The Massachusetts Secretary of State issued a new regulation that would affect the ability of investment advisors to use expert networks. This was a direct result of Risk Reward Capital Management being based in Massachusetts. Since the management company was registered as an investment adviser in Massachusetts they are subject to examination and enforcement by the Secretary of the Commonwealth.
The regulation highlights the continuing split between the state-lvel and federal-level of regulation of investment advisers. Dodd-Frank only widened that split by kicking thousands of advisers out of registration with the Securities and Exchange Commission and over to the various states.
Risk Reward Capital Management had just under $25 million under management. Dodd-Frank raised that level.
To clarify its new regulation, Massachusetts issued this policy statement:
The Securities Division has received several questions regarding the applicability of the expert or matching services regulation to investment advisers that are under the authority of the Securities and Exchange Commission. This notice is to restate and clarify information included in the Division’s adopting release for the regulations adopted on August 19, 2011.
The expert or matching services regulation will not be deemed applicable to investment advisers subject to Securities and Exchange Commission authority, consistent with the requirements of Section 203A(b) of the Investment Advisers Act of 1940. The Securities Division retains its authority to take enforcement action against an investment adviser or any person associated with an investment adviser with respect to fraud or deceit, consistent with Section 203A(b)(2) of the Investment.
Sources:
- Massachusetts Securities Division Policy Statement on Matching or Expert Network Services Regulation under 950 CMR 12.205(9)(c)(16) and Investment Advisers under SEC Authority (.pdf)
- Adopting Release for the Use of Expert Networks and Performance Based Fees (.pdf)
- Secretary Galvin Adopts New Regulations
- Hedge fund paid for inside data, state says by Beth Healy in the Boston Globe
- Administrative Complaint against Risk Reward Capital (.pdf)