Sound Point Capital Management Fined $1.8 Million by SEC for Compliance Failures Related to Non-public Information

Investment adviser Sound Point Capital Management has agreed to pay a $1.8 million fine to the Securities and Exchange Commission (SEC) for failing to implement written compliance procedures regarding the handling of material nonpublic information (MNPI). The New York City-based firm was cited by the SEC for not having adequate policies in place to prevent the misuse of MNPI in its trading of collateralized loan obligations (CLOs).

According to an SEC press release issued on Monday, Sound Point failed to “establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of [MNPI] concerning its trading of collateralized loan obligations (CLOs).” The SEC’s order detailed that Sound Point managed and traded both its own CLOs and those of third parties. The firm’s credit business also participated in lender groups and creditors’ committees, through which it occasionally acquired MNPI.

While Sound Point had a policy prohibiting trading in the securities of a company when the firm possessed MNPI and maintained a restricted list, it did not have a policy that specifically prohibited trading a CLO tranche for which it had MNPI.

The order describes an incident in June 2019, when a portfolio manager at Sound Point became aware of MNPI regarding a company with loans in a Sound Point CLO that would require rescue financing. In July 2019, the portfolio manager sought approval from Sound Point’s compliance department to sell two equity tranches containing the company’s loans but did not disclose the MNPI to the compliance team. The compliance department approved the sale.

The day after the sale, the MNPI was made public, and the value of the two CLOs sold the previous day dropped by 11 percent, according to the SEC order. Following this, Sound Point compensated one of the counterparties in the transaction with an amount representing the decline in value of the CLO tranches.

After the incident, Sound Point began conducting pre-trade compliance reviews to assess the potential impact of MNPI on loans in its managed CLOs. However, the SEC noted that the firm did not formalize a written policy for these reviews until July 2022 and did not enforce policies regarding MNPI obtained in third-party managed CLOs until June 2022.

Andrew Dean, co-chief of the Enforcement Division’s Asset Management Unit at the SEC, emphasized the importance of comprehensive compliance measures, stating, “Fund managers–including those with multiple business lines or strategies–must consider how they may come into possession of [MNPI] and then adopt and implement reasonable policies and procedures around those risks. Among other things, advisers must evaluate how their roles as lenders could expose them to MNPI that may relate to their CLO trading positions.”

In response to the settlement, a spokesperson for Sound Point stated that the firm was “pleased” to have reached a resolution with the SEC. The spokesperson added, “We cooperated with the SEC in this matter, which relates to certain compliance policies and procedures, the majority of which were modified in 2019. We have enhanced our controls since then. This matter does not include any findings of insider trading or misuse of [MNPI] by Sound Point or its employees.”

Sound Point agreed to the settlement without admitting or denying the SEC’s findings.

By fLEXI tEAM