Funds that use expert networks to provide their research analysts with specialized company and industry intelligence constantly face the risk that some of the information so obtained is both material and non-public and cannot therefore be used in trading.
Funds have reduced this risk by prohibiting their analysts from speaking to employees of public companies about their employers and, in some cases, by reminding all the experts they consult that they must not divulge any information they are duty-bound to keep confidential.
Nevertheless, there is no foolproof way to prevent someone with material, non-public information from passing it on to someone eager to trade on it. It is also generally impossible for fund lawyers or compliance personnel to monitor every research call with an outside expert. As a result, probably the best a fund can do to minimize the risk of its trading on insider information provided by outside experts is to (i) tape record all expert calls (where legal to do so) and (ii) advise its portfolio managers and research analysts that any trade that closely predates a corporate earnings or deal announcement that was influenced in any way by an outside expert consultation will be investigated by compliance and that the investigation will include a review of the taped calls and an interrogation of the expert or experts consulted in connection with the trade. The same warning should be given in writing to each outside expert prior to his or her engagement by the fund so that both sides of every call are on notice that the transmission of material, non-public information between them is ultimately discoverable.