Best Practice Tips for the Use of Expert Networks in Investment Research

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!

Related Content

Latest Content

Coming to America – California Adopts GDPR-Like Privacy Regulation

After a number of firms struggled last year to get their marketing and information systems into compliance with the EU’s General Data Protection Regulation (GDPR), advisers to U.S. clients will soon be facing similar requirements on the home front.  On the heels of the Cambridge Analytica scandal, California enacted the California Consumer Privacy Act of … Continued

SEC and FINRA 2019 Examination Priorities

The SEC and FINRA have recently released their examination priorities for 2019. These releases provide insight into regulatory priorities and serve as guidance for a firm in evaluating its compliance program. We will discuss topics covered in these releases, including: Protecting retail investors Fees and expenses Disclosure Conflicts of interest Suitability Protecting senior investors Trading … Continued

SEC Reopened After 35-Day Government Shutdown

SEC Chairman Jay Clayton announced on Saturday, January 26 that with an agreement reached to end the government shutdown, the “Commission has resumed normal staffing levels and is returning to normal operations.” In total, about 94% of the commission’s approximately 4,400 employees had been furloughed during the 35-day shutdown, according to its operations plan. In a … Continued

FINRA Rolls Out New Central Registration Depository Functionality; Annual Verification Deadline Nears

FINRA first introduced enhancements to the Central Registration Depository (“CRD”) on October 1, 2018, which were rolled out in support of FINRA’s restructured qualification examination program as well as the adoption of consolidated FINRA registration rules. The new enhancements were intended to also more easily assist member firms with satisfying their reporting and compliance obligations. … Continued

SEC’s Latest Risk Alert Focuses on Electronic Communications

The SEC’s most recent risk alert, “Observations from Investment Adviser Examinations Relating to Electronic Messaging,” issued on December 14, 2019, focuses on the use and maintenance of electronic communications for business purposes. The purpose of the alert is to remind advisers of their obligations related to personal use of electronic messaging and the requirements for … Continued

Mailing List

Subscribe to the Ascendant Compliance email list for the latest compliance resources, conferences, ComplianceCasts™, and more.

Loading form...

Contact Us

Ascendant works together with clients to identify and assess critical needs through customized plans. If you need assistance with compliance functions, regulatory services, cybersecurity or technology tools, we’d love to speak with you.