Failing to adequately manage Material Non-Public Information (MNPI) remains a high risk area for compliance, as evidenced by recent actions in the U.S. and the U.K. A private equity firm paid $1 million to settle SEC charges for failing to implement effective Insider Trading compliance policies. The FCA published a Decision Notice fining a former CEO £658,900 for market abuse and banning him from future roles linked to regulated activity.
To avoid hefty fines and actions, firms must have comprehensive and actionable policies and procedures around the management of MNPI and insider lists to minimize risk.
The firm paid to settle SEC charges that they allowed an employee to be placed on a portfolio company's board while continuing to participate in trading decisions regarding the portfolio company. "Investment advisers and private equity firms that place employees on the boards of public companies bear heightened risks that they will obtain non-public material information through their representative occupying dual roles," said Anita B. Bandy, Associate Director in the Division of Enforcement. "It is critical for firms to have proper policies and procedures in place to address these risks and prevent the misuse of information obtained under these special circumstances."
What is Considered MNPI and Examples?
Material Non-Public Information or MNPI is information not generally disseminated to the public or available to investors generally, which a reasonable investor would likely consider important in making an investment decision such as to buy, sell, or hold securities. It can include strategic plans, significant capital investment plans, negotiations concerning acquisitions or dispositions, major new contracts (or the loss of a major contract), financial results and more. This information is considered non-public if it has yet to be distributed to the public via a press release, company announcement, etc.
An example of MNPI is the fact a CEO resigns from the position in March, and on the same day the company makes an announcement, the information is made public. However, a month before, in a company meeting with main stakeholders, the management discuss the CEO resignation. These main stakeholders know that the CEO will resign the position a month before the public, and if any of these employees trade, sell or buy using this information as a market advantage, this act constitutes illegal trading.
We have a great selection of content that explains what an insider list is, what are your obligations to protect and manage MNPI and when to provide information to the public under current regulations, such as market abuse regulation.
- Insider List and MNPI Management under MAR
- Insider Trading and Safeguarding MNPI - Webinar
- SEC Finds Deficiencies in Disclosing Conflicts of Interest and MNPI
What is Insider Trading?
According to the SEC policy from 2013, "insider trading" generally refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material non-public information about the security.
Insider Trading Cases
Many cases of insider trading made the news in 2020. ESMA, the FCA and SEC have voiced concerns about managing insider trading with employees working from non-office locations.
A few cases that made the press recently:
- Conor Foley was accused by the FCA of disseminating false information and manipulate transactions while being the former CEO of Worldspreads (WSL).
- The FCA charged a Goldman Sachs Group employee for fraud and insider trading after using information about deals he worked on.
A Hypothetical Example of Insider Trading
A high-level employee gets the information that the company will merge or will be sold—understanding the market impact of that information which is not yet made public consequently buys or sells the shares of the company in his father's account in order to make a profit from it and gain market advantage.
Implications for firms
The SEC has served notice that firms must continue to make monitoring for insider trading a priority. With many employees working remotely, “a greater number of people may have access to material nonpublic information than in less challenging times.”
Amy Lynch and Giselle Casella from FrontLine Compliance spoke about the importance of managing MNPI and Insider trading in the webinar Maintaining Market Integrity in Today’s Regulatory Environment. “Insider Trading risk is very high right now, and the SEC is aware of it. Firms should be monitoring employees to see what kind of access they might have to MNPI. This becomes very important if you are a firm that has a large research desk, publishes your own research, or where your analysts are regularly talking to corporate insiders.”
In the recent Risk Alert Observations from Examinations of Investment Advisers Managing Private Funds the Office of Compliance Inspections and Examinations (OCIE) of the SEC noted policies and procedures relating to MNPI as a general deficiency commonly seen during examinations of registered investment advisers that manage private equity funds or hedge funds.
OCIE staff found deficiencies under Section 204A of the Advisers Act in the establishment and enforcement of MNPI policies and procedures including failing to address the risk of the exchange of MNPI when employees interact with outside entities, the risk of employees obtaining MNPI though access to office space and systems, or employees who periodically had access to MNPI about issuers of public security.
The recent FCA Decision Notice also reflects regulator focus on market abuse and the management of MNPI. To be in compliance with Market Abuse Regulation (MAR), firms must have controls in place to manage conduct risk and reduce the risk of market abuse. For more information on FCA expectations around Conduct Risk and Market Abuse mitigation including current enforcement trends and heightened risk arising from remote work, watch our webinar Managing Conduct Risk and Protecting Against Market Abuse During the COVID-19 Crisis with Gowling WLG.
MyComplianceOffice can help your firm manage regulatory guidelines around the sharing of MNPI among corporate insiders in advance of trading and investment deals. Our software can help you identify and mitigate potential Conflicts of Interest from the activities of employees, third parties and the company and automate your MNPI and Insider Trading policies & procedures and embed them within your business.
Our Insider List Management solution enables users to create insider lists, complete with individuals and roles/rights assignments, timeframes when individuals can access inside information as well as a cross-referenceable hierarchical database of securities listings and company information on tens of thousands of entities. The automated solution supports standardized data management formats for sharing insider lists in accordance with regulatory guidelines.
Let us know if you’d like to learn more.