In general, an expert network platform facilitates the exchange of information between “experts” and investment professionals. Unfortunately, certain industry participants have misused expert networks, and in many insider trading cases, the analysts sought to cultivate relationships with experts outside of a structured platform.
At the recent Ascendant Compliance Management Conference “Compliance Disruptors: Seismic Shifts of the Regulatory Landscape” held in Napa, California, we discussed best practices for leveraging expert networks, political intelligence agencies, and direct paid consultants in the investment research process.
The following were the key takeaways provided by panelists Laurence Herman of Gerson Lehman Group, Jonathan Streeter of Dechert LLP, and Samantha Addonizio of Ascendant:
- Develop compliance policies, procedures and controls that:
1) are separate from those provided by the platform;
2) are tailored to the specific risks of the information source; and
3) address how the Firm intends to monitor the activities of the experts on the platform or direct paid consultants.
- Do not speak to experts that are current employees of a public company. Use the six-month rule!
- Government employees should be subjected to the same compliance controls as “experts.” Government information can be just as sensitive and the SEC is currently focused on political intelligence agencies.
- When speaking to direct paid consultants, verify and document the source of the information being exchanged. Require the consultant to sign an acknowledgement of compliance.
- Monitor your analysts’ social networks (both online and offline). Do they have connections to officers at public companies on LinkedIn, Facebook, or Twitter? Is the portfolio invested in any of those companies?
- If speaking to former officers at public companies, research whether they have ever had issues with Regulation FD.
- Require employees to obtain pre-approval to schedule a call. Maintain a log of when calls occurred, and what individual securities and/or sectors were discussed.
- Ask analysts to prepare notes of each consultation to provide to compliance for review!