Management Consulting Firm’s Advisory Affiliate Allowed Use of Material Nonpublic Client Information
The investment adviser affiliate of a large management consulting firm will pay an $18 Million fine for failing to establish information barriers.
The SEC asserts that the investment committee of the investment adviser, established for current and former partners and employees, included senior firm leaders that had access to material nonpublic client information. Active partners serving on the investment committee had inside access to clients’ financial results, bankruptcy filings, merger and acquisition plans, product pipelines, and senior management. The investment adviser invested in clients directly and through third party managers. The SEC faults the firm for failing to implement policies and procedures that would prevent the misuse of such inside information. Instead, the firm adopted a policy that specifically carved out investment committee members that sat above the protective information wall.
We call this “compliance alchemy” i.e. the appearance of a compliance program that hides underlying violations. Sure, the firm had an information barrier for most employees, but the information wall was flimsy, exempting the most senior partners and employees that made investment decisions. We recommend high and thick information barriers especially for private equity companies that allow insider co-investing.
Read SEC Order here.