SEC Cracks Down on CLO Manager’s Insider Trading Controls
The Securities and Exchange Commission (SEC) recently took action against a registered investment advisor, Sound Point Capital Management, for failing to have proper safeguards in place to prevent insider trading. This case highlights the importance of strong compliance measures for firms dealing with confidential loan information.
What Happened?
Sound Point manages investment vehicles called Collateralized Loan Obligations (CLOs). In 2019, while participating in a lender group for a borrower company, Sound Point obtained confidential information (MNPI) about the company’s potential financial troubles. Despite having a restricted list for securities trading, the firm lacked written procedures to address how MNPI related to borrowers might impact CLOs containing loans to those borrowers.
The Problem
Sound Point used this confidential information to reduce their exposure to specific CLO tranches containing loans to the troubled company. This action raised concerns about insider trading since using MNPI to make investment decisions is illegal.
The Takeaway
The SEC penalized Sound Point for failing to implement adequate policies and procedures to prevent the misuse of MNPI, specifically regarding loan information and CLOs. This case serves as a reminder for firms involved in private credit, loan trading, and CLOs to have robust compliance controls in place.
Key Points for Your Business:
- Ensure your firm has clear policies and procedures addressing MNPI related to loan information.
- Consider information barriers and restricted lists to prevent misuse of confidential data.
- Compliance should develop and assess enterprise conflicts of interest If the firm participates in lenders’ groups or creditors’ committees.
- Regularly review and update your compliance measures, especially when dealing with multiple business lines.
- This case isn’t the first time the SEC has penalized firms for weak compliance procedures. In a similar instance, Ares Management LLC faced action for failing to implement information barriers and pre-trade reviews related to potential MNPI involving publicly traded companies where they had board representation.
StarCompliance Can Help
StarCompliance’s SaaS-based products provide employee compliance solutions for banks, asset managers, and hedge funds to effectively manage loan-level information, including watch and restricted lists. We can help you establish strong controls to prevent insider trading and ensure regulatory compliance.
Best Practices Guide: Detecting Insider Trading
