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The recent SEC action against Marathon Asset Management serves as a stark reminder for registered investment advisers (RIAs) to prioritize compliance when participating in ad hoc creditors’ committees or other informal relationships. The SEC’s emphasis on the risk of RIAs receiving material nonpublic information (MNPI) through these committees underscores the need for robust compliance measures.
The Core Issue: MNPI & Insider Trading
The crux of the SEC’s concern lies in the potential for RIAs to gain access to MNPI while serving on ad hoc creditors’ committees. This information could provide an unfair advantage in trading securities of the distressed company or related entities.
To address this risk, RIAs must implement comprehensive insider trading policies that cover a wide range of activities. These include the following.
- Participation In Ad Hoc Creditors’ Committees:
- Clear guidelines for information sharing and confidentiality
- Strict restrictions on trading securities of the distressed company and related entities
- Procedures for identifying and handling MNPI
- Informal Interactions With Company Representatives:
- Policies to govern communications with company insiders, including restrictions on the topics discussed
- Procedures for reporting any potential conflicts of interest or receipt of MNPI
- Due Diligence On Third-Party Service Providers:
- Rigorous due diligence on third-party service providers, such as consultants and advisors, to ensure compliance with insider trading laws
- Clear guidelines for information sharing with third-party service providers
Best Practices for RIAs
To mitigate the risks associated with other informal relationships, such as volunteering for nonprofit investment committees, RIAs should consider the following best practices:
- Comprehensive Policy & Procedure Framework: Develop a robust compliance framework that addresses the specific challenges of access to future trades by the committee.
- Effective Training & Education: Provide employees with regular training on insider trading laws, the importance of information barriers, and the potential risks associated with informal relationships.
- Regular Monitoring & Surveillance: Implement a robust surveillance program to monitor employee trading activity and identify any potential violations.
- Clear Communication & Documentation: Maintain clear and concise documentation of all communications with the nonprofit's representatives, committee members, and third-party service providers.
By adhering to these best practices and staying informed about evolving regulatory expectations, RIAs can effectively manage the risks associated with informal relationships and protect their business from potential legal and reputational harm. Learn more about AdvisorLaw's compliance services.