For my fellow nerds, “May the Fourth” be with you.
For my fellow compliance nerds, hopefully you didn’t miss the new risk alert from the Securities and Exchange Commission’s Division of Examination on Material Non-Public Information.
Section 204A of the Investment Advisers Act requires all investment advisers, registered and unregistered, to have written policies and procedures that are reasonably designed to prevent the misuse of material non-public information (“MNPI”) by the investment adviser or any person associated with the adviser.
I hope it’s obvious that this is not a prohibition on insider trading. It’s a requirement to manage the information so it can’t be used for insider trading. (Of course, insider trading is not defined by statute and is it’s own creation by the SEC.)
Based on the SEC risk alert, examiners have been focused on how advisers, and I would guess especially hedge funds, are trying to get an edge to beat the market.
The SEC’s first target is “Alternative Data”. The classic alternative data is counting cars at Walmart to see if there are more customers this year than prior years to get indirect view of sales. I found the SEC’s view on the alternative data in the risk alert to be strange and seems to be circling around what it really wants to say. The main concern seems to be the lack of diligence around these providers and sources. I think what the SEC is getting at is that some of these providers are lacing inside information into the alternative data source or using the alternative data source as a cover for illegally obtained inside information.
This same theme carries over to “expert networks”. The same concern is that the subject matter expert is using illegally obtained MNPI in his or her take on the company. Or worse, the expert is an employee of the company.
The second half of the risk alert turns to traditional code of ethics problems and foot-faults. There are the usual misses on who is an “access person”, inadequate review of account statements and a failure to get everyone to sign the code.
Not a lot of new ground here. DOE has been focused on how advisers, and especially hedge funds, are trying to beat the market. Getting insider information illegally is something the SEC has been and will always be focused on.
This is the SEC staying in the trench and not needing a targeting computer.
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