Defining Political Intelligence

Last month, on June 6th, First Street and Women in Government Relations sponsored a panel discussion on political intelligence.  It was in Washington, DC, and I didn't attend in person.  However, BusinessWire has a link to the raw footage.

There's a lot of political inside baseball in the conversation.  I didn't see the 60 Minutes story the panelist allude to but caught some of the subsequent press coverage.  My readers seem to be bright well-read people so I thought this might be of interest and assume they also will have some grasp of the issues involved.  If not, well, skip this post and come back tomorrow for a review of Ed Rendell's new book.  

As always, this is not intended to be an exact transcript but more a general overview of the comments made.  Interested readers are encouraged to watch the entire footage themselves to the nuance and details.  Fashionistas take note -- one of the panelists is wearing a really eye-catching suit.  My apologies in advance for any errors or misconceptions.  

Defining Political Intelligence,

Stephen Stesney, moderator, of First Street
Heather Podesta of Podesta + Partners
Pat Cave of the Cypress Group
Robert Walker of Wiley Rein LLP
Michael Mayhew of Integrity Research Associates

SS:  First Street and Women in Government relations invite people to talk about political intelligence, print together panel to talk about it.  Heather Podesta of Podesta+ Partners, a lobbyist and expert, Pat Cave of Cypress Grove, a practitioner, Robert Walker of Wiley Rein, a legal expert, and Michael Mayhew of Integrity Research Associations, co-author of an industry analysis.  We’ll start with general questions.

SS: What is the history of political intelligence?

RW:  Political intelligence has always been with us.  It first came up legislatively in Louise Slaughter’s 2007 bill.  People really became aware of it because of the 60 Minutes story.  Is poke to one of the Hill’s senior ethics attorneys recently and he had never heard of PI until the 60 Minutes story.

HP:  I knew something was up in 2004 and 2005 when working on the asbestos bill.  People would stand in line to hold spots in hearings not for lobbyists or lawyers or unions but for hedge funds.  They didn’t care what the bill said, they just wanted to be the first to know it. 

MM:  PI has been around as long as there have been investors.  Back in the 1980s Ivan Boesky wanted to know if Standard Oil would take over Gulf Corp.  the 2004/2005 asbestos bill.  The number of firms collecting information has been growing since the 1980s, not just lobbying firms but analysis and research.

PC:  Business has been around a long time.  In 2000 [missed name, an undersecretary of the treasury] testified about ending a line of credit for Fannie Mae and Freddie Mac.  Markets cared more about banks than policy research.  Mike deserves a lot of credit for coining the term in the 2006 report.

MM:  First a definition:  1) by deliverable, what customer receives, and 2) what is collected.  Policy research,  typically central bank policy.  Their deliverable was a report.  All those other guys, PI firms, deliverable is something else, typically legislative process.  The STOCK Act talked about registering PI firms.  Saying only those talking to hedge funds, etc. doesn’t include firms doing reports.  More process than deliverables.  But there is a difference between creating an analysis and passing along information.  Important to come to terms with that.

SS:   Question for HP and PC.  What is the difference between lobbying and PI?

PC:  If fits in lobbying and disclosure act it is lobbying.  If not, then something else.  Cypress Advising is not a lobbying firm, it does advising.  Cypress Advocacy is a lobbying firm.  The contracts are clear.  Advisory doesn’t disclose non-public information.  LDA is a law that has evolved.  The letter and spirit of the LDA.  The letter & spirit of insider trading law.

HP:  Attention paid to the letter of the law not the spirit.  In DC 1 in 10 people is a lawyer.  Can parse words,  difference without a distinction.  I think it should all be disclosed.  Every 3 months I have to fill out disclosure forms and err on the side of over disclosing.  Others feel differently.

SS:  Who besides markets and Wall Street are clients?

MM:  Corporations have been subscribing to policy research for decades, for various purposes.

SS:  Question for Robert Walker.  What is the impetus behind the STOCK Act now?

RW:  An obvious locus was the 60 Minutes piece late last year and alleged fact of insider trading by members of Congress not illegal.  Broad political and cultural question – why did that story resonate with people?  So many people wanted to believe that it was true, even though existing law did cover Congress and staff.  Now it has passed and one must accept it.  Even if previous laws did apply there was confusion.  Now it is clear these laws apply to everyone.

MM:  The original STOCK Act that had PI and insider trading by congress.  Insider trading passed.  PI was what Rep. Slaughter was most interested in.  Asbestos hearings.  Many people didn’t know what was happening.  Registry didn’t happen. 

PC:  Law that confirms law.  Brought about by media stories coupled with real insider trading like Galleon.  Some companies selling access to Congress.  What you now confirm is that members of Congress have a duty, law reconfirmed.

HP:  The law had a chilling effect on the industry.  We need a compliance system.  Yes, media reports.  But industry had gotten very bold.  Industry hearing directly from politicians.  Emails, $10K to sit with Rep. So and So.  Being first to know can mean hundreds of thousands of dollars.  Waiting for GAO / CRS reports.  Not until another “gotcha” moment, then Grassley language will fly through Congress and be signed within a month.

MM:  HP is right there is a chilling effect with some investor clients.  General counsel and compliance officers reacting, 2 reactions 1) there is an issue, we’ll fire all PI firms and 2) tried to do my diligence.  Most are struggling, just as many of you are with issue around “what is material information” when you start talking about Washington.  Many of those firms are trying to figure it out.  Confused, concerned.  Don’t exactly know what to do.

RW:  If there is another story, HP is right, the Grassley language will fly through.  Definitions are extremely broad.  Potential chilling effect huge,  beyond what is merited.  That’s why, without putting undue pressure on folks at GAO, I think the GAO study is of immense importance because we may think we know what PI is but that is a long step from regulatory language.  That report will be of immense importance.

SS:  A question from the audience –

Q:  The whole chilling effect and Grassley.  Where do you see media fitting in?

PC:  There’s a fine line between what I do and what a journalist does.  I’m a registered lobbyist.  We should expand registration in a distinct way from LDA, lobbyist, lobbying firms and clients.  In PI that’s a great start.  There will be a year-long conversation with GAO.  You can register a PI form.  Should also register media.  If you market yourself as a PI provider or policy research provider you do what we do.  The media broadly distributes, no so in PI space.  You do see “Political Pro” and B-gov, CQ.  Appropriate way to distribute information.  If I talk with a policy maker I’ve disclosed that I’m a lobbyist.  Media does provide the same content – think about a Bloomberg terminal.  LDA has exceptions, such as income, and percentage of time spent on this.

HP:  When you enter office is there an understanding that you are gathering general information or information of specific interest?

PC:  It’s obvious that I’m going to sell information.  Is there a difference between a lobbyist and an investment manager?  Probably.  When you sit with a staffer of policy maker they know not to share non-public information.  Improved registry would help.

SS:  Passing of information in meetings

RW:  Back to media.  I agree that many newsgathering agencies have PI component but very wary of including them in registration.  That would have a big chilling effect, esp on confidential “leaks.”  That would be too big a price to pay.  Apart from STOCK Act both House and Senate have rules on exchange of information but patchwork and incomplete.  STOCK Act confirming existing law.  Important achievement.

HP:  I agree, there is a difference between PI and reporting.  PI hears something and calls one person, one client, reporters broadly disseminate information. 

MM:  I agree with PAT.  Journalists who distribute broadly, but there is a growing number of companies providing information to asset management industry.  If give blanket exemption supporting an unlevel playing field, what delivery, how and to whom?

PC:  Not saying all media should register.  Look at how LDA differentiates.  If pay more than $5K must register.  Most media would quality under that exemption.

SS:  Where does PI industry go from here?

PC:  Gives emphasis to compliance, need to do it to the spirit and now the letter of the law.  The industry is still new.  I would like the industry to get more mature.

RW:  GAO should be part of the conversation.  If we inform process, we’ll tell them the problem and they’ll address it.  Industry should have concerns heard.

MM:  Industry has to deal with chilling effect with some clients.  How to professionalize business.  How to protect self and clients.  This kind of information will come in the door.  What will you do?  It shouldn’t be scary that you collect non-public information.

HP:  We need to watch how folks in the industry react.  Activist role that some short sellers are playing in DC.  Short sellers going to government agencies and driving actions for sole purpose of driving down stock prices.  In terms of registration, I am a registered lobbyist, I see people out and about who aren’t talking to the same people I do.

Q:  What is material information?

RW:  Material information is something people want to know for investments.  If a committee investigates a company and public doesn’t know but a staffer leaks it, that is non-public information.  Legislation is a tough case.  Say tax legislation affection a small industry of one company would have material effect.  Key area for focusing on.  What is material information in Congressional context.  If in doubt, leave it out.

MM:  Problem with materiality is you only now it after the fact.  If one piece of information will drive investors to invest it is probably material.

Q:  Bothered by regulating flow of information from democratic organizations, the asbestos bill didn’t go anywhere.

HP:  Why not disclose it?  A lot of people made a lot of money.

RW:  Insider trading prohibitions would apply if information provided for a benefit.  If no benefit intended shouldn’t be chilled.

HP:  There are real benefits for disclosure.  Abramoff activities came to light when people started asking question about his astronomical lobbying earning.  Press started to unravel the story. 

PC:  Disclose and registration will not prevent information sharing.  If you operate in this business information comes to you.  I wasn’t working the asbestos information.  If you get source information from one source it is usually wrong.   Congress re-stated their duty.  The chilling effect is surgical; it’s good.   You  have to police yourself.  If one source bury it – usually wrong.

Q:  How is an activist investor different from a lobbyist?  What about a company making an investment decision, would the company register?

HP:  Quite extraordinary to see what happened to  for-profit proprietary schools.  Short sellers went to the Dept of Education and asked for investigation.  One went so far as to go to homeless shelters and get homeless people to say they had been approached by these schools.  Short seller, who had personal gain at hand, asked to testify and trashed the industry, shouldn’t those folks file lobbying reports?  It will always be hard to have definitions and require people to disclose. 

PC:  Hard to argue against that, I agree.  Corporations probably should register.  The Grassley Amendment sweeps up so much.  Most people come to Washington DC because money or some sort of benefit at stake.  The Grassley language can be perfected.  Points to better enforcement of LDA.  If you’re advocating for an investigation or a policy change you’re lobbying.

SS:  Thanks panelists.