October 7, 2024 - The Securities and Exchange Commission (SEC) has lately made it abundantly clear that registered investment advisers (RIAs) had better “establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI) relating to its participation on ad hoc creditors’ committees.” Late last month, the SEC settled charges against Marathon Asset Management LP for failing to do so. This action follows a recent settlement of charges against Sound Point, another RIA, relating to gaps in its “MNPI” policies and procedures. While neither case involved charges of insider trading, both arose out of situations were the RIA had access to MNPI relating to their participation in ad hoc creditors’ committees. In the first case, the SEC called out the absence of written policies relating to the RIA’s trading of CLO tranches of a proprietary CLO that included among its assets a loan to which the RIA had access to MNPI. The SEC even made it clear that it expects such policies and procedures to also cover the trading of third-party CLO tranches.
The current case is more conventional, in the sense that it covers the potential trading of bonds issued by the same company for which the RIA has access to MNPI through its participation on the creditors’ committee. On the other hand, it is reasonable for firms to believe that the robust policies and procedures already in place to address the misuse of MNPI implicitly cover MNPI arising from participation on creditors’ committees. The SEC clearly disagrees. The lesson from the two SEC settlements is clear: RIAs must establish, maintain and enforce MNPI policies specifically designed to address their participation on creditors’ committees.
It goes without saying that, while the two recent cases focused on RIAs’ access to MNPI through participation on creditors’ committees, it is certainly prudent for firms to establish, maintain and enforce policies even if they can receive MNPI through traditional loan market participation as lenders or traders. The LSTA has produced a Code of Conduct and a Statement of Principles for the Communication and Use of Confidential Information by Loan Market Participants (“Statement”) that were first published in 2006 (and revised in 2017). These documents provide guidance on controls, policies, and procedures for receipt, use, and communication by employees and agents of loan market participants of confidential information generally available in the loan market and address the appropriate controls, policies and procedures that should be in place to address the issues regarding the handling of confidential information in specific circumstances.
The LSTA will work with its CLO Committee to update the Statement to address CLO tranche trading and the need for specific policies and procedures addressing participation on creditors’ committees. If you are interested in participating in that project, please reach out.
