Integrity Research Compliance AccreditationsSM
COMPLIANCE BEST PRACTICES FOR EXPERT NETWORKS
The following compliance “best practices” are consistent with general practices of firms offering direct consultations with individual ‘experts’. Not all practices may apply depending on the nature of the firm and its research.
Best practices are based upon: industry surveys, recent case law, regulator sentiment, applicable laws, rules and regulations, and are intended to reduce risks related to confidential and potentially material, non-public information and other potential compliance-related risks. Key compliance controls are designated by an asterisk (*) and summarized in the section ‘Key Compliance Controls.’ See ‘Terminology’ for definitions of the terms used in this document.
To receive accreditation, research firms need to demonstrate that they follow each of the key compliance controls summarized below, as well as a majority of the overall best practices.
Key Compliance Controls
Key practices designated with an asterisk (*) below are summarized here. Each of these key practices needs to be followed to receive accreditation.
- Have a designated compliance professional who is accountable for the firm’s compliance policies and procedures. (See A.1.)
- Establish and enforce compliance policies and procedures written in clear and understandable language. (See A.2.)
- Provide a regular compliance training program for all employees. (See A.3.)
- Have clearly defined and actively used escalation procedures for employees. (See A.5.)
- Keep complete records of all expert consultations. (See A.7.)
- Upon joining an expert network and periodically thereafter, experts should be required to agree to formal terms and conditions that outline the expert network’s policies. (See B.1.)
- Experts should regularly reaffirm and reaccept the terms and conditions. (See B.2.)
- Experts should complete a regular training program. (See B.3.)
- Experts should be incented to (or at least not dis-incented to) refuse to answer client questions and to report client questioning that the expert feels might be in violation of any ethical, legal, regulatory, and contractual obligations or constraints the expert might have. (See B.8.)
A. General Compliance Practices
- Each expert network should have one or more dedicated compliance professionals who are responsible and accountable for its compliance policies and procedures.*
- The compliance professional(s), in conjunction with senior management, should instill a compliance culture in which all employees understand the importance of compliance and are willing to escalate potential issues.
- The compliance professional(s) should be available to employees, should they need guidance or advice related to compliance.
- The compliance professional(s) should proactively keep up-to-date with new developments, and update the compliance platform as necessary; and conduct periodic testing of compliance systems to ensure their adequate functioning.
- Periodic testing should include spot-checking employee interactions with clients to ensure that interactions are consistent with the firm’s policies.
- Establish and enforce compliance policies and procedures written in clear and understandable language for the firm’s employees and experts.* Written policies should include:
- Information control: Confidential information and potentially material non-public information must be promptly detected and handled appropriately through comprehensive written policies and procedures that are well-known and consistently followed at all levels. Policies should include instructions on how to identify, escalate and properly handle information that might be considered material.
- Trading restrictions: Securities trading by employees and their dependents should be limited and periodically reviewed to prevent incentives to obtain or use material non-public information or confidential information.
- Conflicts: Potential conflicts involving the firm’s structure or employee personal or financial conflicts should be vetted and either adequately disclosed or appropriate walling-off procedures should be followed.
- Employees and experts should review and annually certify their agreement with the terms of the policies.
- Employees and experts should have ready access to all compliance policies and should have the ability to seek clarification from the firm’s compliance professional(s).
- Provide a regular training program for all employees.*
- Training should include specific examples of material nonpublic information and how to escalate questionable information.
- To enhance the value of training, also consider testing to ensure all employees really understand the issues.
- Changes in compliance rules should be communicated promptly to experts, clients and employees. Periodically circulate to employees relevant examples of regulatory actions or other materials relating to compliance.
- Each firm should have clearly defined and actively used escalation procedures* for employees who are uncertain about the nature of information received and wish further guidance.
- Maintain records of instances in which employees have escalated issues relating to confidential or potentially material non-public information.
- Records should include who is responsible for follow-up and how each issue is ultimately resolved.
- Expert network firms should maintain an internal database of companies that prohibit consulting by their employees, and such employees should not participate in the network.
- Expert networks should proactively determine whether a company’s policies limit its employees’ ability to be engaged as experts.
- Information on company policies should be stored systematically and efforts should be made to connect such policies to individual profiles of experts who may be affected by them.
- Keep complete records of all expert consultations*, including: expert name; client name; topic of discussion; questions/issues, if known; time and date of consultation(s); and, the amount of fees paid by the network to the expert. This information should be available to clients upon request.
- Conduct periodic compliance testing to ensure systems and processes are adequately catching and preventing violations.
- Create and review compliance exception reports. For example, on a monthly basis compliance could review a report on the top ten most popular consultants or pick a sample of random consultations to review.
- Periodically ‘spot check’ employee interactions with clients to ensure that interactions are consistent with the firm’s compliance policies.
- Ensure that incentive structures are consistent with compliant employee behavior.
- Ensure that those responsible for expert recruiting are distinct from sales.
- Develop and administer trading guidelines for employees to ensure that employees do not make securities trades based on information obtained through client/expert interactions.
- Maintain a restricted list of securities of publicly traded securities that includes, at a minimum, clients and public companies that have been the subjects of projects.
- Periodically review employee securities transactions or holdings.
- If the firm performs custom research for clients, the fact that information was previously disclosed should be disclosed if that same information is later included in broadly disseminated reports.
- Retain documents and internal emails for a minimum of three years.
- Retention should include: compliance-related certifications; records of escalations; communications regarding potential material non-public information; and other compliance-related documents.
- Maintain a ‘whistleblower’ program, whereby employees can anonymously report potential compliance or legal violations within the firm.
- If the firm conducts business in countries outside the U.S., it should have controls in place to ensure that it does not run afoul of applicable anti-bribery statutes.
B. Practices Relating to Experts
- Upon joining an expert network and periodically thereafter, experts should be required to agree to formal terms and conditions that outline the expert network’s policies.*
- No expert should be allowed to engage in any consultation that involves discussions about the company for which the expert currently works or has worked within the past six months.
- No expert should engage in a consultation with a client whose firm competes with his or her employer.
- If the expert is unsure whether s/he is able to participate in a specific engagement due to a potential conflict, s/he must decline to participate in that engagement.
- No expert should disclose or attempt to benefit from any information related to a consultation, including but not limited to, the subject matter of any projects; information about client activity; and information about the nature of a client’s inquiry.
- Experts must not disclose or trade on material non-public information.
- Experts must not disclose confidential information including but not limited to: trade secrets, proprietary information and intellectual property. In addition, experts must abide by all non-disclosure agreements, severance agreements, and other applicable contractual agreements.
- Experts must not give investment or legal advice.
- Additional restrictions on experts with specific backgrounds, including:
- If an expert is a doctor, s/he must not address questions related to clinical trials, patients’ experiences during clinical trials, or medical advice.
- If an expert is an accountant, s/he must not consult about companies that s/he has audited for a minimum of twelve months or offer accounting advice.
- If an expert is a lawyer, s/he must not offer legal advice.
- If an expert is an officer or director of a company, s/he must not consult when an IPO, merger, or tender offer is pending.
- Current or former government employees should seek guidance from their ethics officials or equivalent before agreeing to be a consultant. No former federal legislative or executive branch government employee should consult within six months of leaving the government.
- Experts should regularly reaffirm and re-accept the terms and conditions.*
- Experts should complete a regular training program regarding the legal and ethical obligations that could potentially restrict expert participation in client engagements and the appropriate use of an expert network.*
- Training should include: specific examples of material nonpublic information that experts might encounter during consultations; how to escalate questionable information; and, examples of conflicts that would prevent an expert from accepting a particular engagement.
- Enhanced training would also include a test after each training session.
- Experts who are employed by public companies should obtain meaningful, written approval from their employers regarding participation in the network.
- The written approval should be from a senior employee within the company who is high enough to understand the issues, such as a general counsel or CCO. At a minimum, experts should sign an attestation that they have approval from their employers to consult.
- Prospective experts should review all employment agreements, company manuals, and codes of ethics to ensure that they can participate in an expert network before being enrolled as an expert.
- Experts should confirm their ability to participate on a specific consulting engagement based on their detailed understanding of the subject of the engagement prior to the consultation.
- Ideally, experts should be informed as to which companies are the focus of the project and, consequently, are ‘off-limits’ and cannot be discussed.
- Except where an expert is independently employed or has received formal written approval from his/her employer, experts should be limited in the total number of consultations they can conduct, or the total amount of compensation they can earn, in order to avoid any allegation that their participation in expert network consultations may create conflicts of interest with, or betrayal of their fiduciary duty to, their employer. This limitation need not be the same for all experts, and is dependent on the expert’s salary, position, and employment status.
- Information on experts’ areas of conflict should be stored systematically and regularly reviewed by employees of the expert network responsible for matching clients with experts.
- Ideally, experts with conflicts of interest should not appear in the results when a search is conducted on the topic about which the expert has a conflict.
- Experts should be incented to (or at least not dis-incented to) refuse to answer client questions and to report client questioning that the expert feels might be in violation of any ethical, legal, regulatory, and contractual obligations or constraints the expert might have.* Typically this takes the form of providing full compensation for a set period of time for a basic consultation (such as 30 minutes), even if terminated early because of compliance issues.
- Expert networks should perform some level of background check on experts, such as: identity verification: fact-checking of their background as represented on their CVs, profiles or resumes; or confirmation that the expert has not previously committed a securities or other regulatory violation.
C. Practices Relating to Clients of Expert Networks
- Clients should be required to be as specific as possible when outlining an expert request. Generalized requests are more likely to lead to inappropriate contact with experts such as those who may be employed by a company the client is investigating, or those who have confidential information about a topic of interest to a client. Ideally, clients should identify whether they are interested in specific companies so experts from those companies are not sourced.
- Allow for controls reflecting the policies of clients, specifically a system to accept and implement the policies and procedures of various clients as an overriding filter to permit or restrict access to appropriate experts.
- Clients should have the ability to add their own terms and conditions to screen potential experts (supplementing those that are standard for the network.) Clients should be able to ask all potential experts specific screening questions.
- Expert networks should provide client compliance officers with tools that enable them to monitor, approve, and block pending consultations for their firm.
- Client compliance officers should also have the ability to ‘spot check’ consultations anonymously by surreptitiously listening-in on consultations.
- Expert networks should offer ability to record consultations and client compliance officers should have the ability to review samples of electronic communications with experts.
- Client compliance officers should have a way to blacklist experts based on place and status of employment. Whether handled directly by the client, or by communication between the client and expert network staff, such blacklisting should automatically flag or eliminate blacklisted experts from all searches conducted for that client.
D. Business Structure
The following practices are not applicable to research firms which do not have affiliated non-research businesses.
- If the firm has a trading desk or manages money, these activities must be walled off physically and functionally from other parts of the firm.
- The firm should ensure that research is not disseminated to the trading desk or money management subsidiary before it is widely distributed to clients.
- If the firm conducts investment banking activities such as corporate finance, acting as an underwriter, acting as a financial adviser in a merger or acquisition, or serves as placement agent for corporate issuers, the firm should ensure physical and functional separation from research, including separate reporting lines.
- If the firm has a trading desk, the firm should have trading restrictions in place to prevent insider trading, front running or other trading violations. At a minimum, the firm should have a policy that prevents staff from trading stocks in which the firm has executed a trade for at least 24 hours.
- If the firm performs consulting services, the firm must have established information barriers around the consulting part of the firm.
The following are definitions of terms used in this document:
Consultation: One-on-one discussion with an industry expert, either by phone or in person.
Consulting: We refer to consulting in these best practices as a separate business line designed to generate revenues from confidential consulting projects undertaken at the request of a client. Consulting differs from custom research (see below) in that the latter is a bespoke version of the research product rather than a distinct business.
Custom Research: Research performed specifically for a client at the client’s request. In some cases, custom research may be disseminated to other clients after delivery to the client originally requesting the research.
Expert Networks: Firms which arrange one-on-one consultations and meetings with consultants (‘experts’). Expert networks often also offer survey capabilities of the consultants enrolled in their network.
Experts: Consultants available through the expert network. Consultants are typically paid for consultations by the expert network on an hourly basis.
Primary Research: A research method whereby analysts communicate directly with sources through consultations, surveys, channel checks or less formal interactions. Many different types of research incorporate some form of primary research.
Survey: Soliciting information from multiple sources. Typically surveys are conducted with standardized questions.
 Background sources include: CFA Institute Research Objectivity Standards; NASD Rule 2711; NASD Rule 1120; NASD Notice to Members 04-18 (March 9, 2004); NASD Notice to Members 04-25 (March 2004); NASD Press Release, Sanford C. Bernstein & Co. (Feb. 8, 2006); NYSE Info Memo 04-10 (Mar. 9, 2004); NYSE Info Memo 04-16 (April 1, 2004); NYSE Rule 472; NYSE Rule 344.1; NYSE Rule 351; NYSE Rule 345; FINRA Regulatory Notice 08-55(Oct. 2008); Regulation AC; Stop Trading on Congressional Knowledge (STOCK) Act of 2012; NIRI Best Practice Guidelines; Sarbanes-Oxley; Dodd-Frank; Global Research Analyst Settlement; recent case law; regulator sentiment; industry surveys. However, these best practices do not incorporate all of the specific requirements detailed in these sources. In addition, these best practices do not address foreign affiliates, third party research, or the full requirements for registered entities.
© 2015 Integrity Research Associates LLC. Integrity Research Compliance Accreditations is a service mark of Integrity Research Associates LLC. These best practices do not address specific requirements for/under: entities registered as a broker dealer or investment adviser with the U.S. Securities and Exchange Commission, applicable state law, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, or the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the rules and regulations promulgated under any of these laws. Nor do these best practices require compliance with specific requirements under self-regulatory bodies such as FINRA, NYSE or NASDAQ.