Massachusetts adopted a new regulation requiring investment advisers using expert network firms to obtain certifications that consultants won’t supply any confidential information as part of their service. The certification must also describe all “relevant confidentiality restrictions” that the consultant must follow. Massachusetts is the first state to regulate expert networks, which are otherwise unregulated.
Massachusetts Secretary of the Commonwealth William F. Galvin proposed the regulation in April, and apparently made some amendments to the regulation based on comments received by Investorside Research Association, the U.S. trade association for independent research providers. The original regulation required the certification to disclose “all confidentiality restrictions that the consultant has, or reasonably expects to have, regarding Confidential Information.” The Investorside comment letter requested that the regulation “specify that only confidentiality restrictions relevant to the consultant’s engagement must be disclosed.”
A comment letter from the Investment Company Institute, the U.S. trade association for mutual funds and other investment companies, argued that the regulation does not apply to Federally-registered investment advisers. The ICI argues that the National Securities markets Improvement Act of 1996 (“NSMIA”) limits states’ jurisdiction to enforcement actions, with no ability to regulate Federally-registered investment advisers.
While it has been increasingly common practice among users of expert networks to require certifications from experts, the exact nature of the certification varies from user to user. Some users require experts to certify that they have approval from employers to provide consultations. Most expert networks have the ability to implement the certifications, but commenters on the new Massachusetts regulation were concerned with the details. The Investorside letter and a comment letter from Greenwood Research, an expert network, requested clarification that the certification could be made electronically through an intermediary (that is, an expert network.)
With exception of Massachusetts new regulation, expert networks remain largely unregulated, and we are not aware of any movement by the U.S. Securities and Exchange Commission or other federal regulators to adopt regulations of expert networks. It appears that Massachusetts will be the sole regulator of expert networks for the time being.