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On August 8, 2011, the Massachusetts Securities Division (the
"Division") adopted regulations regarding the use of
expert network services by investment advisers in Massachusetts
(regardless of whether the adviser is registered with the Division
or exempt from registration). Under new 950 CMR 12.205(9)(c)(16),
investment advisers in Massachusetts will be required to obtain a
written certification (see below) before engaging an expert network
service (the "Expert Network Rule"). The Expert Network
Rule will become effective December 1, 2011.
Use of Expert Network Services
The Expert Network Rule states that prior to obtaining
Investment Consulting Services in exchange for compensation, either
directly from a consultant or indirectly through a Matching or
Expert Network Service, the investment adviser must obtain a
written certification that:
(i) describes all confidentiality restrictions relevant to the
potential consultation which the consultant has, or reasonably
expects to have;
(ii) affirmatively states that the consultant will not provide
any Confidential Information to the investment adviser; and
(iii) is signed and dated by the consultant, and is accurate as
of the date of the initial, and any subsequent, consultations.
In addition, an investment adviser who comes into possession of
material Confidential Information through a consultation is
precluded from trading any relevant security until such time as the
Confidential Information is made public. For purposes of the Expert
Network Rule, (a) Confidential Information means any non-public
information, which one is bound by a confidentiality agreement or
fiduciary (or similar) duty not to disclose, (b) Matching or Expert
Network Service means a firm that for compensation matches
consultants with investment advisers and (c) Investment Consulting
Services means a consultation for the purposes of assisting the
investment adviser's decision as to whether to buy, sell, or
abstain from buying or selling, positions in client accounts.
It should also be noted that the Division will not object to an
investment adviser's procurement of an electronic signature for
the certification, provided the investment adviser retains the
electronic documents in compliance with general books and records
requirements.
Applicability to SEC Registered Investment Advisers in
Massachusetts
The adopting release is vague with respect to whether the Expert
Network Rule would be preempted by federal law and therefore not
applicable to SEC registered investment advisers in Massachusetts.
As a conservative approach, we would recommend that SEC registered
investment advisers based in Massachusetts comply with the Expert
Network Rule given this ambiguity.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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