Beginning December 1st of this year hedge fund managers, private equity firms and investment advisers doing business in Massachusetts will need to have policies and procedures in place to address that state’s new regulations aimed at overseeing the use of expert network firms. Expert networks are intended to connect institutional investors, hedge funds, investment advisers and others with industry specialists and consultants, helping them gather data to make investment decisions. The adoption of these regulations makes Massachusetts the first state in the Union to have rules overseeing these relationships.
Under Massachusetts’ newly adopted regulation, investment advisers, hedge funds and other entities that make use of expert networks will be required to certify that the expert network will not, and does not supply confidential information as part of its services. Entities that use expert networks will also be required to describe the confidentiality and non-disclosure arrangements that govern their relationship with the expert networks.
The adoption of this new regulation is designed to thwart perceived abuses by hedge fund managers and investment advisers who gain and trade on inside information through the use of these expert networks. Indeed, recent high profile insider trading cases have involved the misuse of expert networks. For instance, Raj Rajaratnam, founder of the now defunct New York-based hedge fund Galleon Group, faces more than twenty years in prison for his recent conviction on insider trading charges that stemmed from his misuse of expert networks.
While the new regulation may not deter those bent on gaining and trading on insider information, it does put these individuals on notice and may serve as a tool regulators will use to initiate enforcement proceedings.
For more information, please contact Brent Cunningham, Associate Attorney, at 619.298.2880 or at brent.cunningham@jackolg.com.
