The SEC recently released a short Risk Alert covering exam findings related to Material Non-Public Information. (“MNPI”) In short, advisers (Both registered and non-registered) are required to adopt policies and procedures to prevent the misuse of MNPI by the adviser and any person associated with the adviser. These procedures are normally included in the Adviser’s Compliance Manual required by Section 201A of the Advisers Act. Section 204A-1 also requires adopting a Code of Ethics that addresses MNPI risks for internal “Access Persons”.


The Risk Alert focuses on two key areas – Common deficiencies related to the MNPI policies and procedures, and common deficiencies related to Adviser’s Code of Ethics.


Material Non-Public Information

The SEC’s exam findings related to the Compliance Manual address shortcomings with “Alternative Data,” “Value-add Investors” and Expert Networks.” Each of these categories represent potential sources of inside information where procedures must be designed to identify each source, monitor for the receipt or use of inside information, and restrict use of the information.


While conceptually presenting the same risks to the firm, procedurally they are treated differently.

  1. Alternative Data providers should be vetted through vendor due diligence, where the chance of inadvertent receipt of MNPI could be addressed. There may also be provisions in the vendor agreement that place constraints on the information to be received, or sections in the agreement that mitigate the risk. We would recommend procedures that require a thorough review of the vendor, address the risk of the inadvertent receipt of MNPI, and detail what to do with the information if received.
  2. Value-Add Investors refers to clients or fund investors that may have access to MNPI (think corporate executives or financial professional investors). The SEC findings here relate to identification of these types of clients and recording the source of potential MNPI. For Advisers that have these types of clients, we recommend procedures for obtaining this information through account opening or onboarding. The information should be consolidated and treated as books and records, as it seems the SEC may ask for this during an exam.
  3. Expert Networks refers to groups of financial professionals that provide specialized information and research services. While these relationships also present risk in receiving MNPI, The SEC requires more than identification and reporting. For advisors that use Expert Networks, the SEC requires procedures that cover:
    1. Monitoring of the communications between the firm and the network;
    2. Tracking / logging calls;
    3. Reviewing notes; and,
    4. Reviewing trading activity for access persons working with the expert network.


We recommend procedures that leverage other reviews currently being conducted. Email review can focus in on expert network communications, and personal trading reviews can focus on the companies or industries covered by the expert networks.

Code of Ethics

The second key area highlighted by the SEC includes common findings that we see as well. While the Adviser’s Act is generally principles-based and provides for latitude in adopting a compliance program that fits the Adviser, there are sections that are black and white regardless of the Adviser’s risk footprint. The Code of Ethics rule covering personal transaction reporting is one of those areas. Specifically:

  1. Advisors must identify access persons;
  2. Access persons must get pre-approval before investing in an IPO;
  3. The Advisor must get current personal holdings of an access person within 10 days of being an access person;
  4. Access person holdings and transactions must be reviewed and show evidence of such review; and,
  5. Advisors must ensure the Code of Ethics is sent to access persons, and written acknowledgement is received and recorded.


As this section of the rule is so prescriptive, most Code of Ethics include all these provisions. The findings indicate that Advisers are simply not following the procedures, which is always an easy finding for SEC examiners.


These are common deficiencies we see as well. As consultants, we advise clients to focus on the higher risk areas, and in many cases, the risk of insider trading or front-running is low. This section of the risk alert serves as a good reminder that there are clear responsibilities that all Advisers have regardless of risk.


The last section of the Risk Alert provides considerations in crafting the Code of Ethics, namely the use of restricted lists, and allocation procedures between an access person and a client or fund. We agree that most Advisers should have procedures addressing these items.


For Advisers that have Expert Networks, Alternative Data providers, or Value-Added Clients, we would suggest procedures for identifying and restricting employee trading in securities should MNPI be received. These procedures would be needed in the event of inadvertent receipt of MNPI.


We would also suggest a policy governing access person transaction allocations, which can be very simple to craft and provides clear guidelines for personal trading of access persons.