced, and for it to gain bipartisan traction in both the Senate and the House of Representatives.
Background
During the 2012 debate over the Stop Trading on Congressional Knowledge (STOCK) Act, which reaffirmed that insider trading laws applied to Congress, Senator Grassley – along with Representative Louise Slaughter (D-NY) – advocated for inclusion of a provision that would have mandated disclosure of “political intelligence” activities, akin to the disclosure required under the Lobbying Disclosure Act (LDA). Even though the provision passed the Senate with 60 votes, during negotiations over the final version of the STOCK Act, the provision was dropped and the STOCK Act was signed into law with the only requirement being a General Accounting Office (GAO) study on the issue.
Senator Grassley was displeased and attacked the financial services industry. He was quoted in a February 2012 article in The Hill as stating: “It’s astonishing and extremely disappointing that the House would fulfill Wall Street’s wishes by killing this provision . . . If Congress delays action, the political intelligence industry will stay in the shadows, just the way Wall Street likes it.” He then sent investigatory letters to various entities, including the Securities Industry and Financial Markets Association (SIFMA) seeking information on political intelligence gathering activities. Meanwhile, the Securities and Exchange Commission (SEC) launched investigations of alleged insider trading by political intelligence firms.
The GAO report, released in April of 2013, found that it is extraordinarily difficult to define and quantify “political intelligence;” an argument that opponents of Senator Grassley’s amendment made back during the STOCK Act debate.
Disclosure and its Impact
Senator Grassley’s 2012 proposed provision would have amended the LDA to require registrations and disclosures for those entities that obtain, then sell political intelligence to other firms or individuals. In the 2012 provision, a “political intelligence contact” was defined as:
[A]ny 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 intended for use in analyzing securities or commodities markets, or in informing investment decisions, and which is made on behalf of a client with regard to—(i) the formulation, modification, or adoption of Federal legislation (including legislative proposals);
(ii) the formulation, modification, or adoption of a Federal rule, regulation, Executive order, or any other program, policy, or position of the United States Government; or
(iii) 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).
The provision was similar to subsequent versions of legislation introduced in the House, including in the Political Intelligence Transparency Act of 2014 (H.R. 5525). That act expanded the definition of political intelligence both substantively and in the scope of scenarios covered. More specifically, it included in the definition of political intelligence any information derived from a contact with a covered official that “is for use in analyzing the markets for securities, commodities for future delivery, swaps, or security-based swaps, or in informing investment decisions in any such market, and which is made on behalf of a client with regard to” categories (i) – (iii) listed above, as well as a new scenario, “the nomination or confirmation of a person for a position subject to confirmation by the Senate.” While Senator Grassley has not released his draft legislative proposal yet, it is likely to take on a similar construct and therefore be rather broad in its definition.
As a general matter, the aforementioned proposals would require registration of entities or individuals (called political intelligence firms or consultants) that make political intelligence contacts and conduct political intelligence activities, similar to how the LDA requires registration for entities and individuals that make lobbying contacts and conduct lobbying activities above a certain threshold of their time for a client.
Compliance Steps
First, even before any legislation is passed and signed into law, Senator Grassley and others who support the proposals may seek to advance their cause by sending out investigatory letters to both entities that seek and distribute political intelligence and firms that consume such political intelligence. As noted above, Senator Grassley already has sought information specifically from the financial services industry about the use of such information, and there is good reason to believe he will seek additional information.
Given that possibility, it is important for both firms who conduct political intelligence activities and who consume such information to be prepared to respond to such inquiries. Such letters can request an extraordinary amount of information in a limited window.
Additionally, the STOCK Act affirmed that insider trading laws apply to Congressional interactions, and the revival of the political intelligence proposals marks an appropriate time for firms to check their policies and procedures to ensure that interactions with government officials are adequately addressed. Specifically, entities that either make direct contacts with the government, or contract with lobbying or political intelligence firms should make sure their policies and procedures take into account political intelligence activities. As an example, both the insider trading and the lobbying sections of a firm’s compliance manual should address such activities. Further, any contracts with firms that will be conducting information gathering should explicitly note that the parties are not interested in receiving, nor shall seek, material non-public information. Doing so would reduce the risk of exposure to insider trading due to interactions with government officials.
Finally, moving forward, any legislative proposal on political intelligence will create additional compliance requirements. If a proposal is successful, those that may be captured by the disclosure regime will need to update their policies and procedures to take into account the mandates and the reporting requirements.
Conclusion
As the debate over political intelligence disclosure reemerges on Capitol Hill, it is important to note that even if a legislative proposal fails, insider trading laws are still in effect and incidents involving Congressional interactions are being investigated by the SEC. An entity that utilizes political intelligence firms or conducts information gathering itself should use this opportunity to both review its compliance manual and its policies and procedures to minimize any risk of insider trading. Further, firms should take appropriate actions to prepare for supporters of the legislative proposal to investigate the gathering and use of political intelligence.
