New York – In a recent poll of institutional equity market participants by the TABB Group nearly 80% of respondents said that the compliance controls in place at expert networks were not enough to prevent violations. More than half of respondents believe that expert networks need guidance. Many of the market participants we speak with have a similar view—that regulation of expert networks is likely, and in some cases firms are holding back on their usage of expert networks while waiting for regulatory guidance.
The TABB Group, a consulting firm focused on financial markets, conducted a survey of 112 institutional equity market participants, including individuals from investment management companies, hedge funds, brokers, exchanges, advisory firms, and regulators during the week of December 22, 2010.
According to the report, about 78 percent said the compliance controls in place at these firms were not enough to prevent violations. “The industry clearly believes that the business practices of expert networks walk a fine line between legitimate and illegitimate research, and that the industry is in need of a clear code of conduct,” the TABB report said.
About 63 percent of those interviewed said the investigations had hurt investor confidence. “There is an overwhelming belief that the recent insider trading probe has put a damper on investor confidence,” TABB analysts wrote in a report.
Nearly all of the TABB respondents, 98 percent, said they believed the current investigations would reduce revenue at expert networks — 39 percent said the decline would be limited while 29 percent predicted a severe drop. “The need to invest in costly compliance measures — post regulation — could have a negative impact on the use of expert networks,” the report said.
The report also indicated a consensus on the issue of whether employees of public companies should be allowed to work for expert networks — 66 percent of respondents said employees should be “banned from collecting fees.” “Since employees may not know what constitutes nonpublic, material information, the safest thing to do is eliminate the risk,” the TABB report said.
Professional investors also expressed concern that aggressive investigators may be pushing the boundaries of what is considered insider information.
While we are not aware of any regulatory or legislative initiatives currently focused on expert networks, it would not be surprising to see regulators impose guidelines on usage of expert networks by public market investors. One option is for the network industry to impose guidelines on itself, but given the number and diversity of expert network firms such an outcome would be difficult to achieve. Nevertheless, many users are now requiring affirmations from experts at public companies that they have the approval of their employers to participate in consultations. While helpful, this will probably not be sufficient to stem regulatory and/or legislative action.