Failing to adequately manage Material Non-Public Information (MNPI) remains a high risk area for compliance, as evidenced by recent actions in the U.S. and the U.K. A private equity firm paid $1 million to settle SEC charges for failing to implement effective Insider Trading compliance policies. The FCA published a Decision Notice fining a former CEO £658,900 for market abuse and banning him from future roles linked to regulated activity. Show
To avoid hefty fines and actions, firms must have comprehensive and actionable policies and procedures around the management of MNPI and insider lists to minimize risk. The firm paid to settle SEC charges that they allowed an employee to be placed on a portfolio company's board while continuing to participate in trading decisions regarding the portfolio company. "Investment advisers and private equity firms that place employees on the boards of public companies bear heightened risks that they will obtain non-public material information through their representative occupying dual roles," said Anita B. Bandy, Associate Director in the Division of Enforcement. "It is critical for firms to have proper policies and procedures in place to address these risks and prevent the misuse of information obtained under these special circumstances." What Is Material Nonpublic Information?Material Non-Public Information or MNPI is information not generally disseminated to the public or available to investors generally, which a reasonable investor would likely consider important in making an investment decision such as to buy, sell, or hold securities. It can include strategic plans, significant capital investment plans, negotiations concerning acquisitions or dispositions, major new contracts (or the loss of a major contract), financial results and more. This information is considered non-public if it has yet to be distributed to the public via a press release, company announcement, etc. Examples of Material Nonpublic InformationAn example of MNPI is the fact a CEO resigns from the position in March, and on the same day the company makes an announcement, the information is made public. However, a month before, in a company meeting with main stakeholders, the management discuss the CEO resignation. These main stakeholders know that the CEO will resign the position a month before the public, and if any of these employees trade, sell or buy using this information as a market advantage, this act constitutes illegal trading. We have a great selection of content that explains what an insider list is, what are your obligations to protect and manage MNPI and when to provide information to the public under current regulations, such as market abuse regulation.  What is Insider Trading?According to the SEC policy from 2013, "insider trading" generally refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material non-public information about the security. Insider Trading CasesMany cases of insider trading made the news in 2020. ESMA, the FCA and SEC have voiced concerns about managing insider trading with employees working from non-office locations. A few cases that made the press recently:
A Hypothetical Example of Insider TradingA high-level employee gets the information that the company will merge or will be sold—understanding the market impact of that information which is not yet made public consequently buys or sells the shares of the company in his father's account in order to make a profit from it and gain market advantage. Implications for firmsThe SEC has served notice that firms must continue to make monitoring for insider trading a priority. With many employees working remotely, “a greater number of people may have access to material nonpublic information than in less challenging times.” Amy Lynch and Giselle Casella from FrontLine Compliance spoke about the importance of managing MNPI and Insider trading in the webinar Maintaining Market Integrity in Today’s Regulatory Environment. “Insider Trading risk is very high right now, and the SEC is aware of it. Firms should be monitoring employees to see what kind of access they might have to MNPI. This becomes very important if you are a firm that has a large research desk, publishes your own research, or where your analysts are regularly talking to corporate insiders.” In the recent Risk Alert Observations from Examinations of Investment Advisers Managing Private Funds the Office of Compliance Inspections and Examinations (OCIE) of the SEC noted policies and procedures relating to MNPI as a general deficiency commonly seen during examinations of registered investment advisers that manage private equity funds or hedge funds. OCIE staff found deficiencies under Section 204A of the Advisers Act in the establishment and enforcement of MNPI policies and procedures including failing to address the risk of the exchange of MNPI when employees interact with outside entities, the risk of employees obtaining MNPI though access to office space and systems, or employees who periodically had access to MNPI about issuers of public security. The recent FCA Decision Notice also reflects regulator focus on market abuse and the management of MNPI. To be in compliance with Market Abuse Regulation (MAR), firms must have controls in place to manage conduct risk and reduce the risk of market abuse. For more information on FCA expectations around Conduct Risk and Market Abuse mitigation including current enforcement trends and heightened risk arising from remote work, watch our webinar Managing Conduct Risk and Protecting Against Market Abuse During the COVID-19 Crisis with Gowling WLG. Is your firm protected?MyComplianceOffice can help your firm manage regulatory guidelines around the sharing of MNPI among corporate insiders in advance of trading and investment deals. Our software can help you identify and mitigate potential Conflicts of Interest from the activities of employees, third parties and the company and automate your MNPI and Insider Trading policies & procedures and embed them within your business. Our Insider List Management solution enables users to create insider lists, complete with individuals and roles/rights assignments, timeframes when individuals can access inside information as well as a cross-referenceable hierarchical database of securities listings and company information on tens of thousands of entities. The automated solution supports standardized data management formats for sharing insider lists in accordance with regulatory guidelines. Let us know if you’d like to learn more.
Material nonpublic information refers to certain information about a company which could affect its share price and investment decisions as soon as the information has been made public. However, the public does not yet have access to this information. Material nonpublic information, as opposed to immaterial non-public information, can be manipulated to gain an unfair advantage in the marketplace. This is known as insider trading or insider dealing. The terms ‘material’ and ‘immaterial’ mean ‘relevant’ and ‘irrelevant’ in the contexts when they are used. For example, imagine you are one of the directors at John Doe Organics Inc., a company that sells organic milk, eggs and some other foods to supermarkets across the country. People buy your company’s products because they are free of pesticides, artificial fertilizers, preservatives, etc. You have just been told in a confidential meeting that an internal investigation has found that 15% of all John Doe’s products contain significant traces of insecticides – thus making them not organic. As soon as this information goes public, you know that sales will nosedive. If your best friend owns $1 million dollars’ worth of John Doe’s shares and you tell her to sell them immediately, you are doing this based on material non-public information – confidential information that is relevant to the company’s share price and investor decision-making, about which the public knows nothing. By telling your friend about this, and your friend acting on that information to sell the shares before the bad news becomes public, you are guilty of insider trading – in some jurisdictions your friend is also guilty. Unlawful insider trading is an imprisonable offence. The information you give your friend is ‘material’ in the sense that it is ‘relevant’ to the company’s share price and how investors are likely to decide. If you hear that the CEO of your company has taken up basket-weaving as a weekend hobby, and nobody outside the company knows about this, it is nonpublic information, but definitely not ‘material’ – there is no way that this information, if it became public, could have an effect on the company’s share price or investor decision-making. Hence, the basket-weaving information is ‘immaterial’. The US Securities and Exchange Commission (SEC) makes the following comment regarding insider trading and material nonpublic information: “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material nonpublic information about the security.” Policy for material nonpublic informationMany companies, especially those whose employees gain access to confidential information on several publicly-traded corporations, have a policy for material nonpublic information. New York-based Moody’s, the famous bond credit rating company, says that employees who have access to confidential information are not allowed to share or use that information of the purposes of buying or selling securities, or any other purpose except for those related to their employment duties at Moody’s. On its website, Moody’s writes: “Insider trading (or dealing) laws and regulations globally prohibit buying or selling a company’s securities while in possession of Material Non-Public Information about that company. You can also violate these laws by disclosing Material Non-Public Information to another person if, as a result, that person – or any other person – buys or sells a security while aware of that information.” “If you make such a disclosure or use such information, you can be punished, even if you yourself stand to make no financial gain.” Definition of ‘material’ and ‘nonpublic’ information‘Material’, in this context, refers to any information that:
Information is deemed to be ‘nonpublic information’ unless it has been released for public access, for example, through:
Video – When is insider trading illegal?Insider trading is illegal when somebody uses material non-public information for personal gain or to avoid a personal loss. This Seeker Daily video explains what Martha Stewart did and why she ended up in prison. Martha Stewart is an American businesswoman, TV personality and writer. |
What information is not Mnpi?
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