New York RIA faces $1.8M penalty over failures in handling nonpublic information

The SEC has reached a settlement with a New York-based registered investment adviser, which agreed to pay more $1.8 million over reported shortfalls in trades it conducted before the pandemic.

The case involving Sound Point Capital Management centers on deficiencies in the firm's handling of material nonpublic information while managing and trading collateralized loan obligations.

According to the SEC’s order published Monday, Sound Point’s business involved managing its own CLOs, as well as trading CLOs managed by third parties.

The firm also operated a credit business that frequently engaged in lender groups or creditors' committees, which occasionally gave Sound Point a peek behind the curtain of companies whose loans were among the CLOs it traded.

The SEC said Sound Point did not conduct pre-trade compliance reviews concerning MNPI risks in its CLO trading before July 2019 when it sold portions of two CLO equity tranches, which held loans to an unnamed media company, to two different counterparties.

In the weeks prior, certain Sound Point personnel became aware that an expected major asset sale by the company was likely to fail, which left the company in need of rescue financing.

While Sound Point had an insider trading policy preventing it from trading in securities of companies it had MNPI about, that didn’t include prohibitions on trading CLO tranches when it had MNPI about one of the underlying borrowers.

With that gap in its policies and procedures, a co-portfolio manager at the firm emailed the compliance department requesting approval to sell chunks of two equity tranches of Sound Point CLOs that included loans to the company. The request was approved, and Sound Point sold portions of those tranches to two different counterparties on July 30, though it continued to hold other CLO and hedge fund positions that were exposed to those same loans.

When the information about the media company’s shaky finances came to light the following day, the prices of its loans collapsed by more than 50 percent. Consequently, the two CLO tranches it had sold the day before also declined in value by roughly 11 percent, or $685,000, according to the SEC.

“Thereafter, one of the counterparties … demanded either rescission of the sale or a reduction in the purchase price equal to the decline in the value of the CLO tranches … and threatened litigation,” the regulator said in its order. Sound Point agreed to pay the full amount, totaling roughly $350,000.

Following that event, the firm introduced pre-trade reviews concerning MNPI risks in CLOs, but did not formalize the process in writing until July 2022. The SEC also noted that Sound Point only implemented written policies relating to the impact of MNPI on third-party CLOs in June 2024, leaving a year-long gap in compliance.

“Fund managers – including those with multiple business lines or strategies – must consider how they may come into possession of material nonpublic information and then adopt and implement reasonable policies and procedures around those risks,” Andrew Dean, co-chief of the SEC’s Enforcement Division’s Asset Management Unit, said in a statement announcing the order.

“Among other things, advisers must evaluate how their roles as lenders could expose them to MNPI that may relate to their CLO trading positions,” he said.

The SEC said Sound Point violated several provisions of the Investment Advisers Act of 1940, including Sections 204A and 206(4) and Rule 206(4)-7.

In addition to the penalty, the firm consented to a cease-and-desist order and received a censure.

"We are pleased to enter into the settlement with the SEC on a 'no admit or deny' basis," a spokesperson for Sound Point said in a statement.

"We cooperated with the SEC in this matter, which relates to certain compliance policies and procedures, the majority of which were modified in 2019," the statement said, noting that the firm has tightened its controls since then.

It also stressed that the matter with the SEC didn't include any findings of insider trading or misuse of MNPI on the part of the firm or its employees.

"Sound Point takes its fiduciary responsibilities very seriously and remains committed to operating with the highest standards of governance and compliance," the spokesperson said.