January 8, 2025
Who may be interested: Registered Investment Companies; Registered Investment Advisers; Compliance Officers
Quick Take: The SEC charged a hedge fund manager registered as an investment adviser (Adviser) with failing to establish, implement and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI) obtained through its participation on a creditors’ committee.
According to a complaint (Complaint) filed in federal court by the SEC, from September 2019 through February 2020, a consultant of the Adviser (Consultant) participated in a creditors’ committee for the restructuring of Puerto Rico’s defaulted municipal bonds (Puerto Rico bonds) and received MNPI about the bonds from a confidential mediation. To prevent the misuse of MNPI obtained in creditors’ committees, the Adviser purportedly relied on an information barrier established between the firm’s public side, which buys and sells debt of distressed entities, and the firm’s private side, which participates in creditors’ committees to advocate for advantageous recoveries of the distressed debt the Adviser held, often receiving MNPI in confidential negotiations. The SEC, however, alleges that the Adviser’s establishment and implementation of its information barrier policy was deficient, causing the Adviser to fail to monitor the Consultant’s communications with public side employees while the Consultant was in possession of MNPI. The SEC further alleges that, consequently, the Adviser’s failure created a substantial risk of a leakage of MNPI from the Consultant to the public side, and thus a risk of illegal insider trading by the Adviser.
The Complaint states that, during the period in which he had MNPI about the bonds, the Consultant engaged in over 500 calls with the Adviser’s public side employees, and the Adviser purchased over $260 million in Puerto Rico bonds. According to the Complaint, the Adviser made these purchases without any involvement from its compliance department. The Complaint further states that the Adviser generated profits of over $29 million from the sale of the Puerto Rico bonds it obtained during this period.
The SEC claims that the Adviser violated provisions of the Advisers Act relating to establishing and enforcing reasonably designed compliance policies and procedures to prevent the misuse of MNPI and to prevent violations of the Advisers Act and the rules thereunder. The SEC seeks a civil penalty and a permanent injunction prohibiting the Adviser from further violations of the relevant federal securities laws.
The Complaint can be found here.
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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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