SEC Charges Investment Adviser with MNPI-Related Compliance Failures

Who may be interested: Investment Advisers; Compliance Staff

Quick Take: The SEC announced that it had settled charges against a registered investment adviser (Adviser) for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI) with respect to its trading of collateralized loan obligations (CLO).

According to the SEC’s order, the Adviser managed and traded its own CLOs, along with third-party CLOs. In addition, the Adviser maintained a credit business for which it participated in creditors’ committees and lender groups. Through its credit business, the Adviser obtained MNPI about companies whose loans were held in the CLOs traded by the Adviser.

Following an incident relating to the sale of CLOs while in possession of MNPI in 2019, the Adviser implemented pre-trade compliance reviews of the potential impact of MNPI on CLOs managed by the Adviser; however, it did not adopt written policies for these reviews until July 2022. Further, the Adviser did not establish, maintain, or enforce written policies or procedures on the potential impact of MNPI on third party-managed CLOs traded by the Adviser until June 2024.

The SEC’s order found that the Adviser violated Section 204A of the Advisers Act, which requires an investment adviser to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of MNPI by such adviser and its associates. In addition, the SEC’s order found that the Adviser violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require an investment adviser to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. As part of the settlement, the Adviser agreed to a cease-and-desist order, a censure, and to pay a $1.8 million civil penalty. The SEC’s order noted that in reaching a settlement, the SEC considered the Adviser’s prompt remedial actions and cooperation in the agency’s investigation.

The SEC’s order announcing the settled charges can be found here.