In 2020, the Securities and Exchange Commission (SEC) brought an enforcement action against a private equity firm for failing to implement policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI). As a result, the SEC imposed a seven-figure penalty for mishandling MNPI. In 2021, the SEC brought another MNPI case against a financial firm for the same reason.
The takeaway?
The SEC has shown an intent to move aggressively in areas adjacent to insider trading to ensure the market remains fair and stable. And should an investment firm mishandle MNPI, whether with ill-intent or not, it can expect a swift and potentially steep enforcement action from the SEC.
How your investment firm can manage its MNPI risk
Let’s go over some tactics your investment firm can implement to protect your firm from enforcement actions and rule violations. According to a risk alert last year, investment firms should do the following to manage its MNPI:
- Educate employees on MNPI and their responsibility in handling it with sensitivity.
- While many investment firms educate employees on how MNPI relates to traditional financial statements, company filings and press releases, employees must also understand that MNPI can include non-traditional sources like satellite and drone imagery, social media and internet search data.
- Create and enforce policies and procedures which outline diligence processes to consistently follow when dealing with MNPI, whether it comes from a traditional or non-traditional source.
- Create and enforcement policies and procedures which specifically relate to investors or key persons who would be more likely to possess MNPI, such as officers, directors, principals of other asset management firms, investment bankers, etc.
- As a part of your firm’s compliance program, every employee should receive a copy of the Code of Ethics and be required to provide written acknowledge of its receipt and any amendments.
- Offer regular and up-to-date training to employees on best practices in managing MNPI.
As the SEC shows a growing interest in insider trading, MNPI is becoming an increasingly pressing concern for financial advisory firms. As your investment firm navigates the ever-changing financial landscape, protecting MNPI must remain a top priority of your compliance program.
At NRS, our compliance consultants help firms stay ahead of ever-changing regulations, promptly spotting and addressing gaps within their compliance programs which could result in the misuse or mishandling of MNPI. Let’s talk about how we can improve your firm’s compliance program
