The SEC’s Focus on Value-Added Investors

Private fund managers’ controls with respect to MNPI

Marc E. Elovitz and Tarik M. Shah, Schulte Roth & Zabel LLP

Staff at the U.S. Securities and Exchange Commission (“SEC”) have long been concerned about new ways that financial firms can become exposed to material nonpublic information (“MNPI”), which can lead to insider trading. Particularly with respect to investment advisers, regulators view contacts with other industry participants as potentially ripe for the transmission of MNPI. An investment adviser’s contacts with experts from expert networks, officials at publicly traded companies, and counterparts at other buy-side firms (typically within the scope of an adviser’s research and investment process), have long been within the SEC’s focus. 

Examination staff often request a copy of a fund manager’s policies and procedures relating to value-added investors — what are they looking for and how can a manager be prepared? They also ask managers to identify their value-added investors. This article explains the genesis of the term and provides practical suggestions for meeting examination expectations and protecting your firm.

Before the government’s attention turned to a series of high-profile insider trading cases against hedge fund managers using expert networks, examination staff began inquiring into firms’ relationships with investors in their funds who were also affiliated with public companies. The examination staff labeled them as “value-added investors” (“VAI”) because they viewed them as potentially providing a conduit for insider information to the fund managers who would then use such information for the benefit of client funds and their investors, including the insiders. After taking a back seat to expert networks, these types of investors have once again become a focus of regulators. 

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