STOCK Act 2.0 (Mar. 22)

Mike & Co. –

Last week, legislators in both the House and the Senate proposed regulation in the political intelligence industry to increase the transparency of the relationship between Wall Street and Washington.  In an election where campaign finance and Wall Street issues have been salient themes, the bill and the candidates’ positions on it could turn out to be relevant.

Since the STOCK Act passed in 2012, the heat on Hill staffers trading political intelligence has ramped up.  The SEC’s investigation of Brian Sutter put staff on notice – be careful what you tell traders.  But in a $400 million industry that’s conducted largely in shades of gray, how can anyone determine what’s public information and what’s not?  Rep. Slaughter and Sen. Grassley have just put forward companion bills aimed to make things more clear.

Although the bills are unlikely to pass, their significance lies in the discussions they may spark and the positions people may take.

Best,

Dana

 

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STOCK Act 2.0

Rep. Slaughter and Sen. Grassley have formed an unlikely team to push for greater regulation and accountability in the political intelligence industry.  Their bill aims to require political intelligence firms, which provide information to traders and banks from Congressional sources, to publicly declare their work through disclosure forms, just like lobbyists.

Rep. Slaughter said that the measure would allow Congressional staff to better know who they are talking to – and therefore avoid accidentally disclosing information to a political intelligence operative.  The bill would supplement the STOCK Act, which expanded reporting requirements for trades made by Congressional staff and certain Executive branch officials.  The Act also explicitly barred insider trading, selling nonpublic information, and in some cases participating in private IPOs.

The Act was inspired by a CBS 60 Minutes episode investigating whether members of Congress were personally profiting by trading on private legislative information. After the episode aired, Congress rushed to pass the STOCK Act. Language was included to require additional disclosure by political intelligence firms, but it was removed by House Republicans under Eric Cantor. He was accused of removing it because of pressure from the financial industry.

The Political Intelligence Market

After the STOCK Act was signed into law the GAO and CRS began coordinating on a study on political intelligence – including its role in financial markets, the extent to which it is comprised of nonpublic information, and the legal and ethical issues of its sale.  The GAO found that it would be “extremely difficult” to quantify the impact that political intelligence has on financial markets; this is because political intelligence makes up only a portion of the information provided to traders, and it is often set within reports that include policy analysis and market research.

Insider Trading or Public Information?

The GAO pointed to other issues in supplementing STOCK Act provisions, including finding a way to quantify the actual value of political intelligence.  It is not always clear whether political intelligence is material to a financial transaction, whether it was nonpublic information at the time of its disclosure, and whether its communication to a political intelligence operative was sufficiently “direct” to violate insider trading laws.

Despite these issues there still exist some instances of selling political intelligence which are clearly illegal.  The SEC and DOJ have been investigating and prosecuting both firms and individuals practicing insider trading through political intelligence – the biggest being Brian Sutter from Ways and Means, but also against Marwood Group, a political intelligence and research firm which settled with the SEC in November 2015 over charges of insider trading based on nonpublic information.

Is the Legislation Worth Supporting?

The history of these proposals is not sunny: similar language was stripped from the STOCK Act in 2012, and Slaughter’s legislation introduced in 2014 never left the ground.  Conventional wisdom points toward a dim future for this legislation in 2016 as well, despite the STOCK Act’s massively bipartisan support.

In defending her legislation Slaughter points to her partnership with Sen. Grassley and the defeat of Eric Cantor as cause for optimism.  Eric Cantor was responsible for removing this language from the Stock Act in 2012, and his primary challenger, David Brat, attacked him on it during his successful run to unseat the House Majority Leader.  Slaughter sees room for bipartisan support in these developments, although both of her current co-sponsors are Democrats.

In defense of the legislation, the election cycle of 2016 has seen a great deal of attention paid to economic and financial issues.  This proposal sits well inside the sort of rhetoric being touted by candidates like Sanders and Trump, and so may be taken up with energy by legislators hoping to bolster their populist credentials.

Candidates’ Consideration 

It would be difficult to argue that supporting the bills isn’t good politics.  They hit all the right notes for the 2016 election cycle – shining light on a shadowy market that exists between Washington and Manhattan, keeping legislators and their staff honest, preventing the privileged from using secret information from bilking everyday retail investors – there’s little to see on the downside for any presidential candidate who supports these efforts.

Additionally, critiques of HRC have focused on her ties to Wall Street, especially on her receiving money in the form of speaking fees. Supporting a bill that tightens regulations on the relationship between finance and politics is a clear statement against those criticisms. It may even be beneficial to affirmatively endorse it instead of just waiting until it comes up.

The major downside risk is the same that has plagued her stance on TPP and NAFTA – coming to the table late.  But an affirmative message of support at this point, before the legislation sees further action — and, critically — before other candidates voice approval, is still available to a candidate who wants to applaud the effort.

Short of outright endorsement, a candidate might praise the efforts of Rep. Slaughter in finding ways to keep Congress honest; bringing up the legislation when discussing other reform measures is an option as well.