On September 30, 2024, the SEC announced a settled enforcement action against a registered investment adviser (RIA) and fund manager for failure to establish and enforce policies and procedures to prevent the misuse of material nonpublic information (MNPI). The order focused specifically on the manager’s failure to implement effective MNPI controls during its service on an ad hoc creditors’ committee related to an issuer of distressed debt when credit investing is a significant part of the manager’s business.
Although no trading occurred, the SEC found willful violations of Sections 204A and 206(4) of the Advisers Act and Rule 206(4)-7, which require registered investment advisers to implement effective MNPI controls.
The manager agreed to pay a civil monetary penalty of $1.5 million and to update its MNPI policies. This penalty reflects that the SEC may use enforcement to regulate control over MNPI by credit investors that serve on ad hoc creditors’ committees.
In August 2020, analysts employed by the manager believed a debtor, whose bonds were owned in part by the manager, was struggling to meet its debt obligations due to impacts from the COVID-19 pandemic. An ad hoc committee of creditors of the issuer retained a financial adviser to serve as a liaison between creditors and the issuer. The financial adviser received MNPI pursuant to a non-disclosure agreement.
Through the fall of 2020, the manager’s analysts received reports, analyses, and updates from the financial adviser. The manager, however, lacked policies directing its analysts to exercise due care regarding their review and use of the MNPI shared by the financial adviser. While the SEC’s order does not state that the manager illegally tipped anyone or executed an illegal trade, it notes that analysts openly discussed strategy, including with a trader, during the committee’s activity.
The civil monetary penalty evidences the SEC’s continued focus on RIA acquisition of MNPI through service on ad hoc creditors’ committees related to issuers of distressed debt when credit investing is an RIA investment objective. To be effective under the Advisers Act, MNPI policies that apply to participation on ad hoc creditors’ committees must address the likelihood that participants on creditors’ committees will come into possession of MNPI related to the underlying credit, which may not be used to inform future credit investing.
Credit investors that serve on ad hoc creditors’ committees should look into whether their MNPI policies address the actual, rather than hypothetical, risk of abuse of MNPI associated with analyzing distressed debt as a creditors’ committee member and how access to such MNPI must be controlled. Compliance requires that the knowledge of those that serve on creditors’ committees must be isolated from those that have the ability to trade on it.
Although no trading occurred, the SEC found willful violations of Sections 204A and 206(4) of the Advisers Act and Rule 206(4)-7, which require registered investment advisers to implement effective MNPI controls.
The manager agreed to pay a civil monetary penalty of $1.5 million and to update its MNPI policies. This penalty reflects that the SEC may use enforcement to regulate control over MNPI by credit investors that serve on ad hoc creditors’ committees.
In August 2020, analysts employed by the manager believed a debtor, whose bonds were owned in part by the manager, was struggling to meet its debt obligations due to impacts from the COVID-19 pandemic. An ad hoc committee of creditors of the issuer retained a financial adviser to serve as a liaison between creditors and the issuer. The financial adviser received MNPI pursuant to a non-disclosure agreement.
Through the fall of 2020, the manager’s analysts received reports, analyses, and updates from the financial adviser. The manager, however, lacked policies directing its analysts to exercise due care regarding their review and use of the MNPI shared by the financial adviser. While the SEC’s order does not state that the manager illegally tipped anyone or executed an illegal trade, it notes that analysts openly discussed strategy, including with a trader, during the committee’s activity.
The civil monetary penalty evidences the SEC’s continued focus on RIA acquisition of MNPI through service on ad hoc creditors’ committees related to issuers of distressed debt when credit investing is an RIA investment objective. To be effective under the Advisers Act, MNPI policies that apply to participation on ad hoc creditors’ committees must address the likelihood that participants on creditors’ committees will come into possession of MNPI related to the underlying credit, which may not be used to inform future credit investing.
Credit investors that serve on ad hoc creditors’ committees should look into whether their MNPI policies address the actual, rather than hypothetical, risk of abuse of MNPI associated with analyzing distressed debt as a creditors’ committee member and how access to such MNPI must be controlled. Compliance requires that the knowledge of those that serve on creditors’ committees must be isolated from those that have the ability to trade on it.
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