SEC Charges Investment Adviser for Policies and Procedures Failures
Late last year, (December 26, 2023), the Securities and Exchange Commission (“SEC”) settled charges against OEP Capital Advisors, L.P (“OEP”) for failing to maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information (“MNPI”).
As the SEC explains, OEP Funds focus on “middle market” M&A, purchasing domestic and foreign mid-sized companies for its Funds’ portfolios and arranging mergers for these companies (“Portfolio Companies”). Although most of the OEP Funds’ Portfolio Companies are privately held, some are public companies listed on U.S. or foreign stock exchanges.
According to the SEC, from 2019 to 2022, OEP’s policies prohibited disclosure of MNPI and OEP Funds’ confidential information “except as may be necessary for legitimate business purposes”.
The SEC state, OEP senior personnel repeatedly violated these policies by, amongst other things, sending emails to current investors, potential investors, and industry contacts which, in certain cases, unnecessarily disclosed M&A-related MNPI concerning U.S. and foreign-listed public companies, typically in a marketing context.
Interestingly, and similar to another recent case, the SEC does not allege trading based on the sharing of MNPI.
It appears the main grievance the SEC has is that OEP did not follow their own defined policies and procedures. The SEC acknowledged that OEP used non-disclosure agreements (“NDAs”) to protect MNPI and confidential information. However, OEP personnel used NDAs in the course of providing MNPI without always following the firm’s existing policies and procedures governing the disclosure of MNPI, which required a determination that disclosure was “necessary for legitimate business purposes” and which remained applicable whether or not an NDA was in place.
According to the SEC, there’s clear evidence that at times, proper procedures were followed. For example, potential investors in the OEP Funds were sometimes required to sign NDAs prior to receiving MNPI or other confidential information from OEP, e.g., prior to accessing online, due diligence “data rooms.”
Furthermore, OEP sometimes requires industry contacts, potential employees, and other associates to sign NDAs prior to receiving MNPI or other confidential information from OEP in various contexts, e.g., prior to attending, as a guest, OEP’s internal, weekly investment-update meetings.
What is troublesome is from the SEC’s point of view, OEP personnel did not always make an appropriate determination when disclosing MNPI or OEP Funds’ confidential information, that such disclosure was “necessary for legitimate business purposes,” as required by OEP’s policies and procedures.
The SEC appears to be focused on the black-and-white letter of OEP’s policies and procedures to arrive at their findings that a determination had not been made, or documented, that such disclosure was “necessary for legitimate business purposes.” One wonders, if OEP had documented their rationale for sharing MNPI under NDAs and/or changed the wording of their policy if the SEC would still find their actions troublesome.
The SEC claims that although OEP chose to use NDAs as a routine part of its business operations, it failed to maintain and enforce its policies and procedures designed to prevent misuse of MNPI and of other confidential, nonpublic information belonging to the OEP Funds and/or the Funds’ Portfolio Companies. The SEC seem to focus on the perceived failure by OEP personnel that they did not always make an appropriate determination that the prospective disclosure of MNPI, under the circumstances presented, was “necessary for legitimate business purposes,” as required by OEP’s existing written policies and procedures.
Without admitting or denying the order’s findings, OEP consented to a cease-and-desist order, censure and the payment of a civil penalty of $4,000,000.
Firms should take note that the SEC took such a brash stance in determining that OEP’s business practices were not “necessary for legitimate business purposes.” Further, it appears that the SEC wants firms to document they are sharing MNPI due to “necessary legitimate business purposes.”
HOW TECHNOLOGY CAN HELP
Organizations like OEP can hold a significant amount of MNPI at any given time. Managing, monitoring, and preserving each piece of MNPI without a centralized repository for information can pose a significant challenge for any organization, not to mention the task of adhering to policies and procedures. The right technology can seamlessly integrate policies into daily operations, establish consistency throughout processes, and enhance overall efficiency. A best-in-class SEC compliance software solution will provide some of the following:
- Employee portal where MNPI can be reported and MNPI details attached, including NDAs, to specific deals/projects;
- Compliance portal to review and surveil MNPI;
- Track, approve, record and monitor Wall crossings or market-sounding events;
- Insider lists that are easy to maintain and update, listing both employees and third- parties to capture anyone considered an “insider”; and
- Watch and Restricted Lists to mitigate market abuse around employee, customer and firm trading.
StarCompliance works with broker-dealers, private equity firms and asset managers around the globe to help them document and control the flow of MNPI. To learn more, request a call with one of our experts today.
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