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SEC Lawsuit Raises the Question of When Consultants Should Be Considered Access Persons
Summary:
- On December 20, 2024, the Securities and Exchange Commission (SEC) initiated legal action against an investment adviser for violations of Section 204A of the Investment Advisers Act and Rule 206(4)-71. The lawsuit focused on the adviser’s failure to enforce its information barrier policies regarding a consultant.
- This case is notable because, despite the investment manager having robust information barrier policies and procedures, the consultant—who did not qualify as an Access Person under Rule 204A-1(e)(1)—failed to comply with those policies. This raises an important question: under what circumstances should a consultant be treated as an Access Person, and when is such designation unnecessary?
Allegations and Conduct:
- The investment adviser specialized in distressed credit and operated a dual business model:
- A “public side” dealing with public securities.
- A “private side” investing in private securities and potentially holding material nonpublic information (MNPI).
- These sides were separated by an information barrier, with communication governed by policies meeting or exceeding industry standards.
- A bankruptcy consultant employed by the adviser played a pivotal role in the allegations. Operating as an employee for 17 years (2004–2021), the consultant:
- Had no other engagements.
- Received substantial monthly fees and performance-based bonuses.
- Agreed to follow the information barrier policy but faced inconsistent enforcement.
- The SEC highlighted an incident where the consultant joined a creditors committee, accessed MNPI, and had discussions with “public side” employees. Subsequently, the “public side” executed profitable trades, raising compliance concerns.
Takeaways:
- Some Consultants May have to be Treated as Access Persons: Although the manager adhered to best practices, the consultant’s extensive and exclusive involvement blurred lines. His long-term role and close integration may have warranted treatment as an Access Person.
- Don’t Ignore Red Flags: The SEC outlined problematic conduct, including the consultant’s participation in a creditors committee and subsequent profitable trades by the “public side.” The conduct appeared pervasive, suggesting implied awareness by the investment manager.
- Challenges of Credit Distress and Creditor Committees: This case reflects broader SEC scrutiny of creditor committees, which inherently involve MNPI. While creditor committees often lack formal structures, robust information barrier policies remain essential to mitigate risks.
1 SEC vs Silver Point Capital, L.P. Case 3:24-cv-02018