Possible Leak to Lobbyists Gets Attention of the SEC

The Securities and Exchange Commission has looked into whether lobbyists provided hedge funds with potentially market-moving information about a pending congressional speech.

The SEC earlier this year questioned the office of Senate Majority Leader Bill Frist (R-Tenn.) about a possible insider leak to lobbyists about a speech Frist was to give on asbestos legislation, a Frist spokeswoman said.

SEC officials also said they had looked informally into whether hedge funds, in turn, bought shares in companies that would be affected if Congress approved the bill, which would have settled asbestos civil suits.

But the SEC officials said that no charges were imminent and that it was unclear whether providing congressional information could be considered improper or illegal under insider trading laws.

Employees of public companies are barred from disclosing material information about their companies' plans. But lawmakers and their staff in Congress do not face similar restrictions on the information they can provide about legislative actions. Congressional ethics rules prohibit such disclosures only when aides or lawmakers profit from the information.

Few lobbyists reached yesterday expressed worry that their information-sharing might be restricted anytime soon. But Paul A. Miller, president of the American League of Lobbyists, said he would think twice about taking on a hedge fund client until the SEC gave more guidance about the propriety of selling rarified information to hedge funds.

The Frist incident, which was first reported by the Wall Street Journal, points up a growing business among lobbyists: the selling of information and analysis to hedge funds. As hedge funds have proliferated, lobbyists have increasingly supplemented their incomes by advising these big-money investors about Washington trends as an adjunct to their basic task of trying to influence legislation and regulation.

"The advisory business to hedge funds has been growing," said Paul A. Equale, a prominent lobbyist. "But in my experience it is almost a benign exchange of ideas and perspectives. It's more explaining how Washington works."

Intelligence collecting and legislative prognostication has long been a staple of lobbyists. "Information gathering is part of the daily lifeblood of what lobbyists do for their clients," said Frederick D. McClure, a lobbyist with Sonnenschein Nath & Rosenthal.

In addition, various types of companies -- including lobbying/law firms and capital-based research organizations -- have long sold their best guesses about the Washington outlook to investment houses and their clients. Many investment houses have for years had their own Washington offices to churn out the same kinds of reports.

But the SEC was concerned enough about the upward movement of a few stocks prior to Frist's November 2005 speech, which pledged a Senate vote on the asbestos bill, that it posed some questions to the lawmaker's office. Those questions were referred to the Senate's legal counsel, a Frist spokeswoman said.