The SEC Now Charges A Hedge Fund For Compliance Failures
The SEC now charges a hedge fund for compliance failures when it failed to establish and enforce policies within its insider information material.
Note: The SEC has updated their PR to charging Sound Point for ‘compliance failures’ — the title of this article previously read ‘illegal trading’.
As a result, the Securities and Exchange Commission (SEC) has charged Sound Point Capital Management LP a $1.8 million penalty.
The SEC has found that the investment management firm Sound Point violated securities laws related to the management of collateralized loan obligations (CLOs) and the firm’s access to material non-public information (MNPI).
Sound Point managed CLOs and traded its own CLOs as well as CLOs managed by third parties.
Through this work, the firm sometimes came into possession of MNPI about the companies whose loans were held in the CLOs that Sound Point traded.
While Sound Point began conducting pre-trade compliance reviews to address the potential impact of MNPI related to loans in its own CLOs in 2019, the firm did not adopt formal written policies and procedures to handle MNPI from third-party CLOs until much later, in June 2022.
The SEC emphasized that investment advisors with multiple business lines must have reasonable policies and procedures in place to address the risks of accessing MNPI, including through their roles as lenders that may expose them to sensitive information.
As a result of these violations, Sound Point has agreed to pay a $1.8 million penalty and will be subject to a cease-and-desist order and censure by the SEC.
The investigation was conducted by the SEC’s Division of Enforcement and Division of Examinations.
“Fund managers – including those with multiple business lines or strategies – must consider how they may come into possession of material nonpublic information and then adopt and implement reasonable policies and procedures around those risks,” said Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit.
“Among other things, advisers must evaluate how their roles as lenders could expose them to MNPI that may relate to their CLO trading positions.”
A spokesperson for Sound Point told FrankNez:
“We are pleased to enter into the settlement with the SEC on a “no admit or deny” basis.
We cooperated with the SEC in this matter, which relates to certain compliance policies and procedures, the majority of which were modified in 2019.
We have enhanced our controls since then.
This matter does not include any findings of insider trading or misuse of material nonpublic information by Sound Point or its employees.
Sound Point takes its fiduciary responsibilities very seriously and remains committed to operating with the highest standards of governance and compliance.
As an organization, we continue to seek ways to further enhance our policies, procedures and practices and to adapt to changes in regulation, our business and the market.”
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Also Read: Exposures At Hedge Funds Now Surge To Over $28 Trillion
Other Market News Today
An investment banking company is now under investigation for illegal trading according to an SEC and Bloomberg report.
B. Riley Financial Inc. is facing an investigation, meanwhile shares have lost more than half their value amidst the probe.
The agency is assessing whether the investment bank adequately disclosed the risks associated with some of its assets to investors.
The SEC inquiry also extends to examining the interactions between B. Riley’s founder, Bryant Riley, and the former CEO of Franchise Group Inc. (FRG), Brian Kahn.
FRG is one of B. Riley’s larger investment holdings.
In addition, the SEC probe is looking into possible improper trading by other insiders at B. Riley.
Regulators have also asked about the movement of receivables due from cash-strapped retail customers, whose repayment might be doubtful.
The SEC’s civil probes, involving lawyers in Los Angeles, Washington and Philadelphia, are running concurrently with a federal criminal inquiry in New Jersey.
This criminal investigation is focused on the 2020 collapse of an investment fund, Prophecy Asset Management, where Brian Kahn handled most of the fund’s assets.
The news of the SEC investigation has had a significant impact on B. Riley’s stock price, with shares dropping over 54% to $7.73 per share during the trading session.
This multi-faceted regulatory scrutiny of B. Riley underscores concerns about the firm’s risk management practices, disclosures, and potential misconduct involving its leadership and investments.
Prophecy investors who lost money have questioned in a lawsuit whether Kahn improperly used Prophecy proceeds to acquire control of FRG for himself. A co-founder of that fund pleaded guilty in November in a $294 million fraud case and is cooperating with prosecutors, who tagged Kahn as an unindicted co-conspirator, Bloomberg previously reported.
Bryant Riley told investors in a Monday conference call that he and the company received subpoenas in July from the SEC focused mainly on B. Riley’s dealings with Kahn.
“We are responding to the subpoenas and are fully cooperating with the SEC,” Bryant Riley said.
“We are confident that the SEC will reach the same conclusion that our own internal investigation, with the assistance of two separate law firms, did – that we had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates.”
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Also Read: The US Treasury Direct is Now Freezing Customer Accounts
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