Last Tuesday, the SEC issued a cease-and-desist order saying employees of One Equity Partners (OEP) Capital Advisors LP sent investors private details about potential deals and other confidential information, violating the private-equity firm’s policies.

The New York-based private equity firm with over $10bn in assets under management agreed to pay a $4m penalty to settle these alleged violations.

The SEC said that, on numerous occasions, OEP senior personnel did not comply with OEP’s policies and procedures in disclosing merger-related MNPI to current investors, potential investors, and industry contacts, and also made performance-related claims to such persons in a manner that violated SEC rules and OEP’s own written policies.

“OEP senior personnel repeatedly violated these policies by, among other things, sending emails to current investors, potential investors, and industry contacts.”

SEC

Under Rule 204A of the Advisers Act, investment advisers must maintain and enforce written policies reasonably designed to prevent the misuse of material nonpublic information by the investment adviser or any person associated with the investment adviser.

Under Rule 206(4)-4, every SEC-registered investment adviser that has custody or discretionary authority over client funds or securities, or that requires prepayment six months or more in advance of more than $500 of advisory fees, is required to disclose promptly any financial conditions of the adviser that are reasonably likely to impair the ability of the adviser to meet contractual commitments – and to disclose the impairment to such clients or prospects.

Senior personnel flouted OEP policies

According to the SEC’s cease-and-desist order, senior OEP personnel from at least 2019 through 2022 sent emails to investors and other contacts containing confidential information about potential mergers and acquisitions, including information about publicly listed businesses. OEP personnel also made claims to these people about the performance of the firm’s investments.

As required by US law, the firm had in place policies to protect confidential information, which forbade disclosure except for legitimate business reasons, the SEC said.

“However, 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 US and foreign-listed public companies, typically in a marketing context,” the agency wrote in its settlement order on Tuesday.

As per the firm’s policies and procedures, OEP senior personnel should have asked for prior approval by OEP compliance personnel or the firm’s valuation committee regarding the disclosure of MNPI and performance details.

“OEP personnel did not always make an appropriate determination that the prospective disclosure of MNPI, under the circumstances presented, was ‘necessary for legitimate business purposes,’ as required by OEP’s existing written policies and procedures,” the SEC said in its order.

In determining the penalty, the SEC said it considered OEP’s prompt remedial actions, including the enhancement of its compliance policies and procedures regarding MNPI and the strengthening of OEP’s firmwide compliance training related to investor communications.

The SEC’s Marketing Rule

The SEC issued its Marketing Rule pertaining to how asset-management firms communicate performance results to investors back in December 2020, and the rule went into effect in November 2022, nearly two years later. The new rule increased regulatory scrutiny of money managers and more specifically how these entities advertise their funds and monitor their employees’ characterizations of fund performance.

This past September, the SEC announced charges against nine registered investment advisers for advertising hypothetical performance to the general public on their websites without adopting and/or implementing policies and procedures required by the Marketing Rule.

All nine firms agreed to settle the SEC’s charges and to pay $850,000 in combined penalties, with the individual penalties ranging from $50,000 to $175,000.