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’
,” 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.