A hedge fund manager agreed to pay over $4.7 Million in disgorgement, interest, and penalties for failing to prevent trading on material nonpublic information received from a political research firm. Although the respondent had strict policies about information provided by expert networks, the firm’s compliance policies had much lighter procedures for research firms, relying on employee self-monitoring and red flags. Nevertheless, the SEC asserts that the firm ignored red flags including the receipt of several pieces of material nonpublic information and the fact that the political intelligence analyst also served as the CCO. The SEC charges the firm with violating Section 204A of the Advisers Act, which requires the implementation of policies and procedures reasonably designed to prevent insider trading.
OUR TAKE: We call this “compliance voodoo” whereby a firm appears to write detailed compliance policies and procedures that allow behavior that the policies should be designed to prevent. In this case, there was no good reason to treat “research firms” different from “expert networks” when conducting insider trading due diligence.