Compliance Concerns With Expert Networks

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New York, NY – One of the fastest growing segments of the alternative research  industry has been the Expert Network business.  As we have mentioned in previous blogs, there are over 25 firms that directly connect experts from their networks with professionals at hedge funds, asset managers, private equity professionals, consultants, and corporations.   Yet, despite the popularity of this business, many buy-side analysts, portfolio managers, and compliance professionals express concerns about the current state of expert network compliance practices.
Level of Concerns

In fact a few clients have asked us to conduct additional research into this topic.  As a result, the team at Integrity Research Associates has been interviewing a number of compliance professionals at hedge funds and mutual funds to assess their views of current compliance practices at expert network firms.  Based on these surveys, close to half (45%) of all compliance professionals say they are either somewhat or very worried that their use of expert networks might lead to compliance problems for their firms.

Reason for Concerns

One of the primary issues cited for this concern is the fear that experts might leak material non-public information to buy-side investors using expert networks.  Another concern expressed by some is that payments made by expert networks to company employees might be seen as encouraging them to breach their fiduciary duty to their employers.

In addition, some buy-side compliance officers expressed concerns that the expert networks used by their firms did not maintain a comprehensive list of companies that have published policies barring their employees either from speaking to outsiders about company business, or disallowing their employees from engaging in outside work as consultants or experts.  This list is typically called the “Do Not Call” list.

Inconsistencies with Do Not Call Lists

In fact, a few compliance officers expressed considerable frustration that the disparity in “Do Not Call” lists between expert network providers creates both confusion and difficulties for the hedge fund or mutual fund.  For example, a company may have sent a specific expert network a letter informing them that they should not use their employees as experts as they have a policy which prohibits employees from participating in outside consulting engagements.

Unfortunately, this company may not have sent such a letter to the other 24 expert network providers.  Consequently, PMs or analysts at a hedge fund or mutual fund may inadvertently contact employees from this firm through one of the expert networks that did not get the “Do Not Call” notification, even though the compliance officer knew of the prohibition from the one expert network provider that did get the company notification.

Subsidiaries and Other Related Companies

Another related concern is how the various expert networks handle subsidiaries, affiliates, and other related companies.  This issue could come into play with the “Do Not Call” list (should the policies of parent companies be extended to all subsidiaries, affiliates, etc.).  In addition, all expert networks prohibit clients from speaking with experts about their own companies.  However, most expert network providers don’t take into account corporate trees.  As a result, they don’t limit clients from speaking with employees from related companies.  Gerson Lehrman Group is one company that has spent considerable resources in this regard, enabling them to have accurate “Do Not Call” lists, and to make sure clients cannot speak with employees of related companies.

The Upshot

Consequently, many on the buy-side remain concerned about how the various expert network firms handle numerous compliance related issues.  And even though our recent comprehensive ResearchFocus study revealed that this topic is quite important to many expert network providers, it is also clear that current practices in the industry remain quite inconsistent.

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