STOCK Act irks Wall Street’s tipsters

The lucrative market for political intelligence that runs from Washington to Wall Street could be more fully exposed by insider-trading legislation that is moving quickly through Congress. 

Lobbyists and operatives are bristling at a provision in the Stop Trading on Congressional Knowledge (STOCK) Act that would require many traders of political intelligence to register for the first time under the Lobbying Disclosure Act (LDA).

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Observers say the intelligence trade is rapidly growing into a multimillion-dollar industry, powered by clients at hedge funds and other financial firms that can turn a tidy profit on the inside dope about the workings of Congress.

“They don’t want to impact the outcome. They want to know how it is going to play,” said a person who works in the industry. “You can trade it on either side.”

The disclosure provisions in the STOCK Act could put a crimp in the industry by revealing for the first time the true extent of the practice — and who’s engaged in it. 

“Having a lobbyist tell that information to a hedge fund is actually called tipping. You would go to jail for it,” said Michael Mayhew, the chairman and global director of research for Integrity Research Associates, referring to the bill’s restrictions on insider information. 

“I actually do think that if the STOCK Act passes, that the divisions of lobbyists and law firms that provide this kind of information is likely to shrink for just that reason.”

Mayhew said the expanded disclosure would also decrease the value of the information about legislative and regulatory moves in Washington.

“The moment that information becomes commoditized, it has lost all its value,” he said.

Wall Street is beginning to take notice. On Saturday, the Securities Industry and Financial Markets Association (SIFMA), a powerful lobbying group for banks and traders, held a hastily arranged conference call with members to discuss the STOCK Act, according to an email obtained by The Hill.

“Dear Gov Reps –,” wrote Matt McGinley, SIFMA’s managing director of federal relations, in the email Saturday morning. “One of our member firms identified a provision in the recently passed Senate STOCK Act that could apply certain registration requirements to research analysts. … Apologies for the late notice, but this issue was just identified late in the day yesterday and the legislation is moving very quickly.”

Included with the email was a memo written by lawyers at Wiley Rein, who were also scheduled to be on the call.

That memo, dated Feb. 3, warns the STOCK Act’s definition of what constitutes a “political intelligence contact” is “potentially extremely broad” and could require research analysts to register as lobbyists.

“Even the routine activities of research analysts would appear to fall within the covered scope of this definition insofar as these activities include contacting a covered executive branch or legislative branch official and using information derived from such contact in analyzing the securities or commodities markets,” the memo says.

The memo suggests “some potential ‘fixes’ ” for the bill, such as limiting “the broad scope of ‘political intelligence contact’ through further exceptions, including, for example, for ‘routine research activities.’ ”

A spokesman for SIFMA said the group is concerned the bill would have a much broader impact than intended.

“We have a number of concerns over the drafting of this bill and its breadth, which seems to end up impacting people that it was never intended to, including those well beyond our industry,” said Andrew DeSouza, a SIFMA spokesman.

The Washington law firm Covington & Burling blasted out a notice to clients Monday warning the STOCK Act would apply to many in the financial industry who aren’t currently covered by the LDA.

“Hedge funds, private equity funds, and investment advisers (many of which are not currently registered under the LDA) might now be required either to register or to alter their business practices to avoid the need for registration,” Covington & Burling wrote in the notice. 

“Moreover, the reach of the law, if enacted, would likely extend far beyond the financial services sector. For example, a company that seeks to gather information from covered federal officials regarding the likely congressional or regulatory reaction to a proposed merger or acquisition might be required to register.”

If lobby firms and financial companies want to block the STOCK Act, they’ll have to move fast. The bill gained momentum after a November “60 Minutes” report that alleged insider trading by congressional leaders, and was touted by President Obama in last month’s State of the Union address.

The bill cleared the Senate Thursday in an overwhelming 96-3 vote. The House will vote Thursday on the Senate-passed version of the bill, according to a House leadership aide.

The disclosure provision for political intelligence wasn’t originally in the STOCK Act that hit the Senate floor. Instead, Sen. Joe Lieberman (I-Conn.), chairman of the Senate Homeland Security and Governmental Affairs Committee, included a provision that would have required the Government Accountability Office (GAO) to study the political intelligence industry.

On the floor, Sen. Chuck Grassley (R-Iowa) added the disclosure provision as an amendment.

Lieberman voted against Grassley’s amendment and has concerns about it. Leslie Phillips, communications director for the Homeland Security panel, said Lieberman is “considering his options.”

“The senator’s position is that before we go legislating on this issue, we should understand it better,” Phillips said. “We don’t know anything about it. We don’t know who or what information would be covered and it potentially raises First Amendment questions.”

Some in political intelligence agreed with Lieberman’s more cautious approach.

“Let the GAO study it and answer some of the very complex questions first,” said a political operative with ties to the industry.

On Thursday, Mayhew and watchdog groups gave a briefing to congressional aides on the size and scope of the political intelligence industry. A presentation prepared by Mayhew’s firm pegged the value of the global market for policy research and political intelligence services at roughly $402 million in 2009.

In the same presentation, Mayhew’s firm estimated there are 30 to 50 firms that provide political intelligence services, alongside 41 independent research firms. Some of K Street’s biggest names were listed as purveyors of the intelligence trade, including Patton Boggs, Akin Gump Strauss Hauer & Feld and Cassidy & Associates.

“Akin Gump does not maintain a political intelligence practice and has no employees specifically dedicated to this activity. The firm does, however, provide opinions and information on legislative and regulatory developments on a case by case basis as requested by clients,” said a firm spokesman.

Gregg Hartley, vice chairman of Cassidy & Associates, said his firm does provide political intelligence as part of its client services.

“There has been a growth of clients that don’t want us to lobby at all but they do want to be kept highly informed of what’s going on,” Hartley said. “They want to be ahead of the competition. They want an early warning.”

A partner at Patton Boggs declined to comment.

Hartley said his firm does have one political intelligence client, a private-equity fund, that’s not disclosed under the LDA. But he said information gathered by the firm was public information.

Hartley said Cassidy is ready to comply with increased disclosure if that is what Congress deems necessary.

“Congress will do what they do. We will adapt and move forward,” Hartley said. “We would have no problem disclosing more.”