During the COVID-19 pandemic, hedge fund employees were forced to work from home. This new normal created new challenges for hedge funds looking to prevent and monitor insider trading risk.

Insider trading refers to purchasing or selling securities while in possession of material non-public information concerning such securities, or tipping such information, where the trader or tipper breaches a fiduciary duty or a duty arising out of a relationship of trust or confidence.(U.S. v. O’Hagan, 521 U.S. 642 (1997). 

This paper explains how privacy programs can help hedge funds manage insider trading risk in work from home environments.


On the one hand, hedge funds have a duty to have compliance programs that prevent and detect insider trading. Congress enacted Rule 17(j) of the Investment Company Act to provide the Securities Exchange Commission (SEC) the power to address concerns about personal trading and investing by fund employees. Failing to have adequate means to prevent and detect insider trading can result in enforcement action by the SEC.

On the other hand, hedge funds must avoid the legal risks associated with violating employees’ privacy. The Electronic Communication Privacy Act (ECPA) prohibits the interception of wire communications and electronic communications.

 Intrusion upon seclusion is a common-law tort claim relevant to monitoring employees. One who intentionally intrudes, physically or otherwise, upon the solitude or seclusion of another or his private affairs, is subject to liability to the other for invasion of his privacy, if the intrusion would be highly offensive to a reasonable person[1]. The new work from home environment blurred the line of what intrusion may be highly offensive to a reasonable person. With more work being done at home, there is increase risks that employers may listen or intercept employees’ purely personal communications.

  • CASE 1

The SEC charged two brokers with insider trading ahead of IBM-SPSS merger for $1 million profit. In that case, the SEC alleged that a broker learned material nonpublic information about the merger from his roommate, a research analyst who got the information from an attorney working on the transaction[2]. One broker purchased SPSS securities and subsequently tipped his friend and fellow broker who also traded.

  • CASE 2

The SEC charged hedge fund adviser Steven Cohen for failing to supervise employees and prevent them from insider trading under his watch. After being aware that employees possessed material non-public information about an upcoming earning announcement at Dell. Cohen failed to take prompt action to determine whether employees were engaged in unlawful insider trading[3]. Instead, Cohen liquidated his Dell shares based on material nonpublic information.


An effective privacy program sends the message, internally and externally to regulators and potential investors, that privacy is a real priority within the subject hedge fund. Privacy programs will help Chief Compliance Officers (COOs) prevent the potential for abuse of material non-public information by insiders and others. Far to common, hedge funds have boilerplate compliance manuals that do not mesh with or correspond to the type of insider trading risks created by working from home. A privacy programs will help hedge funds minimize the risks of insider trading and avoid violating employees’ reasonable expectation of privacy[4].

Privacy programs supplements CCOs expertise with surveillance technology and employees’ reasonable expectation of privacy. As illustrated by case 1, a roommate using material non-public information for personal gains is insider trading. In this new normal, previous policies and procedures must be updated because working remotely presents new challenges in terms of insider trading. Moving forward, roommates and spouses will increasingly create insider trading risks.

Unfortunately, privacy programs will not help CCOs prevent all types of insider trading risks. In some cases, insider trading is condoned by hedge funds’ culture and executives. In cases similar to the matter of Steven Cohen, having effective monitoring policies may not prevent insider trading. However, effective monitoring policies will give the CCO notice of potential insider trading. The compliance rule exposes the CCO to liability for lapse or failures of compliance programs. Given this reality, it is up to the CCO to report the insider trading up to the board or out to regulators to avoid potential liability. 


The impact of insider trading on investors is hard to measure. On one hand, insider trading generates millions of dollars in illegal profits every year at the expense of investors. On the other hand, insider trading threatens the integrity of the U.S. securities market.

Hedge funds should consider the following measures to avoid non-compliance with insider trading laws and avoid violating employees’ privacy.

  1. Hedge funds should provide employees with work phones to avoid ECPA liability. Hedge funds who provide communication services, such as company telephone or email service, has the right to intercept call that happen in the normal course of business.
  2. Privacy Program policies should detail; 
  • when monitoring can or will occur, 
  • to whom material non-public information may be disclosed, 
  • the consequences for violating privacy program policies, and
  • establish preclearance requirements. Preclearance requires employees to seek pre-approval of their personal securities transactions. Preclearance requirement separate securities in blacklists or gray lists. When a request for preclearance is made, the compliance staff checks the appropriate list to determine whether to permit the trade.





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