RIA Compliance Blog
On April 26, 2022, the Division of Examinations of the Securities and Exchange Commission issued a Risk Alert titled Investment Adviser MNPI Compliance Issues. The Alert identifies compliance issues relating to material non-public information – sometimes called “insider information” – and provides guidance to investment advisers, investors, and other market participants on complying with Section 204A of the Investment Advisers Act and corresponding Rule 204A-1.
Section 204A of the Advisers Act requires investment advisers to establish, maintain, and enforce written policies and procedures designed to prevent the misuse of material non-public information (“MNPI”). Rule 204A-1 requires investment advisers registered under the Advisers Act to adopt a Code of Ethics.
The Division identified three categories of compliance issues related to Section 240A of the Advisers Act. First, the Division observed that advisers have not adopted or implemented adequate policies and procedures to address the risk of receipt and use of data from non-traditional sources (“alternative data”), such as social media and internet search data. Second, the Division observed that advisers have not adopted or implemented adequate policies and procedures regarding investors who are likely to possess insider information, such as corporate investors or financial professional investors. Third and finally, the Division observed that advisers did not have adequate policies and procedures regarding possible interactions with consultants who might have access to insider information.
The Division further identified four primary categories of compliance issues related to Rule 204A-1. First, the Division observed that advisers did not identify certain employees as access persons, nor did some advisers accurately define “access persons” in the firm’s Code of Ethics. Second, the Division observed that some access persons did not obtain pre-approval for the purchase of equity interests in initial public offerings, private placements, or other limited offerings, nor did some advisers include a provision in the Code of Ethics requiring such pre-approval. Third, the Division observed multiple deficiencies related to personal transactions and holdings reporting by access persons, including inability to produce records of review of the reports, failure to implement policies to assign review of the CCO’s reports to another member of the adviser, failure to submit reports in the requisite timeframe, failure to include policies or procedures related to submission of reports, and failure of codes of ethics to require specific content be included in the reports as required by Rule 204-A1. Fourth, the Division observed instances where supervised persons were not given a copy of the Code of Ethics or were not required to attest to their receipt of the code.
In addition to these four categories of compliance issues related to Rule 204A-1, the SEC pointed out that it had previously published a list of drafting pointers, contained in the Adopting Release for the Code of Ethics Rule. For example, the SEC stated the advisers should include a provision in their code outlining a “restricted list” of issuers, which would include any issuers about which the firm has inside information and prohibit trading while the issuer remains on the list. Another example provided in the Adopting Release indicated that advisers should include a provision to ensure that an investment opportunity is offered to clients before the adviser or its employees may take advantage of the investment opportunity.
Based on these observations by the Division, advisers are encouraged to adopt adequate policies and procedures in accordance with the observations and suggestions outlined in the Risk Alert. All advisers should review the policies and procedures in place related to MNPI and identify whether they are sufficient to ensure MNPI rules are being complied with accurately. Advisers should also review their Code of Ethics to ensure that there are sufficient policies and procedures in place regarding the identification and definition of access persons; the review, submission, and content of holdings and transaction reports; and the attestation of and access to the code of ethics by supervised persons.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.