The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Restricted Lists

  • From Vol. 7 No.2 (Jan. 16, 2014)

    How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading?  (Part One of Four)

    Insider trading law is rife with counterintuitive presumptions.  Notable among them is the presumption that if one employee of a hedge fund management company receives material nonpublic information (MNPI), all employees of that management company are in possession of MNPI for insider trading purposes, and any trade in the subject security will be “on the basis of” that information.  See “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment,” The Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010).  However, that presumption can be rebutted by the presence of well-designed information barriers.  An information barrier, in this context, is a set of physical, operational, legal and technological structures and processes used to prevent the flow of information from one part of a firm to another, thereby preserving the ability of one part of the firm to trade securities that another part of the firm may not trade.  For example, assume that a single manager has a distressed debt fund that trades bank debt and a separate high-yield credit fund that trades bonds.  If the investment team for the distressed debt fund receives nonpublic earnings projections of an issuer based on service on that issuer’s creditor committee, the investment team for the high-yield credit fund would be prohibited – as a default – from trading in the public bonds of the same issuer because the whole firm would be presumed to be in possession of MNPI of that issuer.  However, if the firm had implemented a legally sufficient information barrier between the distressed debt and high-yield credit fund teams prior to receipt by the distressed fund team of MNPI, the high-yield credit fund team would still be able to trade public bonds of the issuer, even after receipt by the distressed fund team of MNPI.  This legal issue matters to investment performance because a good and legitimate investment opportunity may arise anytime.  In the foregoing example, the high-yield credit fund team may wish to purchase bonds of the issuer based on immaterial or public information received after the receipt of MNPI by the distressed fund team.  In the presence of a legally sufficient information barrier, the high-yield credit fund team would be able to execute on the opportunity.  Absent such an information barrier, the high-yield credit fund team would have to forego the opportunity or assume heightened insider trading risk.  Implicit in the foregoing hypothetical is the notion that an information barrier is useful to the extent that it is legally, operationally and otherwise sufficient.  Which of course begs the question: How can a hedge fund manager structure, implement and enforce sufficient information barriers?  This is the first article in a four-part series that aims to answer this question, or at least provide the rudiments of an answer and direction for further analysis.  In particular, this article provides an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; describes four principal benefits available from the use of robust information barriers; highlights the types of firms that can benefit most from the implementation of information barriers; and describes the types of firms that will find the implementation of robust information barriers most challenging.  The second article in this series will describe the regulatory environment surrounding the use of information barriers and discuss the building blocks of an effective information barrier control environment.  The third installment will describe how a firm can limit access to MNPI within the information barrier control environment and outline policies and procedures designed to bolster the effectiveness of information barriers.  The fourth installment will discuss the benefits of training and compliance surveillance related to information barriers and describe the four most significant challenges faced by hedge fund managers in structuring, implementing and enforcing robust information barriers.

    Read Full Article …
  • From Vol. 6 No.39 (Oct. 11, 2013)

    ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two)

    ACA Compliance Group recently released a report and sponsored a webcast describing the results of its most recent survey of hedge fund and private equity fund manager compliance practices.  This article, the second in a two-part series covering the survey results, discusses: insider trading issues (including information barriers, online data rooms, non-disclosure agreements, restricted and watch lists, political intelligence, expert networks and public company contacts); and expense practices (including the use of expense caps, the allocation of expenses among a manager and its funds, expense allocation reasonableness reviews and other expense-related controls).  The first article in this series summarized survey results relating to fund managers’ preparation and completion of regulatory filings (e.g., Form ADV, Form PF and non-U.S. regulatory filings), including a discussion of how many managers are making various regulatory filings; what resources are being used to prepare such filings; how Form PF expenses are being allocated among a manager and its funds; and whether Form PF is being shared with fund investors.  The first article also discussed survey results relating to presence examinations.  See “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013).

    Read Full Article …
  • From Vol. 6 No.38 (Oct. 3, 2013)

    ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two)

    ACA Compliance Group (ACA) recently released the second part of its three-part report describing the results of its surveys of hedge fund and private equity fund manager compliance practices, focusing on the completion and preparation of regulatory filings, various insider trading issues and expense practices.  ACA also presented a webcast explaining and expanding on the survey findings.  The report and webcast provided important market color and guidance enabling hedge fund and private equity fund managers to benchmark their compliance practices against those of their peers.  This article, the first of two installments covering the report and webcast, summarizes survey results relating to (1) the present status and focus areas of hedge fund and private equity fund manager presence examinations, and (2) fund managers’ preparation and completion of regulatory filings (e.g., Form ADV, Form PF and non-U.S. regulatory filings), including a discussion of how many managers are making various regulatory filings; what resources are being used to prepare such filings; how Form PF expenses are being allocated among a manager and its funds; and whether Form PF is being shared with fund investors.  The second installment will address insider trading issues (including discussions of information barriers, online data rooms, non-disclosure agreements, restricted and watch lists, political intelligence, expert networks and public company contacts); and expense practices (including the use of expense caps and the allocation of expenses among a manager and its funds).  For coverage of the first part of the ACA compliance report, conducted during the first quarter of this year, see “ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority,” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

    Read Full Article …
  • From Vol. 5 No.4 (Jan. 26, 2012)

    Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part Two of Three)

    Carefully conceived personal trading restrictions and prohibitions (such as pre-clearance of personal trades and blackout periods) are some of the most valuable tools available to a hedge fund manager to detect and prevent personal trading fraud, including insider trading and front-running.  Such policies prove the adage that an ounce of prevention is worth a pound of cure.  Contrast such personal trading restrictions and prohibitions with the reporting obligations mandated by Rule 204A-1 under the Investment Advisers Act of 1940 (Advisers Act) which only require a firm to review its covered persons’ trades retroactively.  Once a trade has been effected, a firm has few remedial options other than breaking the trade (if it is discovered in time) or disciplining the covered person (potentially including requiring him or her to disgorge any profits).  More often than not, once a personal trading violation has occurred, the damage has been done.  As such, unless a hedge fund manager flatly prohibits all personal trading by its covered persons, it will need to adopt some personal trading restrictions and prohibitions to prevent personal trading fraud.  Unfortunately, the securities laws and rules (including Rule 204A-1) provide only limited guidance in this regard.  This is the second article in a three-part series on personal trading policies and procedures for hedge fund managers.  The first article in this series discussed general considerations for hedge fund managers in developing effective personal trading policies; the scope of persons that may be covered by such personal trading policies; and the reporting obligations imposed on registered hedge fund managers by Rule 204A-1.  See “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  This article discusses various personal trading restrictions and prohibitions, including limitations on the number of brokerage firms covered persons can use to effect personal trades; pre-clearance requirements for personal trades; blackout periods during which personal trades cannot be effected; holding periods applicable to securities owned by covered persons; and other types of personal trading restrictions and prohibitions.  The third article in this series will describe various solutions designed to facilitate monitoring of personal trading compliance by hedge fund managers.

    Read Full Article …
  • From Vol. 4 No.37 (Oct. 21, 2011)

    Use by Hedge Fund Managers of Restricted Lists, Watch Lists and Ethical Walls to Prevent Insider Trading Violations

    Information management is at the core of the hedge fund business.  If managed properly, information can generate outsized returns.  If managed improperly, information can lead to insider trading and other securities law charges, and criminal liability.  Hedge fund managers, accordingly, work hard to compile mosaics of information that can serve as the basis of legal trading, and that do not include material nonpublic information (MNPI).  See “Investment Research and Insider Trading on ‘Outside Information’,” The Hedge Fund Law Report, Vol. 4, No. 29 (Aug. 25, 2011).  In doing so, one of the more popular and potent tools is the restricted list.  A close cousin of the restricted list is the watch list, and a related technique is the ethical wall.  This article provides a guide for hedge fund managers in creating, disseminating, updating and enforcing a restricted list.  In particular, the article discusses: the definition of a restricted list; the legal, regulatory and practical sources of the obligation to maintain a restricted list; relevant issues raised by the simultaneous management of hedge funds that invest in public and private securities; when a name should be added to and removed from a restricted list; whether subsidiaries, affiliates and various parts of the capital structure should be included in a restricted list; access to and dissemination and updating of a restricted list; two SEC enforcement actions highlighting compliance concerns that may motivate the SEC to bring an action against a hedge fund manager in this context; and eight techniques for enforcement of a restricted list.  The article also provides a chart of six fact patterns in which names may be added to a restricted list, listing, for each, the event that may require addition to the restricted list and the event that may justify removal.  In addition, the article contains a detailed discussion of “wall crossing” scenarios in the hedge fund context and concludes with a discussion of what watch lists are and how they are used by hedge fund managers.

    Read Full Article …