SEC Reviews Analysts’ Relationships With Hedge Fund Managers

The Securities and Exchange Commission is looking into brokerage analysts’ relationships with hedge fund managers.

The Securities and Exchange Commission is looking into brokerage analysts’ relationships with hedge fund managers. According to WSL sister publication Compliance Reporter, some hedge fund managers are targeting brokerage analysts as prospective investors and may be inducing those analysts to violate their firm’s internal procedures governing the use of research, Thomas Biolsi, associate regional director for examinations in the SEC’s Northeast Regional Office, told a Practising Law Institute hedge fund forum Wednesday.

The managers are making targeted phone calls to individuals referred to as “value-added investors,” who may include brokerage analysts, Biolsi said. He said the brokerage analysts may be deliberately targeted for their ability to provide the manager insights into the companies and industries the analysts cover. It is possible the analysts may tip off the manager by, for example, providing the manager information in an upcoming research report, Biolsi said. The hedge fund managers turn around and invest in those companies that are the subject of the analysts’ research.

The danger arises that the hedge fund managers may be inducing the analysts to breach their internal procedures for how research is released and when, a lawyer in New York said. Particularly if the brokerage analyst is also employed by a broker/dealer that has a trading relationship with the hedge fund manager, that raises a potential conflict of interest and should be disclosed, noted the chief compliance officer of a New York hedge fund manager.

Hedge fund managers are also forgetting their disclosure obligations when they engage in cross-investments with other managers, Biolsi said. Managers that act in concert in an investment are failing to make the required disclosures, he said.