Risk Alert on MNPI

Restrictions on the use of material non-public information (“MNPI”) are one of the cornerstones of the SEC’s regulatory framework. The Division of Examinations (“EXAMS”) published a risk alert on examination trends relating to compliance with MNPI regulation. In addition to highlighting observed deficiencies regarding the Code of Ethics Rule, this risk alert also provided additional guidance on newer sources of MNPI, such as geolocation data and web search histories. Key takeaways from EXAMS findings are below:

Key Takeaways:

• Preventing the Misuse of Material Non-Public Information (“MNPI”)
  • Alternative Data. Failed to implement policies and procedures that mitigate the risk of MNPI derived from alternative data. The SEC defines “Alternative Data” as any data used to inform financial analysis besides “financial statements, company filings, and press releases.” Alternative data may include geolocation information; data derived from scraping social media or web searches; etc.
  • “Value-Add Investors.” Failed to implement policies and procedures that mitigate risks of MNPI derived from “value-add investors.” The SEC defines these investors to include “officers or directors at a public company, principals or portfolio managers at asset management firms, and investment bankers.”
  • Expert Networks.  Failed to adopt appropriate policies and procedures to mitigate the risk of MNPI derived from conversations with expert consultants.

• Code of Ethics Rule
  • Identification of access persons. In violation of the Code of Ethics Rule, failed to identify employees who would be classified as “access persons,” or that failed to provide an organization-relevant definition of an “access person” in their Code of Ethics.
  • Pre-approval. The SEC examined access persons who failed to pre-approve relevant investments (for example: “before directly or indirectly acquiring any interests in an initial public offering or limited offering”).
  • Review of holdings and transactions reports. The SEC examined advisers who failed to maintain records on oversight of holdings and transactions reports. Staff also examined advisers who failed to designate oversight of the CCO’s trading activity to a different employee.
  • The SEC examined instances where access persons failed to submit holdings and/or transaction reports, either at all or in a timely manner pursuant to the Code of Ethics Rule. Staff also examined instances when access persons never received a copy of the adviser’s code of ethics or indicated that they had received the code (including amendments).
  • The SEC examined advisers’ codes of conduct that failed to “include the specified content set out by the Code of Ethics Rule in their transaction and holdings reports”.

EXAMS observations can be used proactively by advisers to review their practices and written policies and procedures. Designing, adopting, and implementing strong policies and procedures are essential and foundational to a successful compliance program.

If your business requires assistance identifying and addressing potential issues, meeting compliance requirements, or seeking further guidance on fund issues, Fairview can help. Our team of compliance experts can get your firm on track with a meaningful compliance program. Contact us today for more information about what Fairview can do for your business.