On August 21, 2017, the SEC charged a hedge fund advisory firm with failing to implement and enforce adequate policies and procedures designed to prevent insider trading. The adviser’s policies and procedures required only an initial review of third party research providers’ policies and procedures; once this review was completed, the adviser’s employees were then expected to identify and report any future issues. From approximately May 2012 to November 2013, the adviser made more than $3.9 million in trading profits based on material, nonpublic information from a third-party research provider. Due to this violation of Section 204A of the Investment Advisers Act of 1940, the SEC has required the adviser to pay more than $4.6 million.
WHAT DOES THIS MEAN FOR ME?
Implementing policies and procedures specifically tailored to the business practices of the firm and to conducting periodic reviews are baseline requirements. The policies and procedures should ensure that the firm’s compliance program is able to efficiently identify and address any potential risks. Additionally, employees should be trained to identify and report the receipt of material non-public information at least annually. Depending on the firm’s business practices, advisers may consider implementing the following procedures:
- Conduct periodic insider trading risk assessments, including the review of investment sourcing ideas and outside activities in which access persons are involved;
- Require analysts to report interactions with industry insiders; and
- Require meetings with industry insiders to be “chaperoned” by the CCO or member of the compliance team.
Please feel free to contact Fairview with any questions or concerns that you might have about this case and how it relates to your firm.