Private Fund Adviser Fined for Insufficient MNPI Controls as SEC Continues to Scrutinize Ad Hoc Committee Participants

Introduction

On September 30, 2024, the SEC announced the settlement of an enforcement action against Marathon Asset Management, L.P. (Marathon) for failing to implement proper policies and procedures to prevent the misuse of material nonpublic information (MNPI).  The issue stemmed from Marathon’s participation in ad hoc creditors’ committees, where the firm inadvertently received MNPI through its consultants and advisers.  This enforcement action highlights the SEC’s intense focus on the participation by investors in ad hoc creditors’ committees and the importance of implementing robust MNPI controls when doing so.

Background and Findings

Marathon, a registered investment adviser and global alternative asset manager, has a significant focus on distressed corporate bonds and similar debt.  As part of its business model, Marathon frequently participates in ad hoc creditors’ committees for distressed companies exploring restructuring options.

From August to November 2020, Marathon joined an ad hoc committee for a foreign-based company experiencing financial distress.  The committee retained a financial adviser, “Adviser A,” who signed a non-disclosure agreement (NDA) with the issuer and received MNPI about the company’s restructuring.  The SEC found that while Marathon had general MNPI policies in place, these policies were insufficient to address the specific risks posed by participation in ad hoc committees.  The policies did not require Marathon to conduct its own due diligence on the materiality of the information being released to Marathon by its advisers and consultants.  This oversight may have resulted in the inadvertent receipt of MNPI by Marathon, creating significant risks of misuse.

SEC’s Enforcement Action

The SEC determined that Marathon’s policies and procedures violated Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.  These provisions require investment advisers to establish written procedures reasonably designed to prevent the misuse of MNPI. Marathon agreed to a cease-and-desist order and a civil penalty of $1.5 million.  In addition, the firm committed to revising its compliance policies, enhancing due diligence on external advisers, and providing additional training to employees involved in restructuring discussions.

This action highlights the SEC’s continued focus on the participation by credit investors in ad hoc creditors’ committees.  The Marathon action comes on the heels of the August 2024 enforcement action against Sound Point Capital, highlighted in Crowell & Moring’s client alert Flag on the Play: SEC Fines Adviser for Insufficient MNPI Controls in CLO Trades, where the SEC found that the firm’s compliance policies were insufficient because they failed to restrict trading in certain CLO securities after acquiring MNPI through an ad hoc committee related to a term loan held within the CLO.  In both actions, the SEC took the position that MNPI-related compliance policies must account for the “special circumstances” presented by an adviser’s participation in ad hoc creditors’ committees.

Conclusion

Firms must implement robust compliance policies and procedures to ensure compliance with Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7, and to mitigate insider trading risks.  Recent SEC enforcement actions against Marathon and Sound Point Capital highlight the importance of maintaining strong controls tailored to the adviser’s specific business and adhering to best practices in managing MNPI.

Crowell and Moring has a team of attorneys with extensive experience advising clients on MNPI management and insider trading compliance for credit-focused funds.  Please reach out to the contacts below for further guidance.