September 4, 2024
What happened?
On August 26, the SEC announced that it settled charges against registered investment adviser Sound Point Capital Management LP (“Sound Point”) for “failing to establish, maintain, and enforce written policies and procedures reasonably designed to present the misuse of material nonpublic information (MNPI) concerning its trading of collateralized loan obligations (CLOs)”.
According to the SEC order, Sound Point managed CLOs, traded its own CLOs, and traded CLOs managed by third parties. Additionally, it also had a credit business. These businesses granted Sound Point occasional possession of MNPI about companies whose loans were held in the CLOs that Sound Point traded. After an incident in July 2019, Sound Point started conducting pre-trade compliance reviews of the potential impact of MNPI about loans in Sound Point-managed CLOs. Written policies or procedures, concerning the potential impact of MNPI about the loans in third party-managed CLOs, were not established, maintained, or enforced until June 2024.
The order found that Sound Point violated Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Sound Point has agreed to a cease-and-desist order and censure and received a $1.8 million civil penalty.
What does this mean for me?
If your firm, or its employees, engage in investments or outside business activities which may involve the exchange of MNPI, you should ensure that your policies and procedures are updated to align with current best practices. In 2022, the SEC issued a risk alert which provided guidance on newer sources of MNPI, such as geolocation data and web search histories. Firms should be sure to follow the latest guidance, as the nature and sources of MNPI will continue to evolve.
