Ernie C. Jolly

On April 4, 2013, the Government Accountability Office (“GAO”) released its anticipated report on the political intelligence industry, an emerging field where operatives research, analyze, and sell market sensitive political information.[1]  Required under the Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”), the GAO’s report discusses: 1) the extent that investors rely on nonpublic information obtained from government branches; 2) whether the practice implicates established securities laws against insider trading; and 3) the costs/benefits of requiring disclosure of political intelligence activity.[2]   Ultimately, the GAO was reluctant to offer policy recommendations on how to regulate political intelligence activity considering the lack of consensus on exactly what the practice entails.

After interviewing a number of political intelligence operatives, including lawyers, lobbyists, and trade association representatives, the GAO concluded that investors do use political intelligence information to “gain advantage in the financial markets.”[3]  Nevertheless, the GAO report notes the difficulty of pinpointing the extent to which investors rely solely on such information since investors may jointly consider a myriad of information prior to investing.[4]  The GAO further explores other issues that make it difficult to determine the prevalence of political intelligence within the financial markets, including the practice of advertising political intelligence services as policy analysis, market research, or information gathering for lobbying purposes.

Regarding the legal implications of political intelligence activity, the GAO reaffirms that political intelligence operatives are already susceptible to insider trading liability when selling confidential information obtained from government sources.  Officials interviewed from the Securities and Exchange Commission (“SEC”) mentioned that political intelligence professionals “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.”[5]  An issue left unresolved, however, is how to determine exactly when political information should be considered nonpublic or material for insider trading purposes.[6]  Nonetheless, the GAO notes that the SEC enjoys broad enforcement powers including countering government employees who improperly use work-related material nonpublic information when trading securities. The SEC has exercised this authority at least once when a chemist at the Food and Drug Administration traded on nonpublic information prior to a drug approval announcement.[7]

Instead of providing policy recommendations on how Congress should regulate the political intelligence industry, the GAO report suggests that policymakers balance the benefits of a disclosure laws against its potential costs.    Likely pitfalls of a political intelligence regulatory scheme include foreseeable legal challenges based on the First Amendment, attorney-client privilege, and duty of confidentiality claims.  Ultimately, the GAO encourages Congress to carefully consider a number of likely issues before taking legislative action, if such action is indeed necessary.

For more information on the report “Political Intelligence:  Financial Market Value of Government Information Hinges on Materiality and Timing,” view it on the GAO’s official website here.  Additionally, American University’s Business Law Review will highlight the STOCK Act and its potential purview over the political intelligence industry in its forthcoming issue (Vol. 2.2).