SEC fines Private Equity Adviser $4 million for Misuse of MNPI and Policy Failures

On December 26, 2023, the SEC fined New York-based private equity fund adviser OEP Capital Advisors, L.P (“OEP”) $4 million for...

On December 26, 2023, the SEC fined New York-based private equity fund adviser OEP Capital Advisors, L.P (“OEP”) $4 million for failing to maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information (“MNPI”) and to implement written policies and procedures reasonably designed to prevent misleading communications to current and prospective investors in its private equity funds.

The SEC found that since at least 2019 OEP made numerous statements to current investors, potential investors and industry contacts that violated OEP’s policies and procedures concerning disclosure of merger-related MNPI and communication of OEP fund performance claims.

Further, the SEC found that in various business contexts, OEP violated its written policies and procedures on its disclosure of MNPI.

Article: https://www.sec.gov/enforce/ia-6514-s

Salus GRC Takeaways:

Private equity managers should consider taking the following steps in order to address potential risks related to the preparation of marketing materials, the dissemination of MNPI and in drafting and updating of their firm’s risk-based policies and procedures:

  • Create a process whereby their firm’s compliance function works closely with other internal stakeholders in drafting and circulating marketing-related communications to current and prospective investors.
  • Conduct a review on how their firm maintains MNPI and develop a workflow whereby compliance and other internal stakeholders determine how and when MNPI may be disseminated internally or externally.
  • Engage for a comprehensive review of their firm’s policies and procedures to ensure that these policies reflect the firm’s actual practices and address the firm’s specific compliance risk areas.

Summary of SEC Findings:

The SEC found that OEP’s policies prohibited disclosure of MNPI and OEP private equity funds’ confidential information “except as may be necessary for legitimate business purposes.” However, OEP senior personnel repeatedly violated these policies by, among other things, sending emails to current investors, potential investors, and industry contacts which, in certain cases, unnecessarily disclosed M&A-related MNPI concerning U.S. and foreign-listed public companies, typically in a marketing context. This MNPI and related, strategic information also constituted the OEP funds’ confidential information.

OEP’s policies prohibited use of fund asset and securities holdings valuations, other than those approved by OEP’s valuation committee, in communications with current or potential investors and in valuation-based performance statements. However, OEP senior personnel repeatedly violated these policies by, among other things, sending certain emails to current investors, potential investors, and industry contacts, soliciting investment capital for OEP funds and often asserting that a particular OEP fund already had generated a substantial “embedded gain” by virtue of the fund’s portfolio activity to date and from which new investors, or current investors who invested additional money, could benefit. These embedded gain and similar claims were predicated on OEP senior personnel’s estimated, current valuations of the funds’ portfolio holdings and had not been approved by OEP’s valuation committee, which met, and approved valuations, on a quarterly basis.

Further, OEP sometimes required industry contacts, potential employees, and other associates to sign non-disclosure agreements prior to receiving MNPI or other confidential information from OEP in various contexts, e.g., prior to attending, as a guest, OEP’s internal, weekly investment-update meetings. However, in the above situations, OEP personnel did not always make an appropriate determination, when disclosing MNPI or OEP funds’ confidential information, that such disclosure was “necessary for legitimate business purposes,” as required by OEP’s policies and procedures.

Additionally, OEP senior personnel disclosed M&A-related MNPI and other non-public, confidential information, concerning multiple U.S. and foreign-listed public companies, where a determination had not been made that such disclosure was “necessary for legitimate business purposes.” Many of these disclosures were made in unofficial update emails sent by OEP senior personnel to specific large, current investors, sometimes in the context of soliciting additional investment. Other such disclosures were made in emails to potential new investors and industry contacts.

Let’s Discuss!  Please contact Salus GRC with your questions and concerns related to these matters, an active or potential SEC exam or the current governance, risk and compliance landscape for investment advisers.

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