Views on improving the integrity of global capital markets
25 March 2011

SEC’s Small Comment on Expert Networks Has Big Impact

Posted In: Insider Trading

At the recent Annual IA Compliance Best Practices Seminar, the SEC offered some of its strongest language yet in clarifying its view of expert networks.

While the bulk of the speech by Carlo di Florio, director of the U.S. SEC Office of Compliance Inspections and Examinations, highlighted changes the SEC had implemented under Chairman Mary Schapiro and progress toward implementing key aspects of the Dodd-Frank Act, it momentarily touched on the legitimacy of expert networks. And those comments, though brief, spoke volumes.

The SEC had previously noted in the 8 February charges against four hedge fund portfolio managers and analysts that, while its ongoing insider-trading investigations focused on the activities of expert networks, it wasn’t illegal for advisers to obtain advice and analysis through these kinds of arrangements. Di Florio’s comments on 21 March further clarified the SEC’s stance that the investigations focused on the fraudulent delivery of material, nonpublic information and the breach of duty of confidentiality — not the use of expert networks, per se.

Along with clearing up any misunderstandings the SEC had perceived regarding the use of expert networks and the so-called mosaic theory, di Florio provided insight into advisers’ compliance policies for such arrangements. He said advisers should review controls for both their employees and the external networks, paying particular attention to their employees’ commitment to neither acquiring nor using material, nonpublic information in coordinating the expert discussion and trading following the event.

CFA Institute is encouraged by the steps the SEC has taken to resolve any confusion regarding application of expert networks and the mosaic theory in conducting diligent and independent fundamental research. Additionally, we continue to support efforts to prosecute those who attempt to shortcut the process by obtaining and using material, nonpublic information.

For more, read a related post: Mosaic Theory or Painting by the Numbers

About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, is a director of professional standards for CFA Institute. His responsibilities include providing member guidance in applying the ethics and standards of practice policies, supporting related educational and public awareness activities, and working with the Standards of Practice Council of CFA Institute on its initiatives. He is co-host of the free, live, interactive webinars used by CFA Institute to promote ethical decision making and global best practices. Previously, Mr. Doggett, as a member of the CFA Institute Financial Reporting Policy Group, represented membership interests regarding reporting and disclosures initiatives, including XBRL. Prior to joining CFA Institute, he worked in the financial information sector with SNL Financial, where he focused on the real estate and energy industries, directing the development and maintenance of a financial data storage system. Mr. Doggett holds a BA in economics from the University of Virginia. He was awarded the CFA charter in 2006 and is a member of CFA Society Virginia.

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