The Securities and Exchange Commission (SEC) recently settled enforcement actions against two registered investment advisers for failing to establish, maintain, and enforce written policies and procedures specifically tailored to the circumstances in which their firms might receive MNPI.
Recent SEC Settlements
On August 26, 2024, the SEC announced that it had settled charges against Sound Point Capital Management, LP (SPCM) for failing to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of MNPI concerning its trading of collateralized loan obligations (CLOs).
SPCM’s compliance manual included an insider trading policy that generally prevented the adviser from trading in the securities of a company while in possession of MNPI. However, the SEC settlement order alleged that SPCM had inadequate written policies and procedures “aimed at preventing the misuse of MNPI about underlying loans in its CLO trading” and that its compliance manual failed to “address the possibility that MNPI [ ] obtained about a company’s loans could impact [the adviser’s] CLO trading if a CLO contained such loans.”
On September 30, 2024, the SEC announced settled charges against Marathon Asset Management, LP (MAM) for failing to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of MNPI relating to the adviser’s participation on ad hoc creditors’ committees.
The SEC’s found that the MAM had adopted generic insider trading policies and MNPI procedures. The SEC alleged, however, that the investment adviser did not maintain policies and procedures “for monitoring or supervision specifically addressing the risk of receiving or misusing the MNPI during participation in an ad hoc creditors’ committee.” As a result, the SEC determined that the investment adviser willfully violated Section 204A and Section 206(4) and Rule 206(4)-7 of the Advisers Act.
Section 204A of the Adviser’s Act requires investment advisers to “establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse” of “material, nonpublic information by such investment adviser or any person associated with such investment adviser” in violation of the Advisers Act or the Securities Exchange Act of 1934.
Separately, Section 206(4) of the Advisers Act and Rule 206(4)-7, which is known as the Compliance Rule, requires registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act, and to review, at least annually, the adequacy of those policies and procedures.
Our Take
The message from these recent enforcement actions against SPCM and MAM is that the SEC expects investment advisers to understand how their businesses might receive MNPI and design their compliance policies and procedures to specifically address those risks. Generalized MNPI or insider trading policies may not be sufficient to address potential regulatory enforcement actions.
For example, in the MAM settlement, the SEC found that policies and procedures concerning MNPI must be tailored to an adviser’s “core strategies” and that the adviser must take into account the “nature of this business” as well as its clients’ holdings. Similarly, in the SPCM order, the SEC indicated that the policies and procedures concerning MNPI must be tailored to “a significant component of its business.”
Together, these two recent enforcement actions demonstrate that the SEC may bring an enforcement action when it perceives that an investment adviser’s MNPI policies and procedures are not sufficiently tailored to its business, even if there is no evidence of misuse and in some cases with no actual receipt of MNPI.
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