Tip for Updating Your Compliance Program: MNPI Compliance Issues

As Form ADV season descends upon us, we are reminded that compliance officers face the thankless task each year of reviewing compliance policies and procedures to determine their adequacy and effectiveness, as required by Advisers Act Rule 206(4)-7. This review entails updating the firm's compliance program to reflect changes to relevant regulations and new regulatory guidance, and confirming the program is appropriately followed by the firm.  

We’ve compiled a series of tips to help understand the U.S. Securities and Exchange Commission (SEC) focus areas for 2023. You can read our previous tips here:

1. Get ready for SEC focus on hedge clauses in advisory agreements
2. Keep tabs on Continuing Education requirements

Tip #3 - Update your compliance program to address the SEC Risk Alert about MNPI compliance issues

The SEC Division of Examinations (EXAMS) issued a Risk Alert about material non-public information (MNPI) compliance issues, describing common deficiencies resulting from investment advisers' handling of MNPI. Under Section 204A of the Advisers Act, advisers must implement written policies and procedures reasonably designed to prevent the misuse of MNPI. EXAMS also highlighted common issues in complying with Rule 204A-1 of the Advisers Act, the Code of Ethics Rule. Advisers should read this Alert carefully to determine whether their current practices sufficiently address the deficiencies cited.

Our guidance

Firms should review their activities and address specific activities that may expose the firm to MNPI, including:

• Alternative data providers: Firms that use data from non-traditional sources, such as information gathered from satellite and drone imagery and social media and internet search data, should include robust and consistent documentation of due diligence and ongoing reviews of such data providers.
• Value-added investors: Firms with investors that are likely to possess MNPI, such as officers or directors of a public company or asset management firm principals, should have a process for identifying these investors and managing the risks posed by such "value-added investors."
• Expert Networks: Firms that use expert networks should consider implementing best practices, such as logging and tracking calls and reviewing detailed call notes. EXAMS also recommended that firms review trading activity in publicly traded companies in industries similar to those discussed during expert network calls.

Firms should also review their Code of Ethics “blocking and tackling,” such as:

• Identification of Access Persons: An adviser's code of ethics should include a definition of an access person, and the Chief Compliance Officer (CCO) should maintain a list of the firm’s access persons.
• Obtain pre-approval for IPOs and limited offerings: Firms should ensure their code of ethics includes preclearance requirements for IPOs and limited offerings and enforce this provision. If firm employees want to invest in private placements, they must get pre-approval. Check employee disclosure of outside business activities to see if they match up with pre-approval requests for limited offerings.
• Require access persons to submit quarterly transaction and annual holdings reports and written acknowledgments of code receipt.

Other best practices include maintaining a restricted securities list where the firm possesses MNPI and ensuring that investment opportunities are first offered to clients before the firm or any employee.

How we help

Firms that use our ComplianceAlpha^® regulatory technology (RegTech) solution have an advantage when adhering to the Code of Ethics Rule. ComplianceAlpha organizes and monitors pre-approval for IPOs and limited offerings, electronically tracks written acknowledgements associated with operating a Code of Ethics’ program, identifies items of interest based on algorithmic searches across multiple liquid asset classes, including equities, derivatives, currencies, and fixed income, and analyzes fairness in dealing across account allocation and execution.

The Control Room feature of ComplianceAlpha manages multiple restricted lists, including historical records, as companies move across restricted and grey lists for a firm and uncover information including the type of conflicted activity, linked companies, and linked employees.

Our Market Abuse Surveillance Solution in ComplianceAlpha helps ACA clients identify potential misconduct and insider trading risk. It tests portfolios after meetings with expert networks or issuers and drills down into your firm’s trading activity when compared to corporate actions, significant price movements, and important events such as expert network meetings or issuers or political intelligence research. ComplianceAlpha has a specific tool to track and log expert network meetings to meet the SEC’s requirements. 

Technology-based solutions for due diligence of alternative data providers are also available through ComplianceAlpha. The Control Room will offer a central repository for all public and private data, including data related to investment banking, private market deals, and MNPI including wall crossings.

Contact us here to learn more about our solutions.

Listen to our 2023 Regulatory Outlook webcast on demand

We recently hosted a webcast to review the regulatory changes that will likely have implications on compliance programs in 2023, and provide recommendations to prepare for these changes. Our experts discussed rule proposals and adoption, examination and enforcement trends, and regulatory guidance. Watch our webcast for more insights to help you prepare your compliance program for this year’s focus areas.

Watch now