Investment Adviser to Pay $18 million to SEC for Compliance Failures in Handling MNPI

December 3, 2021

On November 19, 2021, the Securities and Exchange Commission (“Commission”) entered a settled order (“Order”) against McKinsey & Company (“McKinsey”) affiliate and registered investment adviser MIO Partners Inc. (“MIO”) for its failure to maintain policies and procedures reasonably designed to prevent the misuse of material nonpublic information (“MNPI”).1 MIO offers investment options exclusively to current and former McKinsey partners and employees. At the heart of the matter was that MIO invested in the securities of McKinsey consulting clients while at the same time certain McKinsey partners who were in possession of MNPI concerning those clients also served in an oversight role with respect to MIO’s investments. There were no allegations of insider trading.

According to the Commission’s Order, MIO invested hundreds of millions of dollars in companies to which McKinsey provided consulting services. Members of MIO’s Investments Committee of the Board of Directors (“Investments Committee”), which oversaw MIO’s investment decisions, were active McKinsey partners. Due to their consulting work, these partners had access to MNPI concerning public companies and other issuers in which MIO invested. The Order found such MNPI included financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management at those companies. McKinsey partners on the Investments Committee also had access to MNPI concerning MIO’s holdings, strategies, concentration limits, risk limits, and third-party manager allocations.

On the one hand, the Commission found MIO was invested in the securities of McKinsey consulting clients about which Investments Committee members had access to MNPI. In one example cited in the Order, the Investments Committee reviewed and ratified a large allocation to a third-party manager that was heavily invested in an issuer’s debt, while McKinsey’s crisis and turnaround unit provided restructuring advice to the same issuer, and the president of that unit served on the Investments Committee. In other example cited in the Order, MIO invested in certain municipal bonds while McKinsey was providing restructuring advice to the issuer.

On the other hand, the Commission found that McKinsey provided consulting services to clients while in possession of MNPI concerning MIO’s holdings in their securities, creating the risk that such MNPI would be misused. For example, according to the Order, a partner’s access to confidential information about MIO’s investments in a company through a third-party manager created a risk that McKinsey, which was providing restructuring services to the company at the time, could influence the company’s reorganization plan in a way that favored MIO’s investment.

The Commission concluded that taking into consideration the nature of MIO’s business, MIO’s policies and procedures were not reasonably designed to prevent the misuse of MNPI of McKinsey clients in making investment decisions for MIO or, conversely, prevent the misuse of MIO’s MNPI in providing consulting services to McKinsey clients. Specifically, the Commission identified several deficiencies in MIO’s written policies and procedures including:

  • MIO’s written policies or procedures did not identify whether Investments Committee members may have had MNPI that was relevant to their involvement in MIO’s investment decisions;
  • MIO’s policies and procedures did not contemplate the ways MIO MNPI could be misused by Investments Committee members in the course of their consulting work for McKinsey clients;
  • MIO’s written policies did not set forth a recusal procedure reasonably designed to guard against the misuse of MNPI from both McKinsey clients and MIO itself; and
  • MIO’s “Collaboration Policy,” which was the chief policy governing information sharing between McKinsey and MIO personnel, contained a specific carveout for Investments Committee members allowing them to be above the protective wall and thus not prohibited from accessing MIO investment information.

Overall, in the Commission’s view, given the organizational structure of MIO’s Investments Committee, the Firm had an obligation to enhance its policies and procedures relating to the handling of MNPI to meet the heightened risk posed by the dual role of members of its Investments Committee.
The Order found that MIO failed to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of MNPI in violation § 204A of the Investment Advisers Act of 1940 (“Advisers Act”). The Order also found MIO violated § 206(4) and Rule 206(4)-7, also known as the Compliance Rule, thereunder. Under the terms of the settlement, MIO was censured and required to pay an $18 million penalty.

S&K Observations:

This enforcement proceeding is the most recent in a series of actions involving, in the Commission’s view, investment managers’ failures to establish and implement MNPI policies and procedures reasonably designed to address its business-specific risk factors, without the filing of related insider trading or fraud charges.2

We recommend you take this opportunity to review your MNPI policies and procedures, and restricted list controls, to ensure they are reasonably designed to address your firm’s business-specific risk factors, including all potential sources of MNPI intrinsic to your investment strategy.

Please contact your primary attorney at Seward & Kissel if you have any questions or seek assistance in reviewing your firm’s MNPI policies and procedures.