On December 26, 2023, the Securities and Exchange Commission (“SEC”) settled charges against OEP Capital Advisors, L.P. (“OEP”) while also fining OEP $4 million for violations of OEP’s policies and procedures related to the disclosure of material, non-public information (“MNPI”) and communications to investors.
In the Settlement Order the SEC alleged OEP made statements to current and potential investors and industry contacts that “violated OEP’s policies and procedures concerning disclosure of merger-related MNPI and communication of OEP fund performance claims.”
Key Takeway(s): Everyone loves a good misuse of MNPI case but I believe the more instructive violation is the violation of OEP’s advertising and valuation policies and procedures. Because OEP personnel sent the offending emails to more than one person these communications were advertisements and therefore subject to OEP’s compliance approval process and requirements on performance presentation.
On the MNPI violation, I believe the SEC’s recent advancement in the “shadow trading” case and this enforcement action make it clear the SEC is focusing its attention on idiosyncratic abuses in the handling of MNPI.
MNPI Policy Violations
OEP and the OEP Funds focus on transformative combinations within the industrial, healthcare and technology sectors in North America and Europe. Most of the OEP Funds’ portfolio companies are private, however, some are public companies listed on U.S. or foreign stock exchanges. OEP frequently put in place non-disclosure agreements for the purpose of discussing MNPI with outside persons. However, despite OEP’s use of non-disclosure agreements, OEP’s MNPI policies and procedures also required “a determination that disclosure [of MNPI] or OEP Funds’ confidential information] was necessary for legitimate business purposes” in addition to a non-disclosure agreement.
The SEC alleged OEP senior personnel disclosed M&A-related MNPI and other non-public, confidential information over email to current and potential investors and industry contacts in the context of soliciting new or additional investment. Additionally, non-OEP guests occasionally attended OEP’s weekly, internal meetings and were provided with MNPI without “an appropriate determination” that doing so was “necessary for legitimate business purposes” while sitting in on meetings and in materials provided in conjunction with such meetings.
According to the SEC, OEP’s personnel violated their written policies and procedures by not always making “an appropriate determination, when disclosing MNPI or OEP Funds’ confidential information” that disclosure of MNPI was necessary for legitimate business purposes.”
What could OEP have done differently? The obvious answer is make the determination that disclosure was necessary for a legitimate business purpose in each case of MNPI disclosure. However, I bet OEP determined there was a legitimate business purpose for each instance of disclosure. Otherwise, why bother with an NDA? To me, this is a perfect example of “if its not written down it doesn’t exist.” What OEP failed to do was create a record of each determination. They could have used compliance software, a spreadsheet or even email to make the necessary records showing there was a legitimate business purpose to disclose the MNPI. OEP did not and the SEC fined them $4 million for it despite acknowledging OEP’s prompt remedial actions and cooperation.
Advertising and Valuation Policy Violations
OEP’s policies and procedures required approval by OEP compliance personnel for any “advertisement” which was defined as any written communication “addressed to more than one person.” Additionally, OEP’s policies and procedures required performance data in advertisements to be “presented fairly and in a non-misleading manner” as well as be accompanied by explanatory footnotes supplied by OEP compliance personnel. Finally, OEP’s policies and procedures further prohibited OEP personnel from using “any valuation of any security or other asset held by a Fund, or any performance presentation based on such valuations, in any… communication with current or potential Fund investors other than a valuation approved by the Valuation Committee.”
According to the SEC, OEP senior personnel sent emails to more than one person without prior approval by OEP compliance personnel and without explanatory footnotes. The emails included “identical passages of performance-related content [emphasis added]” including quantified performance or embedded-gains claims based on estimated or current value calculations which were not approved by OEP’s Valuation Committee.
The emails being addressed to more than one person was enough for the SEC to find fault. However, I am not going to discount the inclusion of the “which included identical passages of performance-related content” statement from the SEC. I believe the SEC would have considered the emails “advertisements” even if addressed individually because of the similarity of the content.
How Trillium Can Help
Testing and Surveillance: A key component of Trillium’s ongoing compliance support is reviewing your firm’s practices in key risk areas against policies and procedures and disclosures. The ability to identify and rectify problematic areas, prior to an examination, is integral in preventing potentially significant time and expense later on.
Compliance Program Development: Trillium helps you put in place policies and procedures that work for your firm. Developing and applying consistent policies and procedures is paramount to fulfilling a firm’s regulatory obligations and fiduciary duty.
Marketing Material Review and Process: Marketing material review and commentary is included as part of Trillium’s comprehensive ongoing compliance support. Trillium also helps clients design and implement marketing material review processes through the use of technology to ensure proper records are created and maintained.