Insight

There has been an increase in the number of firms using Expert Research Networks (ERNs) for market insights. 

ERNs can provide a competitive edge in making investment decisions but hedge funds must still implement strong internal controls to ensure they do not fall on the wrong side of the regulator, according to Kinetic Partners, a global professional services firm to the asset management, investment banking and brokerage community.

ERNs are widely used by hedge funds globally to develop market insights; however, with increasing regulatory scrutiny, hedge funds must be careful that any information received does not constitute material non-public information (inside information).

The SEC has taken action against several individuals and firms in the last year for use of material non-public information obtained from ERNs, a trend we expect to continue. In response, the industry has been adopting tighter controls when using ERNs. Such controls include:

• Due diligence on ERNs
• Reviewing terms of agreements with ERNs
• Insider trading training
• Random sample monitoring / chaperoned conversations
• Random sample testing of employee trades after conversations with ERNs

“While it goes without saying that strong internal controls are essential, it is the due diligence which firms have conducted that is likely to be the determining factor when the SEC comes in to visit,” said Gregory Worsfold, Consultant at Kinetic Partners. “We have a strong team of experts that regularly conduct due diligence on these networks, understand industry best practice and can help firms avoid the pitfalls of using these vital tools of the trade.”

For further information about ERNs please contact Greg Worsfold or you ususal contact in our New York office.