Under the Radar: SEC Penalizes Adviser for Weak MNPI Controls in CLO Trades
In August 2024, the SEC hit Sound Point Capital Management, LP with a $1.8 million penalty for failing to implement adequate controls around Material Nonpublic Information (MNPI) in their trading activities. For advisers managing complex assets like Collateralized Loan Obligations (CLOs), this enforcement action is a wake-up call: MNPI policies must do more than tick boxes—they need to be sharp, targeted, and adaptable to the nuances of your specific business.
Managing MNPI risk is no longer just about avoiding direct trades on inside information; it’s about creating robust, tailored safeguards that address the way MNPI can impact related investments, particularly in intricate vehicles like CLOs. With the SEC placing renewed focus on MNPI in credit markets, now is the time to ensure your compliance protocols are more than just routine. This article unpacks the SEC’s action against Sound Point and provides essential takeaways for investment advisers on avoiding similar pitfalls.
What You Need to Know
Tailored MNPI Policies Matter
Standard compliance policies may no longer cut it. Investment advisers and CLO managers need MNPI policies that align closely with the particular risks of their asset classes, including CLOs.When MNPI Can Cross Business Lines
If you’re involved in loan syndicates or creditors’ committees, the risk of handling MNPI increases, making proactive consultation with compliance crucial.Characteristics of CLO Assets Impact MNPI
CLOs with equity tranches and concentrated portfolios make borrower information far more impactful. Understand when this information may materially affect CLO tranches.The SEC’s Spotlight on Credit Markets
The SEC is ramping up its focus on MNPI in credit markets, highlighting this as a top priority in its 2024 Examination Priorities Report.Effective MNPI Controls Are a Must
Regular training, restricted lists, and strict documentation for MNPI handling are essential safeguards to avoid enforcement action.
Understanding MNPI in CLO Management
What is MNPI?
MNPI is information about a company or security that is not publicly available but would likely influence an investor's decision or the market price if disclosed. It becomes public only after being widely disseminated.
Common Examples of MNPI:
MNPI may include merger or acquisition plans, major asset sales, credit defaults, leadership changes, and other significant corporate developments. For CLO managers, this could involve sensitive details about a borrower’s financial status—information that might seem unrelated but could significantly impact certain CLO tranches, especially equity ones.
Case in Point: The SEC Action Against Sound Point Capital
The SEC’s action against Sound Point focused on MNPI leaks between its credit business and its CLO management. In one case, Sound Point accessed MNPI regarding a distressed media company, "Company A," through its role as a lender. Compliance flagged this as MNPI, yet personnel later sought approval to trade CLO notes holding Company A’s loans—a move that triggered SEC enforcement.
The SEC argued that Sound Point’s broad MNPI policies fell short of addressing the specific risks of MNPI exposure across business lines. Like the 2020 action against Ares Capital Management, this case highlights the SEC’s stance that MNPI policies should not be one-size-fits-all but must address the particularities of each business activity.
Key Takeaway: Design Proactive MNPI Protocols
The SEC’s increased scrutiny in this area is clear. If you’re an adviser handling CLOs or similar assets, consider this a call to action: assess your MNPI policies, engage compliance early, and adapt your controls to your firm’s unique activities. This approach goes beyond regulatory boxes—it protects your business from costly penalties and secures your reputation in an increasingly vigilant market.
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