In a recently settled enforcement action, the SEC has again driven home its admonition that, “if the nature of a particular broker dealer’s or investment adviser’s business exposes employees to persons in possession of material nonpublic information on a regular basis, a general policy that those employees self-evaluate information they receive is insufficient” to meet the firm’s duty under the federal securities laws to take reasonable steps to prevent the misuse of material nonpublic information (MNPI). See “SEC Continues to Focus on Insider Trading and Fund Valuation
” (Jun. 30, 2016). In this action, a hedge fund manager and its senior analyst allegedly failed to supervise an analyst who provided them with MNPI about a pending acquisition of a publicly traded company. This article summarizes the SEC settlement order and lessons for fund managers who wish to avoid being subject to similar SEC enforcement scrutiny. For more on insider trading issues, see our two-part coverage of the Seward & Kissel Private Funds Forum: “How Managers Can Mitigate Improper Dissemination of Sensitive Information
” (Sep. 22, 2016); and “How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading
” (Sep. 29, 2016).