SEC Focus May Lead To 2012 Stock Act Being Amended

The Securities and Exchange Commission is conducting an investigation in the hottest sector of Washington's influence industry: political intelligence. It's the business of collecting highly detailed information from Congress and the regulatory agencies, and using it to make money on Wall Street.

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And let's turn now to the topic of political intelligence. This is the business of collecting highly detailed information from Congress and the regulatory agencies and then using it to make it money on Wall Street. The Securities and Exchange Commission is now investigating this practice. The probe comes a year after Congress passed legislation that barred lawmakers and staffers from leaking insider information as a violation of their official duties.

Here's NPR's Peter Overby.

PETER OVERBY, BYLINE: Here's the political intelligence story that really caught Washington's attention. A decade ago, Congress was grappling with the legacy of asbestos. Corporate America was inundated with lawsuits after decades of exposing workers and consumers to the lethal mineral. Corporate lobbyists had fought long and incredibly hard to get the legislative relief.

In 2005, Senate Majority Leader Bill Frist resolved to help them. One morning that November, the Tennessee Republican rose in the Senate with a big announcement.

(SOUNDBITE OF ARCHIVED AUDIO)

SENATOR BILL FRIST: Asbestos reform will be the first major piece of legislation that we consider in late January when we return in January.

OVERBY: Immediately, companies with asbestos liabilities saw their stock prices go up. Trading spiked, but not for all of the companies. For some of them, the spike had come the day before. USG, for instance: its shares jumped 3.5 percent in value and trading volume tripled the day before Frist spoke. It was because a few people had found out what he was going to say.

MICHAEL MAYHEW: I think that's the first time that people on the Hill understood how valuable this kind of information could be to investors.

OVERBY: This is Michael Mayhew. He's the founder of Integrity Research Associates, a firm that advises both investors and research firms. Users of political intelligence profited off of the asbestos bill. Never mind that it didn't pass; the profits came on quick trades as the bill ping-ponged through the legislative process. Mayhew says investors could see that decisions in D.C. affected healthcare, finance, energy and all sorts of other sectors.

MAYHEW: Wherever there happens to be more regulation, that's where the growth in political intelligence is occurring.

OVERBY: So now boutique firms do political intelligence work. So do law firms and lobby firms, news organizations, brokerage houses and investment banks. But there's a law, passed last year, that might impinge on that. The Stock Act took the securities law prohibitions on insider trading and applied them to Congress. Now the Securities and Exchange Commission is looking at an episode last month.

Trading in healthcare firms appeared to spike literally minutes after a brokerage house told its clients the Obama administration would give a break to companies in the Medicare Advantage Program. Adam Goldberg is a spokesman for the brokerage house Height Securities. He says Height didn't use insider information.

ADAM GOLDBERG: The information we reported on began emerging weeks before our report.

OVERBY: The SEC has subpoenaed a Height Securities analyst, the Greenberg Traurig law firm and one of its lobbyists. Greenberg Traurig declined to comment. Now Capitol Hill is taking the Stock Act more seriously. Here's Washington lawyer Robert Kelner.

ROBERT KELNER: We have expected that the Securities and Exchange Commission would look for a good test case, and it looks like they've now found one.

OVERBY: Kelner says he expects the SEC to focus further.

KELNER: On this very target-rich environment.

OVERBY: And he expects Congress to close a loophole in the Stock Act. He predicts political intelligence firms will have to start registering with Congress and disclosing their activities.

KELNER: I think it's virtually inevitable at this point.

OVERBY: One crusader for transparency is Republican Senator Chuck Grassley of Iowa.

SENATOR CHARLES GRASSLEY: Now we need political intelligence disclosure for the same reason that we need lobbying disclosure.

OVERBY: One other reason Congress might like a rule on disclosure: it would affect the firms that gather political intelligence, but not the lawmakers and Hill staffers who supply it. Peter Overby, NPR News, Washington.

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