Investment Adviser Settles SEC Charges Over Misuse of MNPI

An investment adviser settled SEC charges in connection with deficiencies in the firm's handling of material nonpublic information ("MNPI") while trading collateralized loan obligations ("CLOs").

In its Order, the SEC found that the firm, one of the largest holders of term loans issued to a media service company ("Company A") reduced its exposure on certain CLO equity tranches by selling the loans to two counterparties. The SEC found that the firm was in possession of MNPI about Company A prior to the sale. The MNPI concerned "the likely failure of an expected major asset sale by Company A and Company A's need for rescue financing." The SEC stated that when the MNPI was publicly released after the sale, the value of Company A's loans and the sold CLO tranches dropped significantly.

The SEC found that the adviser had "no written policies and procedures aimed at preventing the misuse of MNPI about these underlying loans," nor did it have policies "prohibit[ing] trading a CLO tranche while in possession of MNPI about the underlying loans in that CLO." The SEC noted that one counterparty demanded a refund or price reduction due to the loss which, the agency said, led the firm to pay $350,000 to settle the dispute.

The SEC found that the firm violated Advisers Act Sections 204A ("Prevention of misuse of nonpublic information") and 206(4) ("Prohibited transactions by investment advisers") and Rule 206(4)-7 ("Compliance procedures and practices").

To settle the charges, the firm agreed to (i) cease and desist from committing further violations, (ii) a censure and (iii) pay a civil money penalty in the amount of $1,800,000.