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Volume XII, Number 183

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Insider Trading, MNPI and Related Internal Controls: A Renewed Focus by SEC

Over the past few years, the SEC has brought fewer insider trading and Material Non-Public Information (MNPI)-related cases compared to historical numbers. We expect to see a reversal of that trend in 2022.

The SEC has provided some hints of its renewed focus on insider trading. First, even though the overall number of insider trading cases was down last year, the SEC brought two “first of kind” cases involving MNPI. The SEC successfully defeated a motion to dismiss its first “shadow trading” insider trading case – charging an individual with trading in the securities of an issuer based on MNPI he had obtained regarding another issuer. And the SEC brought its first case against an alternative data provider when it charged App Annie and its founder with making fraudulent misrepresentations in connection with its use of confidential information.

Second, the SEC has made trading by corporate insiders a regulatory priority. In December 2021, the SEC announced proposed amendments to Exchange Act Rule 10b5-1, which provides affirmative defenses for corporate insiders and companies to buy and sell company stock pursuant to trading plans adopted in good faith and before becoming aware of MNPI. The proposed amendments would add new conditions to the existing affirmative defense under Rule 10b5-1 (1)(c) to address perceived abusive practices associated with the existing rule. Typically, enforcement actions track stated regulatory priorities. We expect a renewed investigative focus on whether insiders have engaged in “gaming” their 10b5-1 trading plans, for example, by adjusting them while in possession of MNPI regarding the company.

Third, over the past two years, we have witnessed SEC examinations of fund managers that are highly focused on MNPI issues. For example, the exam staff has requested voluminous sets of emails and text messages, and has conducted interviews of traders and analysts as to those communications, similar to enforcement investigations. Firms that use alternative data sets have also been subject to targeted exams relating to their policies and procedures for onboarding and monitoring data vendors (see App Annie).

Examiners are highly focused on whether MNPI judgment calls have been adequately analyzed, documented, and cleared with legal/compliance as necessary—in other words, is the fund manager enforcing policies and procedures reasonably designed to prevent the misuse of MNPI under Section 204A of the Advisers Act? Where deficiencies are found, the SEC has brought stand-alone enforcement actions focused on 204A compliance violations, even in the absence of insider trading charges.

The following authors have also contributed to this article: Timothy W. MungovanJoshua M. NewvilleTodd J. OhlmsSeetha RamachandranJonathan M. WeissJulia AlonzoJames AndersonJulia M. AnsanelliWilliam D. DalsenAdam L. DemingReut N. Samuels and Hena M. Vora.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 83
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About this Author

Partner

Steven Baker is a partner in the Litigation department and a member of the International Arbitration group. He has over 25 years of experience advising clients on complex, often multi-jurisdictional disputes in a wide range of industries, including asset management, technology, life sciences, financial services and defence sectors. He also has extensive experience advising upon and managing disputes for clients involving major technology or telecommunications projects and their financing, technology licensing and misappropriation of trade secrets.

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+44.20.7280.2238
Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm
Partner

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

212.969.3315
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723
William Komaroff Litigation White Collar Attorney Proskauer Law Firm New York
Partner

Bill Komaroff is a partner in the Litigation Department and White Collar Practice Group. He has a nationwide federal practice focused on corporate defense and investigations, counseling and defending institutional and individual clients in connection with a broad array of complex government investigations, prosecutions and civil disputes.

Bill also has served as a member of the Criminal Justice Act Panel for the District Court for the Southern District of New York.

From 2003 to 2007, Bill served as an Assistant U.S....

212-969-3975
Kirsten Lapham FInancial Services Attorney Proskauer Rose Law Firm, United Kingdom
Partner

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution...

+44.20.7280.2031
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