SEC hammers mid-market firm on MNPI

'Scary' case should worry small- and midsized managers, expert says.

A midsized private equity manager has agreed to pay $4 million to settle SEC accusations that its senior staffers were sloppy in sharing insider information with current and prospective investors.

Without admitting or denying the commission’s allegations, New York-based OEP Capital Advisors ($10.7 billion) has also agreed to accept censure, regulators say in a December 26 settlement order. The SEC claims OEP’s P&Ps prohibited the disclosure of material, nonpublic information or its funds’ confidential information “except as may be necessary for legitimate business purposes.”

“However,” regulators claim in the eight-page order, “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.”

Contrary to P&Ps

OEP’s policies also “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,” regulators claim.

“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.”

Credit for cooperation

Igor Rozenblit, former co-head of SEC’s Private Funds Unit, Iron Road Partners

Neither OEP nor its chief compliance officer, Dora Stojka, responded to requests for comment. The SEC gives the firm credit for “remedial acts promptly undertaken,” including “the standardization and enhancement” of its P&Ps and enhancing “OEP’s firmwide compliance training related to investor communications.” The firm also gets credit for cooperation with SEC staff.

“It’s still a ‘scary’ case because the conduct described in the settlement order is fairly routine among small- and mid-sized private equity firms, says Igor Rozenblit, a former SEC examiner who’s now a partner at Iron Road Partners, a compliance consulting firm.

‘Aggressive but not unusual’ conduct

“Based purely on how the SEC wrote the order, I’m having trouble identifying the materiality of the MNPI cited, primarily because not many parties would find information on potential small private transactions useful,” Rozenblit says. “This appears to be aggressive but not unusual conduct, which has become the basis for an enforcement action. Now that this enforcement action is public, investigators and examiners at the SEC will likely start looking for this conduct at other advisers. If I was a middle market private equity manager, that would worry me given the frequency of this fact pattern.”

Part of OEP’s problem may have been that its policies were broadly written, says Philip Moustakis, a former SEC enforcement lawyer, now a partner with Seward & Kissel.

CCOs ‘in a tough spot’


“While not explicitly stated, based on the facts detailed in the order, it appears the SEC took issue with the fact that the manager often disclosed inside information for its own business purposes, not fund business, including to larger investors or to solicit new investors, even though all such disclosures were subject to non-disclosure agreements,” he says. “The case is another reminder to managers to periodically review their MNPI policies and procedures to ensure they reflect their actual practices.”

The case may also put CCOs at small- and midsized firms in a tough spot, Rozenblit says.

“I think the right thing to do is train anyone who interacts with investors to moderate their communication and to remind them that all emails are discoverable by regulators,” he says. “In a mid-market firm, that’s usually the managing partners of the firm whom some compliance officers are reluctant to confront.”