Massachusetts Securities Division Adopts Final Regulation on the Use of Expert Network Services by Hedge Fund Managers

On August 8, 2011, the Massachusetts Securities Division (Division) adopted a final regulation on the use by hedge fund managers of expert network services.  The Division had proposed the recently finalized regulation four months earlier.  See “Massachusetts Securities Division Proposes Regulation on the Use by Hedge Fund Managers of Expert Networks,” Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011).  One of the stated goals of the final regulation is to “provide investment advisers with greater clarity as to what is impermissible conduct when paying consultants for information.”  However, the final regulation appears to be redundant of existing commercial standards and unlikely on its face to prevent the sort of conduct that motivated the Division’s rulemaking.  See “Massachusetts Commences Civil Securities Fraud Enforcement Action against Hedge Fund Investment Adviser Risk Reward Capital Alleging that the Hedge Fund Traded on Inside Information Provided through an Expert Network,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  Quite apart from providing the intended clarity, the final regulation may constitute a missed opportunity to provide much-needed guidance to the expert network industry and a template for similar state and federal efforts.  This article explains: the mechanics of the final regulation; the three primary changes from the proposed regulation; the Division’s view of the burden to be imposed by the final regulation on expert network firms; whether the final regulation is preempted by federal law; timing of effectiveness of the final regulation; who the final regulation does and does not cover; and four substantive criticisms of the final regulation.

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