Last week, President Obama signed an ethics bill banning members of Congress from trading stocks and other securities on the basis of confidential information they receive as lawmakers. After signing the Stock Act, Obama added, "if members of Congress use nonpublic information to gain an unfair advantage in the market, they are breaking the law."

But what about former members of Congress? Should they also be barred from trading on information they may have learned while in office? Or should political insiders, like former lobbyists and heads of government agencies, be able to sell information gained through their contacts who are still in office?

An earlier version of the bill, which was passed by the Senate last week with a 96-3 vote, would have addressed this issue. Specifically, it would have required political intelligence firms – companies that sell politically sensitive material to hedge funds, private-equity firms, and other high-rolling investors – to register with the federal government and disclose their clients, similar to the system used for lobbyists.

When asked about the removal of the political intelligence provision, Sen. Chuck Grassley (R-IA) who sponsored the bill, was not pleased, to say the least:

"It's astonishing and extremely disappointing that the House would fulfill Wall Street's wishes by killing this provision. The Senate clearly voted to try and shed light on an industry that's behind the scenes," said Sen. Greeley.

Although operating behind the scenes, the tentacles of the political intelligence industry stretch all over Washington D.C. The industry employs roughly 2,000 people and generates about $400 million in annual revenue, according to Integrity Research Associates LLC. Firms like Gerson Lehrman Group, Coleman Research Group, and Public Insight LP supply hedge funds and other institutional investors with inside information related to government actions in an effort to gain an advantage in the market.

It's not just no-name lobbyists getting in on that booming industry: former Federal Reserve Chairman Alan Greenspan works as an advisor to Paulson & Co., while former Treasury Secretary John Snow works for Cerberus Capital Management, just to name two.

Generally, securities laws prohibit trading on the basis of nonpublic information about public companies if the person with access to the information has a duty to keep it secret. However, securities laws don't prevent political insiders from sharing nonpublic information about government affairs, since it is part of lawmakers' work to discuss policy options with interested parties, like lobbyists and former politicians.

Take, for example, former Energy Department official Paul Equale of the firm Gerson Lehrman Group. A recent exposé in the Wall Street Journal highlighted a meeting between Mr. Equale and Sen. Richard Durbin (D-IL) in which Sen. Durbin mentioned a development in his efforts to push through a cap on debit-card fees which, at the time, was a provision in the Dodd-Frank financial-reform law.

During their short meeting at a $1,000-plate breakfast fundraiser for Senate Majority Leader Harry Reid (D-NV), Durbin divulged that he had managed to win support for his provision from Rep. Barney Frank (D-MA), who at the time was the chair of the financial services committee. Rep. Frank had previously opposed the provision, fearing that it may hurt small banks. Additionally, analysts had been warning that a cap on debit-card fees had the potential to cost credit-card companies billions in debit-transaction revenue.

Soon after their meeting, Mr. Equale shared his findings with Perry Capital and Jana Partners, two large US hedge funds. According to regulatory filings, Perry bought up 400,000 shares of Visa (NYSE:V) and 90,000 shares of Mastercard (NYSE:MA) in the fourth quarter, after the Fed proposed a tougher-than-expected debit-card fee cap. Jana, not wanting to be left out, purchased 1.6 million shares of Visa during this period.

Depending on when the shares were purchased, this could have been a clumsy move on their parts, since both Visa and Mastercard's share prices dropped over 10% in mid-December.

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When lawmakers softened the proposal in the first quarter of 2011, credit-card companies started to rally. Again though, it's difficult to tell if this worked out in Perry and Jana's favor, since regulatory filings show the firms sold their respective positions in the first quarter of 2011. Win or lose, Mr. Equale gets paid at a rate of $600 per hour.

In another instance, during the final hours of deliberation over the new healthcare law on December 8, 2009, New-York-based political intelligence firm JNK Securities arranged a meeting between hedge-fund managers from Viking Global Investors and Karsch Capital Management and senators whose support was crucial to the bill's passage. In a nondescript basement on Capitol Hill, these senators said that they would soon reach a deal that eliminated a proposed government-run insurance plan.

Once the funds learned this, they made bullish bets on health-insurance stocks like Aetna (NYSE.AET) and Cigna Corp. (NYSE.CI) during the fourth quarter of 2009, which they sold in the first quarter of 2010 according to regulatory filings. Shares of Aetna rose 6% within days of the announcement, while Cigna rose nearly 10%.

This type of shenanigans, whereby Wall Street uses the power of government to its advantage, is nothing new. Back in the 1980s, stock trader Ivan Boesky, who made his millions speculating on corporate takeovers, hired lobbyists to gather intelligence on whether Congress planned to block a proposed takeover of Gulf Corp. by Standard Oil. Once Boesky heard the merger would go through, he made a handsome profit. Boesky was eventually barred from the securities industry after serving prison time for insider trading; however, the information he attained from Washington was not included in the case.

The real question is whether or not political intelligence firms and similar expert networks give institutional investors a significant advantage over retail investors. I would say the answer is an unquestionable "yes" in light of the actions taken by Perry Capital and Jana Fund soon after they received inside information from Mr. Equale.

Then why did the authors of the most recent ethics bill remove the political intelligence provision, even after it had strong bipartisan support in the Senate?

Perhaps someone with close ties to the executive branch wanted to keep the money flowing and to let the revolving door between government and financial services spin uninterrupted.