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Risk Alert: SEC Cites Advisors for Failing to Protect MNPI and Enforce Codes of Ethics

April 28, 2022

By Todd Cipperman

The SEC’s Division of Examinations has issued a Risk Alert highlighting advisors’ failures to monitor material nonpublic information (MNPI) and implement adequate codes of ethics.

The Examinations staff cited several MNPI failures including (i) inadequate due diligence of alternative data providers arising from nontraditional investment research; (ii) weak procedures to identify value add investors such as officers, directors, principals, portfolio managers, and investment bankers; (iii) insufficient expert network practices that did not include tracking and logging calls, requiring detailed notes, or monitoring trading activity. Notwithstanding several prior warnings about code of ethics failures, the SEC continues to find many firms that neglect to properly identify access persons, ensure the timely submission of holdings reports, and require complete holdings reports and preclearance.  The Exams staff further recommends firms utilize restricted lists and implement more fulsome investment allocations policies and procedures.

OUR TAKE: We’re not sure why these deficiencies persist.  The SEC has clearly defined the MNPI and code of ethics requirements in both the rule and many public statements: don’t allow the firm or principals to benefit from the use of MNPI, adopt a code of ethics, define access persons, require reporting and preclearance. We strongly suggest the adoption of a compliance platform that not only facilitates required Code of Ethics reporting but also assists with monitoring for compliance with the firm’s Code of Ethics and MNPI reviews.

Read the Risk Alert here.

This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.