DealLawyers.com Blog

Late last month, the SEC announced that it settled charges against an investment adviser to private equity funds related to the firm’s failure to maintain, implement or comply with policies and procedures designed to prevent the use of MNPI and to prevent misleading communications to investors. The charges were settled on a “neither admit nor deny” basis.

This Simpson Thacher alert describes the alleged violations involving merger-related MNPI concerning public portfolio companies as follows:

[T]he SEC’s order emphasized that a key component of the adviser’s investment strategy was middle market M&A activity, and that certain portfolio companies were publicly listed. The order also indicated that the adviser’s policies prohibited dissemination of MNPI and the funds’ confidential information except where “necessary for legitimate business purposes.” The order found that senior personnel violated this policy by unnecessarily disseminating—typically in a marketing context in unofficial update emails—M&A-related MNPI involving U.S.-listed and foreign-listed portfolio companies […] [T]he settlement acknowledged the adviser’s routine use of NDAs, and implicitly the efficacy of NDAs generally, but found the adviser’s practice a violation of its policies and procedures, which required a determination that the disclosure of MNPI was “necessary for legitimate business purposes,” which the senior executives did not consistently document.

The SEC’s order stated that this conduct violated Section 204A of the Advisers Act, which requires advisers “to establish, maintain, and enforce written policies and procedures reasonably designed” to prevent the misuse of MNPI by the adviser or any person associated with it in violation of the Advisers Act or the Exchange Act. The alert notes that there were no allegations of harm or insider trading by recipients of MNPI and that “the settlement acknowledged the adviser’s remedial efforts, including enhanced policies and training, and the adviser’s cooperation with the Staff.” But the settlement still included the payment of a $4 million civil penalty. The alert then continues with this takeaway:

This settlement—and its substantial monetary penalty—represents a potent reminder of the SEC’s ability to use internal policy violations as the basis for violations of the securities laws, here in the novel context of MNPI policy violations for personnel discussing its M&A pipeline for public portfolio companies. It serves as a good reminder of the need to carefully adhere (both as to form and substance) to a firm’s formal compliance policies, whether dealing with MNPI or otherwise. Advisers might take this settlement as an opportunity to review their own MNPI policies with an eye towards ensuring their policies are operationally achievable in line with their particular business, and that any particular restrictions going beyond compliance with the securities laws (such as a “legitimate business purpose” standard) are followed and perhaps logged for good housekeeping.

– Meredith Ervine