Consulting's High-Wire Act

Industry experts can reap high fees by hawking their insights on the Street, but they need to be aware of the legal and ethical risks

By Amey Stone

Do you have high-level industry expertise you'd be happy to share with a hedge-fund manager or mutual-fund analyst? Want to make some cash by doing a little consulting on the side?

A new kind of equity research firm has sprung up that makes it easy for midlevel executives, store managers, doctors, retirees, academics, and information-technology consultants to offer their expertise to the investment community. Firms like Gerson Lehrman Group, Standard & Poor's Vista Research (like BusinessWeek, a unit of The McGraw Hill Companies [MHP ]), Nitron Advisors, and Primary Global Research act as matchmakers, hooking up industry experts with investors. Experts reap fees that average around $400 an hour (see BW Online, 08/01/05, "Have Experts, Will Hire Out").

To offer your services, you can visit the Web sites of the research firms and, in most cases, link into their recruiting systems.

Sounds great, right? Not so fast.

While the high hourly fee and opportunity to share your know-how with top investors may be enticing, this kind of consulting is fraught with legal and ethical minefields for consultants, say attorneys and industry observers. So before you start clicking, consider these questions:

If you are employed, would your company approve?

Such activity may well violate the terms of your employment agreement, which means you could be putting your job at risk if you try to consult under the radar, warns David F. Kroenlein, a partner in the New York office of law firm Winston & Strawn. Most research firms require employees to represent that they have approval from their employer, but they don't always check up, so the onus is on you to make sure it is O.K.

Even if your direct supervisor condones such activity (as long as you do it on your own time, of course), senior management may well frown on it. That's especially true if you work at a large public company where any employee granted permission by the company to speak to the investment community may become subject to requirements of tough securities regulation known as Regulation Fair Disclosure (Reg FD), which went into effect in late 2000 and requires companies to publicly release material information to the investment community all at once rather than just to one investor or favored analysts.

Because of these legal issues, David Teten, CEO of Nitron Advisors, says he prefers to find consultants who don't work for public companies, although he says it's legal for employees to consult and that most employers don't object. Stanton Green, managing director of Vista Research, which has 90,000 consultants in its network, says many companies are happy to have their employees engage in this kind of consulting. "It can be very positive for the company to be viewed as a thought leader in the industry and with investors," he says.

However, Louis Thompson, the president of the National Investor Relations Institute, as well as some attorneys, believe very few companies would want their employees to engage in this kind of consulting if they really understood the kind of questions some investors might be asking -- for example, how the monthly sales are shaping up or what new products are in the pipeline.

If you're self-employed, what would your customers, partners, competitors, colleagues, or sources of funding think if they knew information you were providing to investors might be part of a rationale for selling (or buying) stock in their firm?

The research firms require participants not to violate any confidentiality agreements and to disclose any potential conflicts of interest. Furthermore, the research firms specifically tell expert consultants not to recommend stocks and not to disclose material nonpublic information on the calls with investors.

Nonetheless, if a business associate finds out that you are consulting to a firm that is selling their stock, they may consider you are partly to blame, even if you had no idea that the trends you were discussing would lead to a sale. A June article in JAMA, the Journal of the American Medical Association, warns doctors who do this kind of consulting that "a relationship with an investment company may entangle physician advisors in real or apparent conflicts of interest that are very difficult to manage."

Do you understand securities laws?

Be forewarned: It may be easier to run afoul of securities regulations than you think. Reg FD is widely misunderstood to apply only to officers or investor-relations executives at public companies. But it actually applies to anyone who speaks to the investment community on behalf of the company, says William G. Lawlor, a partner at Dechert LLP in Philadelphia (one reason he would be surprised if major public companies condoned this kind of consulting).

Insider-trading rules are also frequently misunderstood. For example, you don't have to personally make trades on inside information to break the law, Lawlor points out. Handing out tips is also forbidden, even if you personally don't invest based on the information.

You might think the information you're discussing is so specific to one division of a company that it would not affect the stock price. But even very detailed information may be material to investors, warns Kroenlein. And while you probably wouldn't plan on discussing proprietary sales information, it can be difficult to evade the questioning of a hedge-fund manager fishing for proprietary information and making inferences based on your tone of voice or conversational pauses.

Is it worth the money?

While the hourly fees are appealing -- $400 to $1,000 an hour -- you won't get rich from this kind of consulting. Most conversations are just one hour -- often with no repeats. Green says 51% of Vista's consultants speak with an investor for just one hour.

Teten says the consulting is very convenient, intellectually stimulating, and may help executives build their personal professional networks and learn how Wall Street views their industry. That may be true, but you'll have to carefully weigh whether such benefits -- along with the high hourly fee -- are compensation enough for any legal or ethical risks you may be taking.

Stone is a senior writer for BusinessWeek Online in New York

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