The Massachusetts Securities Division of the Office of the Secretary of the Commonwealth (the “Division”) adopted a final version of a regulation (the “Rule”) imposing certain requirements on advisers who use consultants and expert network firms. Although, as discussed below, the regulation defines the term “adviser” broadly, the Division has recognized that preemption principles apply, assuring that federally-registered advisers are not subject to the Rule.1 The Division has so far declined to clarify the reach of the Rule to advisers not registered with either the Securities and Exchange Commission (the “Commission”) or Massachusetts.

In adopting the Rule, Massachusetts became the first state to regulate the use of these parties by investment advisers. The Rule, effective December 1, 2011, requires investment advisers using consultants or expert network firms to receive certification from the consultants involved that the consultants will not disclose confidential information. The Rule comes on the heels of a broad, ongoing federal insider trading probe, as well as a similar Massachusetts proceeding. The public aspect of the federal probe began with the October 2009 arrest of Raj Rajaratnam, manager of the Galleon Group hedge fund, and ultimately led to at least 17 cases against expert network firm employees and portfolio managers using their services.