SEC Settles Charges Against Political Intelligence Firm for Failing to Manage MNPI
Commentary by Steven Lofchie
A political intelligence firm agreed to admit wrongdoing and pay a $375,000 penalty for compliance failures regarding the collection and use of material nonpublic information. The firm also agreed to retain an independent compliance consultant after an SEC investigation found that the firm's analysts had failed to inform the firm's compliance officers properly of instances in which the analysts obtained potential material nonpublic information from government employees, rendering the compliance officers unable to control the usage of such information.
According to the SEC's order:
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The misconduct occurred in 2010, when the firm's analysts sought and received information about policy issues or pending regulatory approvals at the Centers for Medicare and Medicaid Services, and the Food and Drug Administration.
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As part of its business, the firm provided hedge funds and other clients with regulatory updates about and analyses of potential timing and developments for future government actions or rulemaking decisions.
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In gathering content for these "research notes," the firm encouraged its analysts to maintain relationships with government employees. Since government employees often are familiar with confidential matters at their agencies, such interactions increased the likelihood that the firm's employees could acquire material nonpublic information in the course of their work.
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The firm's written policies and procedures expressly prohibited the acquisition and dissemination of material nonpublic information and required employees to bring it to the attention of the compliance department if they encountered anything that was confidential.
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Despite red flags regarding information received by analysts, the firm drafted research notes and distributed them directly to clients who could have used any material nonpublic information to inform their securities trading decisions.
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The firm's analysts failed to bring the information to the compliance department's attention to be properly vetted for any material nonpublic information that could be used for insider trading.
Commentary
Notably, the firm was not charged with any violation of Section 10 of the Exchange Act. It was charged only with failing to have appropriate procedures for handling material nonpublic information ("MNPI"). Additionally, the SEC's order against the firm suggested that any use of MNPI, however acquired, is improper. But this is not the law. It is only improper to use MNPI if one comes by the information in a situation in which one has a duty not to use it, or has acquired it improperly. Here, the firm's analysts obtained the relevant information from government employees; it is not clear why the analysts would have owed the employees any duty of confidentiality. Did the government employees believe that what they knew should be kept confidential? On what basis would they have had such an expectation?
That said, when a firm does not follow its own procedures, it can be found liable for behavior that otherwise might not have violated the law.