SEC, FBI and other government officials have acknowledged that expert networks are a legitimate method for conducting primary investment research. See “RCA Symposium Clarifies Current Market Practice on Side Letters, Conflicts of Interest, Insider Trading Investigations, Whistleblowers, FATCA and Use of Managed Accounts Versus Funds of One (Part Two of Two)
,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013) (“Commenting on the permissible use of expert networks, FBI Special Agent David Chaves observed, ‘I think a majority of expert networks serve a very legitimate function and have always acted responsibly. We do not want to scare people into thinking this is not a valid resource because it is, and you can continue to use them. You will know when conduct crosses the line. I do not think people should overreact.’”). Yet many of the recent civil and criminal insider trading actions against hedge fund professionals have involved expert networks, directly or indirectly. See, e.g., “Fund Manager CR Intrinsic and Former SAC Portfolio Manager Are Civilly and Criminally Charged in Alleged ‘Record’ $276 Million Insider Trading Scheme
,” Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012). Accordingly, hedge fund managers have struggled with capturing the research and investment advantages of expert networks while avoiding insider trading and other information risks. To offer concrete guidance and specific best practices in this area, Hedge Fund Law Report recently interviewed Catherine Smith, former Senior Counsel of the SEC’s Division of Enforcement and current General Counsel of expert network firm Guidepoint Global. Smith brought her regulatory and private practice experience to bear on topics including how the use by hedge fund managers of expert networks has evolved; whether managers impose restrictions or prohibitions on the experts that may be consulted; how managers conduct due diligence on expert networks; how expert networks screen prospective experts; whether expert networks restrict topics eligible for discussion by their experts; compliance controls implemented by expert network firms and hedge fund managers; and different surveillance methods for monitoring expert network consultations. This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Risk & Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013. For a fuller description of the Symposium, click here
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