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SEC Sanctions Sound Point Capital Management for Violations Involving Misuse of Nonpublic Information

In August 2024, the U.S. Securities and Exchange Commission (SEC) settled charges against Sound Point Capital Management, LP, a registered investment adviser, for failing to establish and maintain adequate policies and procedures designed to prevent the misuse of material nonpublic information (MNPI). The SEC’s action, which included a cease-and-desist order and a significant monetary penalty, highlighted serious compliance lapses related to Sound Point’s trading of collateralized loan obligations (CLOs) and the firm’s failure to safeguard confidential information.

Key Findings:

  1. Misuse of Material Nonpublic Information (MNPI):
    • Between May 2018 and June 2024, Sound Point engaged in trading CLO tranches while in possession of MNPI related to the underlying loans that backed these CLOs. CLOs are typically composed of corporate loans, and the value of CLO tranches can fluctuate based on the performance of the loans they hold.
    • In 2019, Sound Point personnel traded equity tranches of CLOs containing loans from a media services company, Company A, while in possession of MNPI about the company. The firm was aware of Company A’s impending financial difficulties, but proceeded with selling CLO tranches, which later dropped in value by 50% after the information became public. This caused a significant decline in the CLO tranches’ value, amounting to a $685,000 loss for the counterparties who purchased the CLO tranches from Sound Point.
  2. Deficient Compliance Policies and Procedures:
    • Prior to 2022, Sound Point did not have written policies and procedures to prevent the misuse of MNPI in relation to its CLO trading activities, particularly when it came to loans in which the firm had inside knowledge.
    • While Sound Point eventually began conducting compliance reviews for trades involving its own CLOs, these reviews were not formalized into written procedures until July 2022. Furthermore, Sound Point did not apply similar reviews to third-party CLOs, exposing the firm to additional risks related to MNPI.
  3. Regulatory Violations:
    • The SEC found that Sound Point violated Sections 204A and 206(4) of the Investment Advisers Act and Rule 206(4)-7, which require investment advisers to implement written policies and procedures designed to prevent insider trading and other violations of securities laws.
  4. Remedial Actions and Sanctions:
    • In response to the SEC’s investigation, Sound Point took steps to improve its compliance program by introducing written policies to prevent the misuse of MNPI in its trading of third-party CLOs in April 2024.
    • The SEC imposed a $1.8 million civil penalty on Sound Point, along with a cease-and-desist order to prevent future violations of securities laws.

Conclusion:

This enforcement action serves as a reminder of the critical importance of robust compliance programs in preventing the misuse of confidential information, especially in complex financial instruments like CLOs. The SEC’s action against Sound Point Capital underscores the need for investment advisers to ensure that they maintain and enforce written policies that are reasonably designed to prevent insider trading and protect market integrity.

About Michael Rasmussen

Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets.  

Michael is also the founder of FinProLaw, an online learning platform where Michael has created courses designed for investment adviser compliance professionals. These courses include: 

  • Investment Adviser Compliance Essential for Chief Compliance Officers 
  • Foundations of Investment Adviser Compliance 
  • What is a “Security”? 
  • Investment Adviser Marketing Rule 
  • Regulation A – Exemption from Registration 
  • Regulation Crowdfunding – Exemption from Registration 
  • Regulation D – Exemption from Registration 

Michael can also be found on LinkedIn.

Investment adviser firms who are also clients of United Atlantic Legal Services can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw to learn more.