Information obtained by political intelligence firms from government sources may constitute material nonpublic information (MNPI) and may give rise to insider trading liability. 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 SEC recently charged a political intelligence firm with failing to have adequate policies governing the receipt and dissemination of MNPI by its employees, and with failing to enforce the policies that it did have. This article summarizes the relevant policies and procedures, alleged deficiencies and events that sparked the enforcement action. In the press release announcing the settlement, Andrew J. Ceresney, the Director of the SEC Division of Enforcement, cautioned, “Government employees routinely possess and generate confidential market-moving information. When political intelligence firms . . . obtain information from government employees, they must take the necessary steps to prevent the dissemination of potentially material nonpublic information obtained in the course of their research.” However, bringing insider trading cases based on the use of political intelligence may be challenging. See “RCA ECO 2014 Symposium Offers Insight from Top SEC Officials on Cybersecurity, Reg M, Examinations, Insider Trading Investigations, the Newman Appeal, Expert Networks and Political Intelligence (Part Two of Two)
,” Hedge Fund Law Report, Vol. 7, No. 25 (Jun. 27, 2014). For more on political intelligence, see “GAO Report Dissects the Mechanics of the Political Intelligence Market and Highlights Insider Trading Risks for Hedge Fund Managers
,” Hedge Fund Law Report, Vol. 6, No. 17 (Apr. 25, 2013).