New York RIA faces $1.8M penalty over insider trading policy gaps

investmentnews.com:

The SEC has reached a settlement with a New York-based registered investment adviser, which agreed to pay more $1.8 million over allegations that it failed to enforce adequate policies to prevent insider trading.

The case involving Sound Point Capital Management centers on deficiencies in the firm’s handling of material nonpublic information while managing and trading collateralized loan obligations.

According to the SEC’s order published Monday, Sound Point’s business involved managing its own CLOs, as well as trading CLOs managed by third parties.

The firm also operated a credit business that frequently engaged in lender groups or creditors’ committees, which occasionally gave Sound Point a peek behind the curtain of companies whose loans were among the CLOs it traded.

The SEC said Sound Point did not conduct pre-trade compliance reviews concerning MNPI risks in its CLO trading before July 2019 when it sold portions of two CLO equity tranches, which held loans to an unnamed media company, to two different counterparties.

In the weeks prior, certain Sound Point personnel became aware that an expected major asset sale by the company was likely to fail, which left the company in need of rescue financing.

While Sound Point had an insider trading policy preventing it from trading in securities of companies it had MNPI about, that didn’t include prohibitions on trading CLO tranches when it had MNPI about one of the underlying borrowers.

With that gap in its policies and procedures, a co-portfolio manager at the firm emailed the compliance department requesting approval to sell chunks of two equity tranches of Sound Point CLOs that included loans to the company. The request was approved, and Sound Point sold portions of those