New York, NY – Last week, Massachusetts became the first state in the country to propose rules to regulate the expert network industry. While such a move appears to be a proactive step by state regulators to address concerns raised by the recent insider trading investigations, we wonder if these new rules add any real protections that are not currently in practice today?
The Proposed Rule
The proposed regulation will require all state-registered investment advisers who use expert network providers to obtain a written certification from all experts they use that they are not subject to any confidentiality restrictions and they will not provide confidential information to the investment adviser.
Massachusetts’ top securities regulator, William Galvin, explained the reason for this proposed rule in an interview. He noted that “the passing of confidential information undercuts the concept of a free market. We want to utilize whatever mechanism we have at our disposal to root out that type of contraband.”
Investors and other interested parties will have an opportunity to comment on the planned rule and there will be a public hearing on June 23rd.
Current Industry Practices
Despite Massachusetts’ proposed regulation of expert network providers, we doubt this rule will bring about any substantive change in the industry. The reason for our skepticism is because most serious expert network providers adopted these restrictions a few years ago.
Based on our past research, we have found that most expert networks have their experts sign formal written Terms and Conditions before allowing clients to engage them for a call or meeting. And while every expert network providers’ Terms & Conditions are different, almost all of them prohibit experts from breaching existing confidentiality restrictions, and they expressly preclude experts from providing material nonpublic information or any other confidential information to clients.
In fact, Gerson Lehrman Group’s Terms & Conditions (considered by many to be the standard in the industry) clearly covers these issues. The following is a short excerpt from GLG’s current Terms & Conditions (dated November 19, 2010).
“While there may be many limitations on the scope of your participation and subjects you may discuss depending upon your particular circumstances, you specifically agree that at a minimum you shall not do any of the following at any time in connection with a Project, Platform Activity, or otherwise in connection with your participation in the GLG Councils:
- Disclose material, nonpublic information about a public company;
- Disclose information that you have a duty or have agreed to keep confidential (e.g., by agreement, employer policy, fiduciary duty, etc.);
- Disclose information that you obtained from any person who expects you to keep it confidential or that you believe to be confidential;
- Participate in any Project or Platform Activity if doing so would violate applicable law or any agreement with — or other obligation to — any person, employer, former employer or other entity;…”
While the new rule proposed by Massachusetts to regulate expert network providers appears on the surface to be a move established to limit the communication of confidential information to investors. However, in actual fact, this proposed regulation does little to enhance the current protections that expert network firms have already implemented to restrict their experts from passing on confidential information to investors.