Allen & Overy warns hedge funds on use of political intelligence firms
Hedge funds using political intelligence firms have been advised to bolster their compliance standards in light of growing SEC and US congressional interest in these organisations, a top lawyer at Allen & Overy has warned.
“Hedge funds need to think seriously about implementing sufficiently robust compliance standards when dealing with political intelligence firms. While many managers have bolstered their compliance procedures when dealing with expert network consultants, managers would be well-advised to assure that their procedures apply at least the same level of scrutiny in their dealings with political intelligence firms,” said Jeffrey Lehtman, partner at Allen & Overy, speaking in Washington DC.
Political intelligence firms, which pride themselves on their excellent networks of politicians and government insiders, have proliferated in recent years as lawmakers’ actions increasingly play a major role in market movements.
A growing number of Wall Street firms, including hedge funds, pay for their information and political gloss with investors spending $402 million on political intelligence firms in 2009, according to Integrity Research Associates, a search company which pairs asset managers with researchers.
Lehtman’s warning comes as the Wall Street Journal reported the SEC issued subpoenas for emails and documents from Marwood, a political intelligence firm established by Edward Kennedy Junior, amid allegations the company may have warned its Wall Street clientele, including several hedge funds that the Food and Drug Administration was going to delay approval for a diabetes drug. One hedge fund is reported to have taken a substantial short position in the drug company following this advice generating a neat profit.
There is speculation the SEC is going to take a tougher line on political intelligence firms going forward. “The reported subpoena to Marwood is a strong signal to the hedge industry that the SEC is quite serious about trying to better understand the political intelligence sector and, where necessary, bring enforcement actions as a deterrent against improper activity,” added Lehtman.
The SEC’s review of these entities comes as several hedge funds including Galleon have been charged or faced regulatory scrutiny over their use of expert networks, which in some cases are alleged to have helped facilitate insider trading.
Since then, many hedge funds have adopted extremely rigorous internal procedures when dealing with expert networks. Precautionary measures include requiring compliance officials to listen to conversations between traders and expert networks.
Whether or not legislation will be passed to impose additional regulatory requirements on political intelligence firms remains to be seen.
“It is too early to tell whether there will be additional legislation. Some members of Congress already have taken a strong interest in investigating political intelligence firms. Their interest, combined with aggressive enforcement by the SEC or other regulators, may strengthen the hand of those who have previously called for requirements that political intelligence firms be required to register, similar to the obligations now imposed upon lobbyists,” commented Lehtman.