Understanding the SEC’s April 2022 EXAMS risk alert

Published: 06 Dec 2022

In April 2022, the SEC’s Division of Examinations (“EXAMS”) published a risk alert related to concerns around misuse of material non-public information (“MNPI”) by investment advisers (see the full risk alert here). In summary, the alert flagged “notable deficiencies” across three areas:

  1. Alternative data. Specifically, failure to adopt or implement policies to address the potential risk of receipt and use of MNPI obtained via alternative data sources.
  2. Value-add investors. Specifically, failure to adopt or implement policies to regarding investors or key persons who are more likely to possess MNPI (e.g., directors of public companies).
  3. Expert networks. Specifically, inadequate policies regarding discussions with expert network consultants who may be related to publicly traded companies or have access to MNPI.

As it relates to the third area flagged by EXAMS, the SEC specifically flagged the following deficiencies:

  • Tracking and logging calls with expert network consultants
  • Reviewing detailed notes from expert network calls
  • Reviewing relevant trading activity of supervised persons in the securities of publicly traded companies that are in similar industries as those discussed during calls

This risk alert comes amid heightened scrutiny and enforcement by the SEC of alleged misuses of MNPI by investment advisers. In November 2021, MIO Partners, an affiliate of McKinsey & Co. which manages money for the global consulting firm’s employees, paid $18 million in fines to the SEC for allegedly letting McKinsey partners with insider knowledge from their corporate work oversee investments in public companies by sitting on the investment committee of MIO Partners. And in early 2022, the SEC proposed new rules to tighten Rule 10b5-1 requirements that govern trading activity of insiders.

On the heels of SEC enforcement related to MNPI, public scrutiny of expert networks also continues to grow. In September 2022, the New Yorker published an article specifically naming several expert networks, highlighting what they described as aggressiveness in pursuing information related to a former Twitter employee who filed a whistle-blower disclosure about the social media company (and which was particularly financially relevant given the contemplated take-private of the company working its way through the courts at the time).

Modern Diligence’s Expert Networks product helps manage processes and procedures related to expert network MNPI risk, including:

  • Upload your firm’s Code of Ethics to the Expert Networks platform and require regular certification by users (including expert networks and investment team members)
  • Centrally manage expert call requests, with all relevant information displayed in one location, including expert work history, relevant target information, expert call history with your firm, call agendas, and call chaperoning
  • Easily track and analyze expert call history to assess risk for any contemplated investment transaction by accessing all previous calls related to a given company or industry

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