Responding to increasing legal and regulatory scrutiny of the relationship between Washington D.C., hedge funds and traders, particularly insider-trading probes, the political intelligence industry is beginning to change.
One example is Alex Vogelspent, who spent decades as a Washington lobbyist, providing investors with intelligence about potentially market-moving policy changes. His newest project, VogelHood Research, uses computer algorithms of publicly available data, with no physical contact with Congress or other policymakers.
Vogelspent is part a growing cluster of Washington’s political intelligence industry insiders leaving the business, while others — such as law firms — are creating new protocols to avoid violations of insider-trading regulations.
A few Wall Street firms have scaled back political intelligence operations and revamped Capitol Hill activities, reports Brody Mullins of the Wall Street Journal.
Vogel’s firm has not been involved in any allegations of inappropriate trading, but he does recognize the shift in his evolving industry.
“The market has been demanding the change,” Vogel says. “The combination of dramatically increased access to data via growth in transparency, and the increased compliance burden on the old access model made the change obvious to us.”
Hedge-fund stakeholders believe they have legal rights to government information, provided they are not basing trading decisions on nonpublic, potentially market-moving information, according those associated with firms handling hedge funds.
However, what worries the political intelligence industry in general are the increasing regulations and scrutiny of the process that investors use in trades, often applying information originating from the federal government.
“The SEC is trying to make a test case, and you don’t want to be it,” ethics lawyer Rob Walker, a former congressional-ethics attorney, told the Journal.
Several hedge funds have retreated from the business, says Michael Mayhew, the president of the New York-based firm Integrity Research Associates, which monitors the policy-research industry.
“A few years ago, they would use as many political-intelligence firms as they needed—now they are being extremely careful,” Mayhew said. “Some are using no firms. Others are using only those they have carefully vetted.”
Changes come amid Security Exchange Commission and Justice Department investigations into alleged insider-trading violations involving stock tips emanating from Washington.
The Journal reported last week that prosecutors are amassing evidence and testimony for a federal grand jury in New York involving a potential leak of government health-care announcements in April 2013. The SEC issued subpoenas for documents and testimony from officials with the U.S. House Ways and Means Committee.
The SEC is also investigating if investors illegally received tips about the upcoming Food and Drug Administration decision to delay approval for a new diabetes drug.
Additionally, the 2012 Stock Act, regulation designed to tighten rules on congressional stock trading, has produced new uncertainties about what information Wall Street analysts can receive from lawmakers and congressional aides.
Overall, ambiguities in the new laws and more aggressive law-enforcement investigations have made it unclear exactly what is legal and what is not.
Vogel says that the uncertainty is what led him to develop his new company for gathering information on government policy for investors.
Wall Street investment houses have tracked economic trends in Washington for years, but now hedge funds were desperate for tips about bills and changes in policy, intelligence such as legislation curbing asbestos liability or FDA approving new drugs.
Firms turned to Washington insiders, former government officials and lobbyists like Vogel. Lobbyists, found providing information straightforward, since it was already at hand back then.
Today, providing that info is simply too risky.
“In the past, the business was based on setting up dinners with people,” Vogel says. “We don’t want to talk to any of those people; we want to look at the data and the story that the data is telling.”