Political Intelligence: Financial Market Value of Government Information Hinges on Materiality and Timing
Published: 2013-04-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Companies and individuals use political intelligence to understand the potential effects of legislative and executive branch actions on business, finance, and other decisions. The STOCK Act of 2012 directed GAO to report to Congress on the role of political intelligence in the financial markets. GAO reviewed (1) the legal and ethical issues, if any, that may apply to the sale of political intelligence; (2) what is known about the sale of public and nonpublic political intelligence, the extent to which investors rely on such information, and the effect the sale of political intelligence may have on the financial markets; and (3) any potential benefits and any practical or legal issues that may be raised from imposing disclosure requirements on those who engage in these activities.
To answer these objectives GAO examined federal guidance including Securities and Exchange Commission Rule 10b-5 (related to insider trading), federal disclosure models including the Lobbying Disclosure Act, the Investment Advisers Act, and the Federal Election Campaign Act; and the extent to which data existed to measure the size of the political intelligence industry. GAO also interviewed individuals at political intelligence, media, financial services, and law firms; trade associations; advocacy organizations; and executive and legislative branch officials. Interviewees were selected based on research on the political intelligence industry, their experience with these activities and referrals.
section_title: What GAO Found
paragraphs: The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 specifically defines political intelligence as information that is "derived by a person from direct communications with an executive branch employee, a Member of Congress, or an employee of Congress; and 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." While no other laws or ethics rules specifically govern political intelligence activities, securities laws and executive and legislative branch ethics rules and guidance do provide guidelines for government officials to protect material nonpublic information (e.g., information that has not been disseminated to the general public or is not authorized to be made public). For example, insider trading laws apply to both the executive and legislative branches and prohibit the disclosure of material nonpublic information derived from employees' official positions for personal benefit.
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.
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.
section_title: What GAO Recommends
paragraphs: GAO is not making recommendations in this report.

section_title: Letter
paragraphs: Companies and individuals use what has been called “political  intelligence” to understand the potential impact of legislative and  executive branch actions on business, finance, and other decisions. The  financial market value of government information hinges on materiality  (i.e., would a reasonable investor find the information important in making  an investment decision) and timing (i.e., information has a higher value at  a time when it is not widely known and thus has the potential to inform a  profitable transaction). The Stop Trading on Congressional Knowledge  (STOCK) Act of 2012, defines political intelligence as information that is  “derived by a person from direct communication with an executive branch  employee, a Member of Congress, or an employee of Congress; and  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.”
Generally, public information is information that has been disseminated to the general  public, and nonpublic information is information that has not been disseminated to the  general public or is not authorized to be made public. considered for any potential disclosure model developed for political  intelligence. We selected three laws that require the filing of disclosure  reports: the Lobbying Disclosure Act (LDA), the Investment Advisers Act,  and the Federal Election Campaign Act. These models were selected  based on a database search of other disclosure models to ensure their  potential applicability, as well as suggestions from external parties such  as congressional staff and officials at regulatory agencies. To seek  economic data on the size of the political intelligence industry, we  searched for political intelligence in the industry classification systems  used by federal statistical agencies to collect economic data on U.S.  business establishments, the North American Industry Classification  System and the Standard Industrial Classification system.
We conducted 34 semi-structured interviews with entities including  political intelligence firms, law firms that conduct political intelligence,  legal experts who specialize in the LDA, securities law or ethics laws; a  media organization; trade associations representing both pension funds  and businesses; a financial services firm; non-governmental citizen  advocacy or protection organizations that cover public policy issues such  as government transparency and openness; an academic researcher  specializing in law reform efforts focused on securities fraud; and  regulatory bodies including the SEC, Commodity Futures Trading  Commission, and Financial Industry Regulatory Authority. We selected  these entities and individuals based on database searches using key  terms related to political intelligence and referrals from firms we  interviewed. The semi-structured interviews with these firms and  individuals included questions about the nature of the services they  provide; their processes for gathering and disseminating information; the  types of clients they represent; their understanding of terms such as  lobbying, political intelligence, and policy research; legal and ethical  issues related to potential political intelligence disclosure requirements;  existing statutes and regulations that cover political intelligence activities;  and potential benefits and practical issues that could be raised by  imposing disclosure requirements on those who engage in political  intelligence activities.
In addition, we conducted interviews about political intelligence with three  individuals with broad public policy experience, two of whom were former  government officials. We also met with staff from the Senate and House  Committees on Ethics to discuss the laws and ethics rules for protecting  government information and corresponded with the Office of Government  Ethics. We consulted with the Congressional Research Service and the  National Academy of Public Administration as we conducted our work.
We identified two illustrative examples of the use of government  information linked to investment decisions. We used these examples, one  involving actions in the legislative branch and another in the executive  branch, to frame discussions with executive and legislative branch staff  regarding the guidance, policies and procedures in place for protecting  and disseminating information that could be defined as political  intelligence. In the first example, a longtime congressional debate about  legislation regarding the Asbestos Trust Fund litigation led to an instance  in 2005 where investors profited prior to an asbestos liability speech on  the floor of the Senate. Administration (FDA) chemist used material nonpublic information to  make stock trades (i.e., insider trading). We selected these two  examples based on referrals from external parties interviewed for this  report, a database search of political intelligence cases with the potential  to illustrate the protection and dissemination of government information,  and individuals with expertise in matters related to these issues. For  these cases we reviewed relevant legal documentation and executive and  legislative branch guidance on protecting information. In addition, we  interviewed executive branch officials from the FDA and a congressional  staff member about current policies and procedures in place for protecting  government information.
In the second example a Food and Drug  We conducted this performance audit from April 2012 to April 2013 in  accordance with generally accepted government auditing standards.
There are no published reports finding wrongdoing by any of the parties in the 2005  Asbestos Trust Fund litigation case.
Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. For more details on our  methodology, see appendix I.
subsections: section_title: Background
paragraphs: The STOCK Act includes several provisions affecting executive and  legislative branch employees. For example, the Act makes clear that  executive branch employees, Members of Congress, and employees of  Congress are not exempt from insider trading prohibitions under  securities laws. In addition, the STOCK Act requires that certain financial  disclosure forms be made available to the public via official websites,  and that some financial transactions that exceed $1,000 be filed within 30  to 45 days for certain executive and legislative branch employees, as well  as Members and employees of Congress.
Generally, government information can be characterized as public or  nonpublic and material or nonmaterial. The definition of political  intelligence in the STOCK Act includes public or nonpublic and material or  nonmaterial information. Political intelligence information can be collected  through briefings, meetings, committee hearings, public or non-public  documents, personal conversations, and other communications between  an employee of a political intelligence firm and an executive branch  employee, a Member of Congress, or a legislative branch employee. The  following examples describe two instances where individuals used  government information to make investment decisions. These examples  provide context for understanding the potential use of political  intelligence.
section_title: No Laws or Ethics Rules Specifically Govern Political Intelligence Activities, But Existing Laws and Ethics Rules Apply to the Misuse of Nonpublic Information
paragraphs: There are no laws or ethics rules that specifically govern the sale of  information by a political intelligence firm. However, as illustrated in figure  3 and the discussion that follows, there are laws and ethics rules that may  govern the purchase and sale of material nonpublic information in the  executive and legislative branches, and ethics rules that govern nonpublic  information in the executive and legislative branches of government.
Executive branch employees, Members of Congress, and their  employees and staff are subject to ethics rules and insider trading  prohibitions. The STOCK Act affirmed that executive branch employees,  Members of Congress and their employees are not exempt from insider  trading prohibitions and that a duty of trust and confidence is owed to the  Congress, the government, and the citizens of the United States. Insider  trading prohibitions stem from Section 10(b) of the Securities Exchange  Act of 1934 and SEC Rule 10b-5, as well as a long line of judicial  decisions.existence and nature of the duty being breached and both the materiality  and nonpublic nature of the information. If material nonpublic  governmental information is improperly disclosed to a political intelligence  professional in breach of a duty, and that professional sells the  information to an investor who trades based on the information, then the  government employee or Member of Congress, the political intelligence  professional, and the investor could all be liable for potential insider  trading violations. According to SEC officials, any party may defend  against a claim of insider trading by arguing that the information lacked  materiality, the information was public, there was no breach of duty, or  there was no act of bad faith. With regard to the legislative branch,  attorneys we interviewed for this report explained that Members of  Congress may also be able to assert the Speech or Debate privilege of  the U.S. Constitution as a defense to any potential charge of insider  trading. Such a defense would be based on the principle that the  information being shared constituted a legislative act—an integral part of  the deliberative and communicative processes by which Members  participate in legislative activities. To date, according to the SEC, no  Members of Congress have been prosecuted for insider trading based on  material nonpublic information learned in the course of their work in  Congress under Section 10(b) or Rule 10b-5.
SEC investigates cases of insider trading by examining the  Guidance issued by the House of Representatives Committee on Ethics  defines material nonpublic information as any information concerning a  company, security, industry or economic sector, or real or personal  property that is not available to the general public and which an investor  would likely consider important in making an investment decision and is  not widely disseminated to the public. Senate ethics rules also define  nonpublic information as confidential or not widely disseminated to the  public. Both the House and the Senate ethics committees may impose  penalties other than ones allowed under securities laws.
Executive branch employees are prohibited from using or allowing the  use of nonpublic government information to further their own private  interests or the private interests of others, and can be subject to penalties  for doing so. The Office of Government Ethics (OGE) defines nonpublic  information as information that the employee gains by reason of federal  employment and that he or she knows or reasonably should know has not  been made available to the general public. According to OGE, nonpublic  government information includes, but is not limited to:  information that is exempt from disclosure under the Freedom of  Information Act,  information that the agency has designated as confidential, or  information that has not actually been disseminated to the general  public and is not authorized to be made available to the public upon  request.
section_title: The Prevalence of the Sale of Political Intelligence Is Unknown, but Some Investors Use It to Inform Investment Decisions
paragraphs: The prevalence of the sale of political intelligence is not known and is  therefore difficult to quantify, as political intelligence information gathering  and dissemination is often bundled with other information sources,  financial compensation is usually not tied to specific sources of  information or investment decisions, and consensus among political  intelligence firms does not exist regarding some terms used in the  STOCK Act definition of political intelligence. It is especially difficult to  make a determination that a sale of nonpublic information has occurred,  in part because it is not always known when information is exchanged or  the timing of when nonpublic information becomes public. Nonetheless,  investors do sometimes use political intelligence information and two  examples that we reviewed illustrate the use of government information to  gain advantage in the financial markets.
subsections: section_title: Political Intelligence Information Gathering and Dissemination Is Often Bundled With Other Information Sources
paragraphs: According to interviewees at seven of eight political intelligence firms and  all four law firms who provide political intelligence, this information is often  bundled and provided to clients with other information such as research,  opinions, and policy analysis. Figure 4 illustrates the possible flow of  political intelligence information. For example, one firm we interviewed  provided us with a product it sent to all of its subscribers which analyzed  recent developments in federal health care programs. The analysis cited  information from rulemaking in the executive branch, past and current  legislative activities in Congress, publicly available documents, relevant  trade publications, and the firm’s analysis of government actions. We  were also told by five of six investors that investment decisions are most  likely to be based on an overall analysis of the political climate for specific  issues and not necessarily a single piece of political intelligence. For  example, according to sixteen of thirty-four interviewees, investors often  rely on multiple sources of information to make an investment decision.  As a result, it is difficult to link the sale of political intelligence and an  investment decision to a single piece of information obtained from  executive or legislative branch officials. 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 or nonmaterial and whether  such information stemmed from public or nonpublic sources at the time of  the information exchange.
In addition to bundling information, the nature of compensation structures  for political intelligence firms is another factor complicating efforts to  determine the prevalence of the sale of political intelligence. Financial  compensation is usually not tied to specific sources of information or  investment decisions. Consequently, there is not a reliable, consistently  used data source to measure economic activity for political intelligence. In  the absence of such data, we asked firms how they track the sale of  information. Interviewees at six of eight political intelligence firms and  three of four law firms who provide political intelligence told us that they  do not specifically track the sale of political intelligence. In addition, the  compensation structure for services provided by firms varies. For  example, interviewees from five of the eight political intelligence firms and  two of four law firms who provide political intelligence firms do not charge  investors for single pieces of information. Instead, political intelligence  clients generally pay firms for an overall analysis of a topic or a particular  issue. Specifically, three of eight political intelligence firms and three of  four law firms who provide political intelligence told us they charge a  monthly retainer for provision of their products and services, and six of  eight political intelligence firms and all four law firms who provide political  intelligence reported that they charge hourly as services are provided, ask  clients to pay an upfront fee for specific analyses, or charge a flat rate for  newsletters.
section_title: Quantifying the Sale of Political Intelligence Is Complicated by Lack of Consensus on Definition of STOCK Act Terms
paragraphs: Attempts to quantify the prevalence of the sale of political intelligence are  further complicated by a lack of consensus on the meaning of some of the  terminology in the STOCK Act definition, including “direct  communication,” and someone “who is known to intend to use information  to inform investment decisions.” Seven of eight political intelligence firms  and three of four law firms who provide political intelligence stated that  they had direct communication with executive branch officials or  congressional staff when needing clarification or additional details on  specific issues. Five of thirty-four interviewees said it was unclear if  information shared by executive or legislative branch officials providing a  legislative or regulatory update at an event such as a town hall meeting  could be considered direct communication. Not knowing whether  information is gathered by direct communication can make it difficult for  firms to determine whether an exchange of political intelligence occurred.
The phrase “who is known to intend to use information to inform  investment decisions” is also unclear and difficult to interpret, because  investor’s intentions are not always known. For example, an investor can  make a range of decisions, including a decision to take no action, in  response to receipt of information. According to five of eight political  intelligence firms and all four law firms who provide political intelligence,  they do not know how their clients use information they provide in their  investment decision-making process or if they use it at all. Specifically,  some firms provide information to their clients through mass  communication such as newsletters, thus making it difficult to know the  extent to which, if at all, a client used their product when making an  investment decision. Similarly, representatives of trade associations were  unsure how their members used political intelligence information in  making investment decisions. Interviewees at four of five trade  associations told us that they provide guidance and information to their  members when new legislation is filed or when regulations are issued that  could have an impact on their members’ investment or business  decisions, but are unaware of the decisions that are made based on the  information provided.
Another challenge related to the definition is that firms do not always  characterize their information gathering activities as political intelligence.  For example, some individuals described political intelligence as policy  analysis, market research, or information gathering that results from the  exchange of information that could be included as a part of lobbying  activities.
section_title: Timing of Information Exchange Makes It Difficult to Determine the Extent to Which Nonpublic Information Is Sold
paragraphs: While it is challenging to determine the prevalence of the sale of political  intelligence information as a whole, we found that it is especially difficult  to determine the extent to which nonpublic government information is  being sold as political intelligence. This is due in part to uncertainty about  when a piece of nonpublic information becomes public. It is important for  a political intelligence firm to know exactly when a piece of material  nonpublic information becomes public so it can pass that information  along to an investor in a timely fashion, while at the same time being  cautious not to violate insider trading laws. Interviewees from six of eight  political intelligence firms and one of four law firms who provide political  intelligence said that they have policies in place to ensure they do not  knowingly sell material nonpublic information, which would be a violation  of insider trading laws. As noted earlier, federal guidance defines material  nonpublic and nonpublic information to include any information that is not  available to the general public which would likely be considered important  in making an investment decision or information that a federal employee  gains that is reasonably known to be important and therefore should not  be disclosed to the general public. Because of the potential risk to their  reputation as well as the possible imposition of penalties, interviewees at  six out of eight political intelligence firms told us that if they suspect that  information is material and nonpublic, they would not sell or distribute it  until after it is known to be public.
According to ethics guidance from the House of Representatives, if  information about the work of Congress is obtained during public briefings  or hearings, it is then considered public information. Examples of material  nonpublic information gained during the course of government service  could include legislation and amendments prior to their public  introduction. House guidance further provides that a good rule of thumb to  determine whether information may be material nonpublic information is  whether or not the release of that information to the public would have an  effect on the price of a security or property.
section_title: Investors Sometimes Respond to Political Intelligence
paragraphs: Nonetheless, our review of economic literature and interview responses  suggests that individuals and firms value political intelligence and  sometimes respond to such information through investment and business  decisions. Investment decisions could narrowly include an individual  investor’s decision regarding investments in the stock market or could be  broader and also include business decisions made by a company, such  as whether or not to expand existing operations or where to locate new  operations.
Some economists believe that the onset of the recession in late 2007 and  subsequent events in the world economy and financial markets have  increased uncertainty about the direction of U.S. economic policy. A firm’s  finances can be affected by federal legislative and regulatory actions that  alter its revenues or its costs. Uncertainty regarding the future direction of  government policy may complicate firms’ attempts to estimate future  profitability. Firms may respond to such uncertainty by delaying  investment in future productive capacity (i.e., hiring or opening a new  office) while awaiting resolution of policy uncertainty. Similarly,  uncertainty about a firm’s profitability may also affect the price of its stock.  Financial market investors may then have a comparable interest in  gaining knowledge about potential government action that could affect a  firm’s profitability. Three of eight political intelligence firms and two of four  law firms who provide political intelligence confirmed that they have seen  a rise in demand for their services in recent years, in part due to interest  in policy issues such as the nation’s budget uncertainty and health care  reform legislation.
The asbestos liability trust fund example illustrates one instance where  investors responded to government information and used this information  to trade stocks. In 2005, a small group of investors used information  obtained from the legislative branch about a pending announcement on  the Senate floor that could affect the value of companies with asbestos- related liabilities. Investors used the information to make stock purchases  in those companies before the announcement was made and the  information—that the Senate would vote on a bill creating an asbestos  liability trust fund—became public. In this example, investors anticipated  making profitable trades by buying firms’ stocks at lower prices than  would prevail once all market participants knew that firms would benefit  from the creation of a liability trust fund. No charges were filed, and the  Senate did not pass the bill.
In another example, an FDA chemist bought, sold, and short-sold stock  based on pieces of material nonpublic information, which he could access  due to his position at FDA. The information allowed him to judge the  direction that stock prices would change when information about a  pending regulatory decision became public. The SEC investigated this  case and filed a civil complaint, while the Department of Justice filed a  parallel criminal case in federal court alleging violation of insider trading  laws. In cases such as these, the possession of material nonpublic  information provides the potential for profitable trading in anticipation of  price changes once the information becomes public. When political  intelligence is material and public and is disseminated through the  market, its influence on prices may be evident in immediate price  changes (as with the announcement of a drug approval) or may be  difficult to isolate (as with a general increase in defense spending). This  explains why it is difficult to determine the effects, if any, of political  intelligence on financial markets.
section_title: Potential Disclosure Requirements Would Need to Balance Benefits and Costs while Also Considering Practical and Legal Issues
paragraphs: If Congress chose to require disclosure of the exchange of political  intelligence information, then the benefits and costs of disclosure would  have to be balanced while at the same time considering practical and  legal issues. For example, interviewees discussed the potential benefit of  increasing the transparency of political intelligence firms’ activities.  However, the cost of administering and enforcing disclosure of  government information (such as staff and information technology  resources) would also need to be considered. In addition, there are a  number of practical issues regarding the structure and form of disclosure  that would need to be resolved. Specifically, key definitional terms such  as direct communication would need to be clarified, and the required  disclosure elements—such as what the elements of disclosure include,  what political intelligence information needs to be disclosed, who should  file, and how often—would need to be determined. There could also be  legal challenges to requiring such disclosure (based on perceived  restrictions on First Amendment rights).
Some individuals we interviewed cited potential benefits of disclosing  political intelligence activities. According to three of eight public  advocacy groups, a benefit of political intelligence disclosure could be the  transparency of a political intelligence firms’ activities such as the source  of political intelligence (executive or legislative branch), disclosure of who  (investor) purchases such information, and what information was shared.  However, all three interviewees with broad public policy expertise  questioned whether requiring disclosure would be a matter of promoting  transparency without a compelling public purpose and were not certain  what specific problem disclosure would resolve. They pointed out that the  information being disclosed would most likely be public information and  there are already laws in place governing the protection of nonpublic  information.
In addition to transparency, another potential benefit cited by SEC  officials was that disclosure could potentially lead to investor protections  as the nature and timing of the flow of information between a government  official, a political intelligence firm, and an investor is made public through  disclosure. SEC officials told us that access to information promotes  investor confidence and maintains the integrity of markets. However, for  political intelligence it is uncertain how helpful disclosure would be to an  investor given the pace of market movements. For example, a firm’s  disclosure that it shared political intelligence with a large pension fund  would only be helpful to other investors if the disclosure was filed and  made available almost instantaneously.
Finally, according to SEC officials, disclosure could help them accomplish  their mission. For example, 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. According to those officials, SEC analyzes  investigative information and builds its insider trading cases by, among  other things, looking for relationships between people and events that are  related to a suspicious trade. SEC officials suggested that political  intelligence disclosure legislation could include the name of the filer’s  former employer, dates of prior employment, and the dates of contact  between the filer and government source.
Disclosure of political intelligence activities would also involve incurring  costs for the entity processing the disclosure as well as for individuals  required to disclose their activities. Congressional staff we interviewed  stated that without knowing the requirements of political intelligence  disclosure they could not speculate on the potential cost. However, based  on their experience with administering the LDA, congressional staff said  that disclosure costs most likely would include staff to administer the  disclosure process, the creation and maintenance of an information  technology infrastructure for disclosure, and the administrative support  necessary to track registration and compliance. In addition, individuals  required to disclose their activities would also likely bear the cost of  compiling such information for filing.
There are also practical issues regarding the requirements and potential  form of disclosure that would need to be resolved. These issues include:
Clarifying key terms: Although the STOCK Act defines political  intelligence, some terms in the definition are unclear. Specifically,  agreement does not exist on the meaning of the phrases “direct  communication” and someone “who is known to intend to use  information to inform investment decisions” making it difficult for firms  to determine whether an exchange of political intelligence occurred,  and, as a result, uncertain as to whether they would be required to  register. For example, a clear description of what constitutes direct  communication would be necessary to help potential filers determine  whether a disclosure requirement applied to them. As a point of  comparison, state lobbying laws define direct communication as, but  not limited to, contact in person, on the telephone, by telegraph, by  letter, or using electronic media. With regard to investment decisions,  disclosure rules would also need to clarify whether disclosure is  required for the range of decisions that an investor can make  including internal business decisions and a decision to do nothing.
Establishing who would administer and enforce registration and  reporting requirements: Interviewees also raised practical issues  regarding the structure and function of disclosure requirements with  respect to who should administer a potential political intelligence  disclosure requirement for both the executive and legislative  branches. Specifically, two of eight attorneys and interviewees from  two of eight advocacy groups discussed the importance of deciding  which agency should administer political intelligence disclosure, and  that disclosure should not be modeled after or be made to fit into the  LDA as a default disclosure model. One of the two attorneys stated  that political intelligence does not fit cleanly into the LDA and there is  no public rulemaking in place to address uncertainties that may arise.  The attorney suggested that the SEC, OGE or another executive  branch agency that regularly handles disclosure should administer  political intelligence disclosure. In addition, potential disclosure  requirements would also need to identify which agency would be  responsible for political intelligence enforcement.
Identifying the elements and characteristics of disclosure: According  to the STOCK Act definition of political intelligence three parties are  involved in the exchange of political intelligence: the source of the  information (e.g., the executive or legislative branch employee), the  person or firm collecting the information, and the client that receives  the information. Twelve of thirty-four interviewees said that who  should file is a key element that would need to be determined. A  representative from a media organization and two of eight attorneys— one from a law firm that gathers political intelligence—expressed  concern regarding the number of contacts that might need to be  disclosed, especially if a firm has hundreds or thousands of clients.
We analyzed three federal laws that require disclosure of information to  explore what elements may need to be considered in establishing political  intelligence disclosure requirements. These laws were the LDA, the  Federal Election Campaign Act, and the Investment Advisers Act.
From our analysis we found that there are at least 24 elements that would  likely need to be considered, as shown in table 1. All of the elements  identified were requirements in at least one of the three models we  reviewed.
Table 1. Analysis of Three Federal Laws Relevant to Potential Political Intelligence  Disclosure Requirements  Purpose of Disclosure Requirement (establish a  clear definition)
What forms to file
Where to file  Allows or requires electronic registration or  reporting  Termination of registration (e.g., if filer no longer  fits requirements, a request may be made to no  longer file reports)
Who must file
Who is exempt from filing  Threshold requirements (only if a threshold is met)
Records maintained (e.g., a record of contributions  to a government official is kept and the location is  reported)
Filing deadline  Frequency of filing reports  Information about the filer’s communications or  contacts made on behalf of the client  Information about the client  A list of individuals who acted on behalf of the  client during the reporting period (applicable if the  lobbyist was engaged in political intelligence)  Expenditures or income
Campaign contributions (contributions paid by filer  to a government official’s election)
Gifts (from filer to a government official )
Training or ethics course (e.g., education on new  requirements and procedures for those required to  report)
Restriction provisions on what filers can and cannot  do  Enforcement, fines, and penalties  Audits (to monitor compliance with requirements  and procedures of disclosure reports)  Public access to filer’s data (e.g., timing and format  for providing information)
Additional practical issues and concerns that would need to be  considered include:
A robust enforcement effort may be necessary to ensure compliance:  Specifically, interviewees from four of eight political intelligence firms  said firms could be less willing to register and report political  intelligence activities because of concerns that public disclosure could  result in a loss of their competitive advantage. In addition, seven of  thirty-four interviewees stated that once political intelligence is defined  some firms may attempt to avoid having their activities categorized or  identified as political intelligence in order to avoid registration  requirements. For example, firms may more discretely and informally  provide services, may advertise their services in a way that does not  indicate that they provide political intelligence information, or may join  other types of businesses, such as lobbying firms, and bundle political  intelligence services with other services so that they are not detected  as political intelligence firms.
Concern about exposure of clients and clients’ interests may need to  be considered: Seven out of thirty-four interviewees had concerns  regarding their clients’ interests being exposed. For example, an  official from one political intelligence firm said that some of their  clients include a clause in their contracts with political intelligence  firms requiring that the firm not disclose that the political intelligence  firm is working for the client because they do not want their  competitors to find out who gathers information for them.
The potential need for, and scope of, a media exemption would need  to be considered: Of the seventeen interviewees who said an  exemption from disclosure may be necessary for media organizations,  eight stated that an exemption from registration for and reporting on  political intelligence should be established for media organizations  because of the First Amendment press protection. However, other  interviewees questioned the need for a media exemption. For  example, three political intelligence firms, and one attorney from a law  firm said that there should not be an exemption for media  organizations because they engage in the same activities as political  intelligence firms, and ask the same type of questions about the same  issues that their subscribers and clients are interested in.
The definition of “media” could further complicate a possible media  exemption. For example, in 2006 the Federal Election Commission  (Commission) amended its campaign finance rules to clarify the  applicability to the Internet. The Commission acknowledged the  expansion of the Internet and noted that bloggers and others who  communicate on the Internet are entitled to the media exemption in  the same way as traditional media. The Commission did not change  its rules to specifically exempt all blogging activity.  Instead, it  amended the media exemption to use the terms “website” and  “Internet or electronic publication” with the purpose of encompassing  a wide range of existing and developing technologies.  “Chilling” effect or slowing of communication between government,  media, and political intelligence firms: Twenty-one of thirty-four  interviewees said that disclosure of political intelligence activities  could result in a potential chilling effect among government officials,  the media, and political intelligence firms. For example, a political  intelligence firm and an attorney from a law firm that gathers political  intelligence stated that firms would likely be reluctant to share or  request government information because disclosure could expose  them to potential liability from an allegation of insider trading or would  risk damage to their reputation from negative media coverage.  Similarly, a slowdown of communication could also affect Congress as  they often consult with interested parties when crafting legislation  which could in some cases be considered political intelligence.
In addition, some interviewees said that they foresee legal challenges to  political intelligence disclosure stemming from potential or perceived  restrictions on First Amendment rights, attorney-client privilege, and an  attorney’s duty of confidentiality. Specifically, sixteen out of thirty-four  interviewees stated that those who challenge disclosure could contend  that their First Amendment rights have been violated. Four of four  attorneys at law firms that gather political intelligence stated that this  could be an issue because under the First Amendment there is a  constitutional right to participate in the political process and that  disclosure could impede that process. However, three of four attorneys at  these law firms and an academic researcher said that political intelligence  is not different from gathering any other kind of information and there is  nothing wrong with gathering information from the government. One  attorney said that gathering information is what any thoughtful individual  does to analyze or form conclusions about policies, regulations, or the  law.
Thirteen of thirty-four interviewees stated that a political intelligence  disclosure requirement could be challenged on the basis that it  contradicts the attorney-client privilege and the attorney’s duty of  confidentiality to his client. Under this rule, keeping client confidences  applies not only to matters communicated to the lawyer in confidence but  also to all information relating to the representation, no matter the source.  However, one of eight citizen advocacy groups and one of three legal  experts suggested that this argument is likely to be rejected as a similar  concern was raised during consideration of the LDA. The LDA requires  lobbyists, many of whom are attorneys, to report identifying information  about their clients. For example, the LDA requires lobbyists to report the  names of their clients, physical address, principal place of business, a  general description of the client’s business or activities, and the issue  areas the attorney is lobbying for on behalf of the clients.
section_title: Concluding Observations
paragraphs: Government information helps companies and individuals understand and  anticipate the potential effects of executive and legislative branch actions  on business, finance, and other decisions. The financial market value of  government information can hinge on the materiality and timing of such  information. What is most difficult to measure is the extent to which  investment decisions are based on a single piece of government  information or political intelligence. 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 or nonmaterial and whether  such information stemmed from public or nonpublic sources at the time of  the information exchange. This is in part because government information  is often bundled with other information which collectively influences an  investment decision and in part because the flow of information does not  lend itself to quantification or ongoing documentation for the purpose of  measuring industry activity.
While no laws or ethics rules specifically govern the political intelligence  industry, executive and legislative branch ethics guidance and securities  laws provide parameters for government officials to protect material  nonpublic information. Specifically, SEC’s Rule 10b-5, which applies to  both the executive and legislative branches of government, prohibits the  use of material nonpublic information. The SEC can open an investigation  if it is suspected that a person has used material nonpublic information to  trade stocks. If Congress chose to supplement existing guidance and  laws with required disclosure of political intelligence information, the  benefits and costs of disclosure would have to be balanced along with  consideration of related practical and legal issues.
We are sending copies of this report to the Secretary of the Senate, Clerk  of the House of Representatives, Senate Select Committee on Ethics,  House Committee on Ethics and other interested congressional  committees and members. This report is available at no charge on the  GAO website at http://www.gao.gov. If you or your staff have any  questions about this report, please contact me at (202) 512-6806 or  sagerm@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made key contributions to this report are listed in appendix  II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Stop Trading on Congressional Knowledge (STOCK) Act of 2012  (P.L. 112-105) directed us, in consultation with the Congressional  Research Service (CRS), to report on the role of political intelligence in  the financial markets. The objectives for conducting our work were to  describe  the legal and ethical issues, if any, that may apply to the sale of  political intelligence; what is known about the sale of public and nonpublic political  intelligence, the extent to which investors rely on such information,  and the effect the sale of political intelligence may have on the  financial markets; and any potential benefits and any practical or legal issues that may be  raised from imposing disclosure requirements on those who engage in  these activities.
To address these objectives, we conducted key word searches of  relevant databases and literature for studies that included political  intelligence and policy research and analysis. In addition, we conducted  34 semi-structured interviews with entities that were selected to provide a  range of views from those involved in providing, regulating, researching,  analyzing, and receiving political intelligence. Individuals provided their  own perspectives rather than the official view of their firm or organization.  Specifically we interviewed individuals from: eight political intelligence firms, eight non-governmental citizen advocacy or protection groups that  cover public policy issues such as government transparency and  openness,  five trade associations representing pension funds and businesses  (investors)   four law firms that conduct political intelligence,  three legal experts that specialized in the Lobbying Disclosure Act  (LDA), securities law or ethics law;  three regulatory entities—the Securities and Exchange Commission  (SEC), Financial Industry Regulatory Authority, and the Commodity  Futures Trading Commission one financial services firm (investor), one academic researcher specializing in law reform for securities one media organization.
We selected the interviewees because they were the most frequently  mentioned in the results of our database and literature searches of  research reports, articles, and studies. In addition, we included  interviewees that were referred by one or more participants from other  interviews. As such, our results may not reflect the opinions of firms not  publicly identified as political intelligence firms.
We used the interviews to obtain the following types of information  (depending on the type of individual or organization we interviewed): differences in the use of the terms lobbying, political intelligence and  range of services provided by the respondent, process for collecting information, client relationships and services,  legal questions pertaining to direct communication,  legal and ethical issues that may arise from the sale of political  intelligence, any statutes and regulations that cover political intelligence activities, compliance mechanisms in place to deal with legal, ethical, or  regulatory issues,  information shared that would be considered material nonpublic  information, any benefits to requiring registration and reporting of political any disadvantages to requiring registration and reporting of political  intelligence activities.
The information we obtained from these interviews cannot be generalized  to all parties that are knowledgeable about political intelligence. Prior to  conducting the semi-structured interviews, the questions were pretested  with five firms and questions were reframed based on the findings from  these pretests.
In addition to the semi-structured interviews, we separately interviewed  ten entities including staff from the Senate Select Committee on Ethics,  the House of Representatives Committee on Ethics, the Secretary of the  Senate, the Clerk of the House of Representatives, the Senate Judiciary  Committee, the House of Representatives Financial Services Committee,  three individuals selected based on their broad expertise as private sector  leaders and their experience from previous positions in the executive and  legislative branches of government, and officials from the Food and Drug  Administration (FDA). The interviews were conducted to discuss legal and  ethical issues that could arise if disclosure of political intelligence  activities was required, as well as any compliance mechanisms in place  to safeguard the disclosure of material nonpublic information. We also  consulted with the Congressional Research Service and the National  Academy of Public Administration as we conducted our work.
We identified executive and legislative branch examples of the prior use  of government information with a resulting effect on financial markets or  individual portfolios based on literature reviews, media reports, and  referrals by political intelligence practitioners. For purposes of this report  we focused on two examples. One example is a 2011 FDA case where a  chemist misused government information and pled guilty to insider  trading. The other example was a 2005 case where the Senate proposed  a bill to create an asbestos trust fund. Investors traded stock based on  information about the proposed bill which had not been publicly released.  No wrongdoing was found. We selected the two cases and highlighted  the issues associated with them in order to show potential problems that  could result from the exchange of government information. In addition, we  used these examples to discuss and illustrate the guidance, policies, and  procedures in place for protecting and disseminating information with the  potential to be defined as political intelligence from the two branches of  government. For these cases we reviewed relevant legal documentation  and executive and legislative branch guidance on protecting information.  We interviewed FDA officials concerning the FDA case and a  congressional staff member about the asbestos trust fund case.
To determine the laws and ethics rules that govern the sale of political  intelligence and to determine the extent to which information being sold  would be considered nonpublic information we examined legislative and  executive branch ethics guidance and the interpretation and application of  SEC Rule 10b-5 (related to insider trading) to identify and summarize the  distinctions between public and nonpublic information. Interviews were  used to obtain opinions on what information shared by Members of  Congress or executive or legislative branch employees would be  considered material nonpublic information. In addition, we obtained  opinions about the statutes and regulations that cover political intelligence  activities, and the compliance mechanisms in place to deal with legal,  ethical, and regulatory issues that may arise regarding the use of political  intelligence. We also met with staff from the Senate and House ethics  committees to discuss the laws and ethics rules for political intelligence  activities and contacted the Office of Government Ethics.
To determine what is known about the sale of political intelligence and  assess the extent to which investors rely on such information and what is  known about the effect the sale of political intelligence may have on the  financial markets, we used the semi-structured interviews to  systematically collect testimonial evidence from the various interviewees  potentially engaged in political intelligence activities. We asked  interviewees about the role of various parties involved in the collection  and dissemination of political intelligence, the process through which  information is gathered and disseminated, client relationships and  services, the types of information used to make an investment or  business decision, and the extent to which political intelligence  information affects financial markets. To seek economic data on the size  of the political intelligence industry (i.e. measure the size of the industry),  we searched for political intelligence in the industry classification systems  used by federal statistical agencies to collect economic data on U.S.  business establishments, the North American Industry Classification  System and the Standard Industrial Classification system.
To describe any benefits or practical and legal issues that could arise  from the imposition of disclosure requirements on those who engage in  political intelligence activities, during the semi-structured and open-ended  interviews we asked interviewees to describe any benefits or costs, as  well as potential legal and practical issues, that could be raised by the  imposition of disclosure requirements on those who engage in political  intelligence activities. We also reviewed three federal disclosure  models—the LDA, the Investment Advisers Act, and the Federal Election  Campaign Act—to determine the types of requirements that would likely  need to be considered for any potential disclosure model developed for  political intelligence. We selected these models based on a database  search of other disclosure models to ensure their potential applicability,  as well as suggestions from external parties such as congressional staff  and officials at regulatory agencies. Further, we selected these models  because they all included a requirement to publicly disclose information,  financial and non-financial data about the filer’s activities, and elements  that could provide useful investigative data. The elements in each of the  models were ranked based on relevance, independently reviewed for  objectivity, and then selected as possible elements that could be relevant  for consideration of political intelligence disclosure.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgements
paragraphs: In addition to the contact named above, Lisa M. Pearson (Assistant  Director), Pawnee A. Davis, Rebecca S. Heimbach, Hayley Landes, Lou  V. B. Smith, and Katrina D. Taylor made key contributions to this report.