Hedge fund managers and other sophisticated investors are increasingly seeking out political intelligence (as defined below) to inform their investment decision-making. While political intelligence can give hedge fund managers a trading edge, it also presents insider trading and other legal risks. See “Former Federal Prosecutors Share Perspectives on Insider Trading Hot-Button Issues and Enforcement Trends Relevant to Hedge Fund Managers
,” Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012). To address such insider trading risks, Congress passed the Stop Trading on Congressional Knowledge Act (STOCK Act) in 2012 to clarify that insider trading laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, apply to information derived from members of Congress and their staffs. See “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls
,” Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012). The STOCK Act defines political intelligence to include 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.” As part of the STOCK Act, Congress commissioned the United States Government Accountability Office (GAO) to study the role of political intelligence in investment decision-making and any attendant risks that could require the passage of additional legislation. The GAO recently published a report detailing its findings (Report). The Report discusses: (1) what is known about the sale of public and nonpublic political intelligence, including the extent to which investors rely on such information and the effect the sale of political intelligence may have on financial markets; and (2) potential benefits, costs and challenges associated with suggested legislation that would impose disclosure requirements on those who provide, gather, sell or use political intelligence. The Report offers hedge fund managers a richer understanding of the political intelligence market and the risks involved in using this type of information in their investment decision-making. This article summarizes key findings of the Report.