SEC Enforcement Actions Highlight Expectations for Tailored MNPI Policies

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:

1. 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.
   
   

2. Enhance Training Programs
   Provide targeted training to staff on identifying and handling MNPI in specific business contexts.
   
   

3. 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.