Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News August 15, 2011 Issue

Massachusetts Becomes First State to Regulate Expert Network Relationships

If you or someone you know is registered as an adviser in Massachusetts, take note.

Massachusetts has become the first state in the nation to adopt regulations related to the use of expert network firms by advisers.

In an attempt to thwart would-be insider traders, Massachusetts is requiring expert matching firms to certify to the Massachusetts-registered advisers they work with that:

  • they will not provide certain types of confidential (i.e. inside) information to the adviser;
  • they have confidentiality restrictions in place relevant to the consultation, as described in the certification; and
  • the certification is accurate at any time services are provided to a Massachusetts adviser.

If the adviser has received confidential information about a security, the new regulation also prohibits an adviser from trading in the security until the information becomes public.

Massachusetts-registered advisers and any expert matching firms have until December 1 to come into compliance with the new regulation.

Massachusetts securities officials said "[t]he rise of expert network firms, and the number of abuses that have been addressed by regulators, make it clear that additional measures are required to ensure that confidential information is not being accessed and traded upon." The new regulation doesnít alter an investment adviserís existing duty not to trade on insider information, said the state. The regulation seeks to provide advisers with "greater clarity as to what is impermissible conduct when paying consultants for information."

The adopted rule only requires the written certification for "Investment Consulting Services." "Investment Consulting Services" is defined as a consultation for the purposes of assisting the investment adviserís decision as to whether to buy, sell, or abstain from buying or selling, positions in client accounts.

Also, the new requirements apply only to investment advisers. No requirements are directly imposed upon matching or expert network services. "Should firms providing such services to investment advisers choose, as an accommodation to the investment adviser," said the adopting release, "they may act as an intermediary and incur the administrative cost of procuring the required certifications."

E-signatures are acceptable on the certifications, "provided the investment adviser retains the electronic documents in compliance with general books and records requirements."