SEC Enforcement Actions: Increased Emphasis on Advisers’ Policies and Procedures

The Securities and Exchange Commission (SEC) has taken action against two registered investment advisers for failing to have effective policies and procedures in place to prevent the misuse of material nonpublic information (MNPI). These actions serve as a reminder to advisers about the importance of tailoring their practices to address specific situations where MNPI may be involved. The SEC emphasized that having general insider trading policies is not enough, and advisers must create detailed policies relevant to their business activities.

In the recent cases, the SEC did not accuse the advisers of trading illegally based on MNPI, or of lacking any procedures related to MNPI. Instead, the focus was on the content of the policies and procedures, which were found to be too vague and not tailored to the specific nature of the advisers’ business activities. The first case involved an adviser who did not have suitable written policies regarding collateralized loan obligations trading, while the second case highlighted deficiencies in policies related to participating on ad hoc creditors’ committees.

According to Section 204A of the Investment Advisers Act of 1940 and the Compliance Rule, investment advisers are required to have written policies and procedures to prevent the misuse of MNPI. These rules take into consideration the nature of the adviser’s business and mandate regular reviews of the adequacy of these policies.

For example, in the case of Sound Point Capital Management, LP, the SEC found that the adviser lacked appropriate policies to address MNPI related to its trading of CLOs. The adviser was aware of a media services company’s impending financial troubles but failed to adequately consider this information when trading CLO tranches connected to that company. While the adviser had a general insider trading policy in place, it was not tailored to address the specific impact MNPI could have on their trading decisions.

The SEC’s message is clear: advisers must have well-defined policies and procedures that reflect the unique circumstances of their business activities when it comes to handling MNPI. These recent enforcement actions serve as a reminder to the investment community about the importance of maintaining proper controls to prevent the misuse of sensitive information.