New York – In a Wall Street Journal article yesterday, entitled “SEC Pushes for Hedge-Fund Disclosure”, a thorny issue raised its head. The SEC is, of course, trying to get a handle on the degree of potential access to “material non-public information” that hedge funds may have access to by virtue of serving as officers in public corporations. This has been exacerbated the trend towards hedge funds as shareholder activists (upon acquisition of large blocks a individual company stock).
The SEC has asked that disclosures of hedge fund personnel, their relatives and their clients as to which companies they are servicing as officers. As such, the probe seems to be predominantly related to insider trading. However, we believe that there will be some collateral damage to certain segments of the research industry.
The SEC is also asking for lists of one-on-one meetings at conferences, which are sponsored by brokerage companies. In particular, the SEC is asking for dates of meetings, names and titles of employees who attended, the names of the brokerage firms, and the names of corporate insiders and their companies involved in these meetings.
As with much of the SEC activity, however, there is the intended impact and unintended consequences.
It is, of course, the unintended impact that is the main issue for the alternative research industry. The unintended effect may be that it serves to limit research firms ability to access company management. This would clearly be a negative for serious institutional investors, as well as small cap research firms that rely on management information and dialogue to make their recommendations. In a recent ResearchFocus, we surveyed a number of money managers with regard to their opinions about small cap research. Not surprisingly, one of the key findings was that the money managers valued research providers that had solid access to management in the companies that they covered.
It is understandable that the SEC would want to get at insider information, but going to the extent extreme of asking for the details of conference meetings may have too much of an economic cost for the alternative research industry to warrant its implementation.