POLITICAL INTELLIGENCE: A BIG GROWTH INDUSTRY IN THE U.S.A.

One of the biggest growth industries in Washington right now is something called ‘political intelligence’. Companies and individuals use political intelligence to understand the potential effects of legislative and executive branch actions on business, finance, and other decisions. 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.

Political intelligence is specifically defined 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 non public 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 non public information derived from employees' official positions for personal benefit. The SEC can open an investigation if it is suspected that a person has used material non public information to trade stocks.

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 non public 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 non public government information is being sold as political intelligence. Specifically, it is not always possible to determine the timing of when non public information becomes public. Representatives of most political intelligence firms say they have policies in place to ensure they do not knowingly sell material non public 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.

The Political Intelligence Industry

The appetite for political intelligence was initially concentrated on such heavily regulated industries as health care, energy, and defense. Initially the banking and financial-services industries weren’t a big focus, because they weren’t often the subject of major legislation. That changed when the financial crisis hit in 2008. The massive government intervention in the economy and the blizzard of new programs aimed at propping up banks and homeowners put a premium on insider knowledge. The intelligence industry mushroomed. By 2009 it was a $400 million business, according to Integrity Research Associates, which tracks the sector, although nobody knows the industry’s size for sure. Unlike lobbyists, political intelligence shops aren’t required to disclose their clients or revenue. Most operate in the shadows.

The targets of intelligence gathering aren’t limited to members of the government and their staffs. The most effective operatives are expert at recognizing and exploiting mutuality of interest. The premium on secrecy isn’t merely to guard tradable investing tips. The industry operates in constant fear that negative attention will prompt a crackdown. In 2012, spurred by reports that politicians were trading on inside information, Congress passed the Stop Trading on Congressional Knowledge (Stock) Act. Originally, the act called for political intelligence outfits to disclose their clients and fees to federal regulators, but this provision was stripped.

Perhaps as a consequence of negative publicity, practitioners avoid describing themselves with the increasingly toxic term “political intelligence” in favor of such vague but important-sounding euphemisms as policy research, strategic advice, and economic strategy. Still, the work has become lucrative enough to attract not only former congressional staffers but also diplomats, White House advisers, even chief executives with the right Washington connections.