Expect greater SEC scrutiny of hedge funds that share information or collaborate in advance of their trades

By Perrie Michael Weiner and Patrick Hunnius

A recent Wall Street Journal article — ‘Activist investors often leak their plans to a favoured few’ — focused attention on ‘activist’ investors and stock analysts who (as part of their bullish or bearish campaigns for or against companies in their sights) ‘tip’ other investors about their planned campaigns and their accumulation of long/short positions.

While the article caused quite a splash, what seems to have gone unnoted is that the article appears to provide further confirmation that the Securities and Exchange Commission (SEC) is turning more aggressive attention toward shareholder activists and the type of ‘tipping’ described in the Wall Street Journal article. Moreover, the article itself has revived an issue that has been lying dormant for years — should, and will, the rules regarding the timing of filing Schedule 13Ds be revised by the SEC?

The Wall Street Journal article focused on instances where ‘activists’ ‘sometimes provide word of their campaigns to a favoured few investors days or weeks before they announce a big trade, which typically jolts a stock higher or lower’. According to the article, many lawyers, including ourselves, believe that this type of conduct would not raise insider-trading ‘risks… because this typically doesn’t involve a breach of a duty to keep the information confidential’. The article goes further, citing information from an SEC spokesman who said ‘he couldn’t recall the agency having brought a case in the area’…

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