A hedge fund manager agreed to pay over $4.7 Million in disgorgement, interest, and penalties for failing to prevent trading on material nonpublic information received from a political research firm. Although the respondent had strict policies about information provided by expert networks, the firm’s compliance policies had much lighter procedures for research firms, relying on employee self-monitoring and red flags. Nevertheless, the SEC asserts that the firm ignored red flags including the receipt of several pieces of material nonpublic information and the fact that the political intelligence analyst also served as the CCO. The SEC charges the firm with violating Section 204A of the Advisers Act, which requires the implementation of policies and procedures reasonably designed to prevent insider trading.
OUR TAKE: We call this “compliance voodoo” whereby a firm appears to write detailed compliance policies and procedures that allow behavior that the policies should be designed to prevent. In this case, there was no good reason to treat “research firms” different from “expert networks” when conducting insider trading due diligence.
An investment bank was fined and censured for failing to enforce information barriers between its research department and an affiliated hedge fund managed by the bank’s CEO. The investment bank maintained policies and procedures related to the misuse of material nonpublic information, including a restricted list applicable to the bank’s employees. However, the restricted list did not stop the hedge fund from making 126 trades in restricted list securities over a 6-month period. In response to deficiencies raised during an SEC examination that occurred before the unlawful trading, the hedge fund adopted policies and procedures that applied the restricted list, required physical barriers, instituted email monitoring, and restricted information flow. The SEC alleges that the hedge fund failed to enforce those policies.
OUR TAKE: Compliance means more than a drafting unused policies and procedures. It means actually enforcing those policies to prevent unlawful conduct. This firm likely incurred the enforcement action because it told the SEC that it had fixed the problem by adopting policies and procedures but then ignored implementation.