SEC fines PE firm $1m for compliance failings

The SEC agreed to settle charges for compliance failings against a Los-Angeles-based private equity firm and its registered investment adviser. The firm knowingly traded public portfolio shares, for violations of Section 204A related to MNPI and Rule 206(4)-7 related to company trading in public portfolio company shares while in possession of non-public information, and as a result face a substantial fine of one million dollars. The firm agreed to the settlement without either admitting or denying any wrongdoing.

According to the Administrative Proceeding Order, the PE firm had invested “several hundred million dollars in client funds in a portfolio company in the form of debt and equity”, resulting in two of the firm’s employees being appointed to the other company’s board. During the appointment, one of the employees received information from the portfolio company that posed a risk of MNPI, which was then distributed more widely across the PE firm. The MNPI included potential change in senior management, adjustments to the portfolio company’s hedging strategy, asset sale plans, potential equity issuance and debt retirement, amongst other material information.

While the PE employee sat on the portfolio company’s board, their firm purchased more than $1 million of the company’s publicly-traded stock. The purchases were approved by compliance and occurred during the open “trading windows”.

The SEC notes the PE firm “maintained certain policies and procedures relating to the treatment of MNPI.” The procedures included use of a “restricted list,” pre-approval by compliance for companies in which the PE firm had board representation, confirmation by compliance of any restrictive trading window and affirmation from any board representative for MNPI. The firm also had written procedures for establishing information barriers for public-listed portfolio companies. However, the SEC noted the firm routinely “did not routinely establish information walls” and did not do so with respect to the portfolio company.

The SEC alleged the PE firm didn’t sufficiently take into account the special circumstances presented by the firm’s dual role as both a member of the portfolio company’s board and as an employee that continued to participate in trading decisions concerning the company. Despite compliance staff confirming that the relevant trading windows were open, they simply didn’t do enough to identify relevant parties with whom to inquire regarding possession of potential MNPI, and the manner and degree to which compliance should explore MNPI issues with these parties.

Additionally, the SEC noted compliance failed, in numerous instances, to document sufficiently that they had inquired with the PE firm employee and the members of the deal team as to whether any of them had received potential MNPI from the portfolio company, or to apply a consistent practice to the inquiries made.

How we can help

Now more than ever, firms have a duty to protect their investors. We offer a number of related services to make sure you have everything in place.

  • Design and review policies and procedures
  • Mock SEC exam
  • Targeted testing of compliance policies and procedures

We can also advise on a broad range of other regulatory issues. Get in touch to find out more.

Want more insights like this?

Join our mailing list