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. The Prevalence of the Sale of Political Intelligence Is Unknown, but Some Investors Use It to Inform Investment Decisions

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. 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. 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. 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. These laws were the LDA, the  Federal Election Campaign Act, and the Investment Advisers Act. 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. Concluding Observations

Government information helps companies and individuals understand and  anticipate the potential effects of executive and legislative branch actions  on business, finance, and other decisions. 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. 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. 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. Appendix I: Objectives, Scope, and Methodology

The Stop Trading on Congressional Knowledge (STOCK) Act of 2012  (P.L. 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 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.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

GAO is not making recommendations in this report.