SEC reminds firms to track sources of data as part of Code of Ethics

Advisers should consider all potential sources of information and monitor for misuse of MNPI on an ongoing basis according to the recent SEC risk alert.

The SEC’s risk alert, issued to investment advisers this week, looks at the Code of Ethics required by Section 204A of the Investment Advisers Act of 1940 and in particular the receipt of material non-public information (MNPI).

The staff listed common deficiencies cited in examinations of investment advisers and highlighted risks specific to sources of MNPI, such as alternative data providers, value-add investors or expert networks.

The staff noted alternative data includes information obtained from apps and other tools that consumers may utilize, for example geolocation data from mobile phones.  The staff noted that while alternative data providers may not explicitly provide MNPI, an adviser who relies on this data should address the potential risk of receipt and use of MNPI through these sources.  Advisers should document diligence processes, policies and procedures regarding the assessment of terms, conditions or legal obligations related to the use of such data.

Advisers should also consider whether MNPI could be obtained through “value-add investors” which are clients or private fund investors who are corporate executives or financial professional investors who may have access to MNPI.  Advisers should adopt and implement policies and procedures specific to the identification of value-add investors and tracking relationships with potential sources of MNPI.

Finally, the staff noted the use of expert networks, referring to a group of professionals who are paid for their specialized information and research services, and the potential receipt of MNPI by supervised persons.  Advisers should track and log calls with expert network consultants, review notes from calls and review relevant trading activity of supervised persons with mandates in similar industries as those discussed on the call.

Advisers who are currently engaging in their annual reviews should pay particular attention to their Code of Ethics and the firm’s information sources.  Overall, the Commission is signaling that Advisers should look beyond the black letter requirements of the Code of Ethics rule and consider all potential sources of MNPI which may accumulate.  CCOs should actively engage in monitoring these sources for misuse of MNPI, beyond quarterly reviews of supervised person’s account statements.

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