Massachusetts plans to regulate expert-network firms and will become the first state in the U.S. to set rules for an industry that was caught up in the federal government's insider trading investigation.
The proposed regulation will require state-registered investment advisers that pay expert-network firms to obtain written certification that the firms aren't subject to any confidentiality restrictions and won't provide confidential information, Secretary of the Commonwealth William F. Galvin wrote last week in an e-mailed statement.
“These firms tout their compliance systems, but policies are often not followed and the systems can be ineffective,” he wrote. “This first-in-the-nation regulation is intended to stop, or at the very least make more difficult, the wrongful use of this inside information obtained through paid consultation.”
Traders seeking an edge have turned to expert networks and other independent-research firms for investment information. The firms charge as much as $70,000 for six months' unlimited consultations with clients seeking knowledge of any industry, issue or company.
Prosecutors working on insider trading cases last year charged consultants at Primary Global Research LLC, a networking firm, with leaking inside tips to hedge fund traders.
In March, hedge fund manager James A. Silverman was charged by Massachusetts officials with using inside information on clinical trials to lift returns. Mr. Silverman, who started RRC Bio Fund LP in 2007, used Guidepoint Global LLC to obtain the information, Mr. Galvin said March 9.
The regulations governing expert-network firms will take effect after a public comment period and a public hearing June 23.
