Expert Networks are gaining increased scrutiny from the SEC insofar as they are being used as a means to circumvent Rule Full Disclosure, which was enacted in 2000 to conteract alleged abuses during the technology bubble of the 1990s. Rule FD forbids companies from selectively disclosing material information in private briefings for favored securities analysts, money managers and/or large investors.
Expert Networks are assembled by specialized consulting firms, and usually consist of professionals who can provide insight into emerging technologies. These professionals can include research scientists, doctors and midlevel executives, among others. The consulting firms that assemble these Expert Networks then hire out their members to brief securities analysts, money managers and large investors. The SEC is concerned that Expert Networks are evolving into a means for passing inside information. Hedge funds are particularly noteworthy as users of their services.
According to The New York Times ("Next Up: A Crackdown On Expert Networks," 5/12/2011), revenue at consulting firms that assemble Expert Networks fell 20-30% in 2010, as leading Wall Street firms get increasingly concerned about the legal and reputational risks associated with using them.
The same article says that the leading Expert Networks firm is the Gerson Lehrman Group (GLG), with a 60% U.S. market share, a roster of about 250,000 experts worldwide for hire, and only about 39 competitors. Just a handful of these firms have annual revenues of $40 million or more. The cost of compliance is becoming increasingly onerous for smaller firms, which may be forced to merge. GLG has a staff of about 20 to vet consultants, train employees and maintain databases.
