How Can Hedge Fund Managers Distinguish Between Market Color and Inside Information?

Hedge fund managers are in the business of collecting, analyzing and acting on a significant volume of complex information, which requires navigating various federal securities laws to determine whether that information can be traded upon. The spectrum of information received by managers ranges from public information gleaned from sources such as filed annual or quarterly reports (permitted for trading), to material nonpublic information (MNPI) obtained from someone with a duty to the securities’ issuer (impermissible for trading). Somewhere in the middle is “market color” – information that is more specific to a company, industry or market than public information, but that does not rise to the level of MNPI. Distinguishing between market color and inside information is, however, infamously difficult and fraught with peril considering the SEC’s recent attempts to crack down on insider trading. See “SEC Insider Trading Action Highlights Red Flags Hedge Fund Managers Must Heed When Employing Political Intelligence Consultants” (Jun. 8, 2017). This article addresses this issue by identifying sources of market color and the channels via which it is provided; distinguishing between these information types in various contexts; detailing the relationship between soft dollars and market color; and identifying regulatory precedents that may provide insight into how the SEC may treat market color. For coverage of recent developments in insider trading laws, see “Supreme Court’s Ruling in Salman v. U.S. Affirms the Importance of a Tipper’s ‘Personal Benefit’ for Insider Trading, but Also Creates Uncertainty” (Feb. 9, 2017); and “General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action” (Nov. 3, 2016).

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