The Securities Industry and Financial Market Association (“SIFMA”) indicated to its membership that those who engage expert networks – entities referring paid industry professionals to third parties for fees – should have in place policies, procedures, and training for their employees or others who engaged those services. These expert networks have drawn regulatory attention, especially in insider trader investigations.
These expert networks have found themselves in certain insider trading cases where it was alleged they tipped hedge funds or other investors in return for a cash payments. Of course, this is more the breach than the rule, and the vast majority of expert networks would never do such a thing. However, expert networks have become important in the financial system since they assist broker-dealers to design or implement investment strategies. Nonetheless, broker-dealers should take precautions, as well as devise procedures to ensure that there is not even an appearance of impropriety.
In sum, SIFMA believes that its membership should have policies to find and detect “red flags.” These red flags will allow broker-dealers to ensure that their policies are being followed, especially, regarding material non-public information. See Best Practices for Use of Expert Networks at http://www.sifma.org/uploaded files uploadedfiles/issues/legal_compliance_and_administration/expert_networks/expert-network-policy-bestpractices.pdf.