SEC Enforcement Actions Highlight Expectations for Tailored MNPI Policies
RIAs
Regulatory Exams and Oversight
December 31, 2024
The Case
The SEC recently brought settled enforcement actions against two registered investment advisers for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI), in violation of Section 204A of the Investment Advisers Act of 1940 (Advisers Act) and the Compliance Rule. The actions involved the advisers’ trading of collateralized loan obligations (Sound Point) and participation on ad hoc creditors’ committees (Marathon). In both cases, the SEC indicated that the advisers’ MNPI policies and procedures must be tailored to the “core strategies” and “significant components” of their respective businesses, including client holdings and specific risks tied to their activities.
The clear message in these recent enforcement actions is that the SEC expects advisers to design their MNPI policies and procedures to specifically address how their business might receive and handle MNPI. Generalized MNPI and insider trading policies may not be deemed sufficient. These enforcement actions demonstrate that the SEC may recommend action when it perceives that an adviser’s MNPI policies are not sufficiently tailored, even absent misuse or actual receipt of MNPI.
Regulatory Implications
These enforcement actions reinforce the importance of tailoring MNPI policies and procedures to the specific activities and risks of an adviser’s business. Key implications include:
Customizing Policies
Advisers should move beyond generic insider trading policies and design MNPI procedures that address their specific investment strategies and business risks.Proactive Risk Assessment
Regularly assess business practices to identify areas where MNPI could be received, and ensure policies address these risks.Adapting to SEC Expectations
Following the Panuwat case, advisers may need to evaluate the potential materiality of MNPI across related entities, not just directly involved companies.
Practical Guidance for Firms
To mitigate compliance risks, investment advisers should:
Review and Update Policies
Periodically evaluate MNPI policies and procedures to confirm they are appropriately tailored to the adviser’s business model and investment strategies.Enhance Training Programs
Provide targeted training to staff on identifying and handling MNPI in specific business contexts.Monitor and Document Compliance Efforts
Maintain thorough records of compliance reviews, risk assessments, and updates to MNPI policies.
InnReg provides specialized compliance consulting services to investment advisers, helping firms develop and refine MNPI policies, enhance training programs, and address regulatory expectations.
RIAs
On Sep. 4, 2024, FinCEN published a final rule (Final Rule) adding certain RIAs and ERAs (collectively, Covered Advisers) to the definition of “financial institution” under the regulations implementing the BSA, and imposing on Covered Advisers broad AML and CFT program requirements, as well as other BSA recordkeeping and reporting requirements.
Broker-Dealers
On November 22, the SEC announced (here) that broker-dealers Webull Financial LLC, Lightspeed Financial Services Group LLC, and Paulson Investment Company, LLC agreed to settle charges that they filed with law enforcement SARs that failed to include required information.
NFA IBs
At the heart of the statutory and regulatory framework governing transactions in derivatives in the United States is a customer asset protection regime that requires futures commission merchants (FCM) and derivatives clearing organizations (DCO) to hold customer funds in segregation.
