SEC Settlement Reminds Fund Managers With Affiliated Broker-Dealers of Importance of Robust Controls Over Use of MNPI

In an effort to expand its business, a broker-dealer established a private fund that traded in many of the same securities that it covered in its research and investment banking activities. That broker-dealer allegedly failed to adopt policies and procedures to prohibit its employees from using material nonpublic information learned from its investment banking clients in connection with the fund’s trading, however. The SEC’s recent settlement order (Order) with that broker-dealer is a timely reminder that fund managers and broker-dealers must adopt and implement appropriate policies and procedures to ensure compliance with insider trading and other applicable rules under the securities laws. This article summarizes the Order and crucial lessons for fund managers that can be gleaned from it. For more on mitigating the risk of insider trading through compliance programs, see “General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action” (Nov. 3, 2016); “Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities” (Jan. 30, 2014); and “How Hedge Fund Managers Can Use Technology to Enhance Their Compliance Programs” (Nov. 17, 2011).

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