Compliance

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Buy Side Vets Research Providers with Standardized Questions

Buy-side concerns over insider trading led Castine Consulting and Integrity Research to launch a cloud-based platform that standardizes due diligence questionnaires posed to research providers.

Vetting expert networks
A lot of the insider-trading investigations from 2009 and beyond were triggered by contacts that research providers had with outside experts. “There is a lot of compliance activity around [the] use of third-party experts,” said Sanford (Sandy) Bragg, principal at Integrity Research. One of the concerns of compliance professionals or asset managers is, “What interactions are my analysts having with third-party experts, and how is that being monitored and tracked?” asked Bragg.

Asset managers need to ask if third-party research providers are providing their analysts with access to third-party experts, and if they have all the proper controls in place to ensure no improper information is passed on, he says. For example, Matthew Martoma, a former portfolio manager at SAC Global Advisors, illegally obtained confidential details about a clinical trial for a drug for Alzheimer's disease from Dr. Sidney Gilman, a medical professor who was employed by an expert network firm. Martoma was found guilty of insider trading in February and was sentenced last month to nine years in prison.

Compliance Telescope is designed to help assess whether firms that are not necessarily labeled as expert networks have expert-network-type offerings. The access to the network is only one piece of their services, says the asset manager. Asset managers would ask if you provide access to a network of experts and then, based on that response, ask a series of questions.

Hodgkins said that some research providers consider themselves to be execution only brokers, but they may have other services that would require different compliance questions to elicit the information. Or, a research firm might be an expert network but not think of themselves as such, but because of the way they compensate their consultants, the buy side may say, “You look like a duck, so you walk like a duck,” says Hodgkins.

However, concerns around non-public material information are not limited to expert networks, according to the asset management source. It pertains to “any of our research providers doing channel checking and other things. The question is what is the nature of their sources and is that information being gathered in such a way it’s not violating any confidentiality agreements,” said the asset management source.

Payment model
At this stage, the research provider doesn’t pay, nor does the asset manager if they want the universal due diligence package. They could ask their 50 research providers to participate and get a PDF of the answer. But if the asset manager wants to ask unique questions, and doesn’t want to share them with anyone else, that’s a premium service and requires a license. The premium version also handles all approvals from the compliance department and the firm’s executive management committee, as well as surveillance alerts and internal notifications of a vendor’s status. “It provides a lot of time savers like communications options to the asset manager’s compliance team,” says Hodgkins, “In the past this was handled with a legal pad and crayons.”

Ultimately, Compliance Telescope can help asset managers who procure research to protect themselves against obtaining non-public material information. “We need to make sure that research providers aren’t giving us information that has gone through a confidentiality agreement with another business. These are very real issues that we have to make sure that we are vetting thoroughly,” said the asset manager.

 

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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