Avoiding Insider Trading Risks in Fundamental Investment Research

Recent high-profile Securities and Exchange Commission cases against hedge fund managers revive the most universal question associated with insider trading regulation. For almost every "buy-side" investor, a persistent concern centers on determining when fundamental investment research touches the gray areas of insider trading law. A renewed SEC focus on "Wall Street" defendants heightens the importance of understanding when research activity that can be viewed as appropriate nonetheless may become the source of regulatory scrutiny.

This is not a new concern. Since its inception, insider trading regulation has focused on distinguishing between legitimate research on the one hand and fraudulent conduct on the other. In its 1981 opinion relating to securities analyst Raymond Dirks, the SEC recognized that, with respect to research analysts, "[t]he value to the entire market of these efforts cannot be gainsaid; market efficiency in pricing is significantly enhanced by