At a breakfast fund-raiser last year at the Liaison Capitol Hill hotel, former lobbyist Paul Equale pulled up a chair next to Sen. Richard Durbin. As they chatted, the Illinois Democrat told him about a recent breakthrough in his efforts to push through a bill to cap debit-card fees.In Washington, such shop talk between political insiders is so routine that it hardly warrants mention. For Mr. Equale, however, it yields intelligence that fetches good money on Wall Street.

Mr. Equale works as a consultant for Gerson Lehrman Group Inc., which connects Wall Street investors hungry for information with Washington insiders who possess it. After hobnobbing with Mr. Durbin, Mr. Equale shared his conclusions about the debit-card legislation with hedge funds including Perry Capital and Jana Partners. Both funds subsequently traded in the stocks of Visa Inc. and MasterCard Inc., according to regulatory filings. It is unclear what role Mr. Equale's report played in their investment decisions.

Information about what's happening in Washington is at a premium on Wall Street these days. Government regulatory changes and economic initiatives following the 2008 financial crisis have affected numerous industries, and even minor shifts in policy can be of interest to hedge-fund managers. When the health-care bill was snaking its way through Congress in 2009, for example, hedge funds wanted to know about every twist and turn. They followed the debt-ceiling showdown over the summer just as closely.

Keen for information about what's happening behind the scenes, hedge funds have been drilling ever deeper into the government. Thousands of political insiders are being paid by hedge funds, private-equity firms and other big investors. Former Federal Reserve Chairman Alan Greenspan, for example, is an adviser to Paulson & Co., and former Treasury Secretary John Snow works for Cerberus Capital Management. SAC Capital Advisors and Eton Park Capital Management have hired former congressional staffers. Some investment groups contract with lobbyists to pass along information they pick up during conversations with lawmakers, congressional aides and other government officials. "I have information from doing my day job as a lobbyist," explains one lobbyist. "That information has value on Wall Street. So I sell it."

Securities laws generally prohibit trading on the basis of material nonpublic information about public companies, if the person with access to the information has a duty to keep it secret. Expert networks that traffic in corporate information have attracted government scrutiny. Prosecutors have charged five consultants at Primary Global Research LLC, an expert-network firm in Mountain View, Calif., with violating those prohibitions.

Securities laws don't, however, bar most political insiders from sharing nonpublic information about government affairs. On the contrary, part of the job of lawmakers, staffers and lobbyists is to discuss policy options and pending legislation with anyone who might be considered an interested party. "A legislator normally talks to a lobbyist without any expectation that the information will be kept confidential," says Karl Groskaufmanis, a lawyer at Fried, Frank, Harris, Shriver & Jacobson LLP in Washington who focuses on securities regulations

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