At least one of the hedge funds being investigated for
its use of expert networks in based in Massachusetts. In an unusual instance of
the state regulators acting before Securities and Exchange Commission, the
Massachusetts securities regulators are proposing a new regulation to address
the use of expert network services. They are proposing a new section under 950
CMR 12.205(9)(c)(16) to the existing list of dishonest and unethical practices:
16. a. To retain consulting services, for compensation
that is provided either directly to the consultant or indirectly through a
Matching or Expert Network Service, unless the adviser obtains a written
certification, signed by the consultant that:
(i) describes all confidentiality restrictions that the
consultant has, or reasonably expects to have, regarding Confidential
(ii) affirmatively states that the consultant will not
provide any Confidential Information to the adviser.
b. Notwithstanding section (a) an investment adviser who
comes into possession of material Confidential Information through a
consultation is precluded from trading any relevant security until such time as
the Confidential Information is made public.
c. Definitions. For purposes of this section:
(i) "Confidential Information" means any non-public
information, which one is bound by a confidentiality agreement or fiduciary (or
similar) duty not to disclose.
(ii) "Matching or Expert Network Service" means a firm
that for compensation matches consultants with investment advisers.
As alleged in In the Matter of Risk Reward Capital
Management Corp., RRC Management LLC, RRC BioFund LP, and James Silverman,
Docket No. E-2010-057, some investment advisers have paid expert networks and
consultants to access confidential information about publicly traded companies.
Massachusetts wants additional measures to ensure that
confidential information is not being accessed and traded upon. The proposed
regulations do not alter an investment advisers' existing duty not to trade on
insider information. The goal is to provide investment advisers with greater
clarity as to what is impermissible conduct when paying consultants for
In the end, it seems like it is just a record-keeping
exercise to me.
You can review
comments or submit a comment on the proposed regulation. There is a
proposed effective date of December 1, 2011.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
For more information about LexisNexis
products and solutions connect with us through our corporate site.