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Expert-networks rule kicks in Dec. 1

By Chris Reidy
August 9, 2011

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A state regulation to govern how hedge funds use so-called expert networks will take effect Dec. 1, Secretary of State William Galvin said yesterday.

Galvin proposed the rule earlier this year, following a federal investigation of expert networks that found they sometimes passed along information that enabled insider trading, which is illegal.

For a fee, expert network firms arrange for executives from public companies to provide nonpublic information to investment firms.

The probe into expert networks has resulted in charges against employees of hedge funds and high-tech and pharmaceutical companies for allegedly engaging in or enabling insider trading.

The new state rule will require investment advisers that hire expert-network firms to obtain written certification that the experts are not subject to confidentiality restrictions and will not pass along confidential information to investors.

The Securities Division of the secretary of state’s office, Galvin said, has as adopted a “first-in-the-nation’’ regulation to govern hedge fund advisers and other investment advisers that use matching or expert network services to engage the services of investment consultants.

“This regulation is designed to thwart the misuse of inside information improperly obtained by these expert network consultants and ensure that information they provide was properly obtained,’’ Galvin said in a prepared statement.