SEC Charges Political Intelligence Firm for Compliance Misstep
On November 24, 2015, The Securities and Exchange Commission (SEC) concluded its landmark four-year review into Marwood Group Research LLC's handling of government information. This was the first action against the political intelligence community since Congress acted to control the flow of market-moving information.
While Marwood was the first to be charged, there may be more on the way. This was just one of multiple recent investigations into the handling of government information.
The SEC found that Marwood violated both the Securities and Exchange Act of 1934 and the Investment Advisers Act of 1940. As a result of these findings, the SEC is imposing stiff penalties. In accordance with the administrative settlement, Marwood is required to pay a $375,000 fine, admit wrongdoing, and it will retain an independent compliance consultant to establish safeguards for the future.
Andrew Ceresney, head of the SEC's enforcement division, sent a clear message regarding the standard for businesses with employees who are involved in political intelligence:
Government employees routinely possess and generate confidential market-moving information. When political intelligence firms like Marwood Group obtain information from government employees, they must take the necessary steps to prevent the dissemination of potentially material, nonpublic information obtained in the course of their research.
The SEC's expectations for businesses coming into contact with government information are clear, but the legal boundaries can be murky for those not experienced in SEC compliance.
Companies involved in political intelligence, like Marwood, advise clients about policy and regulatory issues. As part of this, the political intelligence employees often interact with government employees. These interactions impose obligations upon such companies given the increased potential that a company's employee who deals in political intelligence will receive sensitive government information. For Marwood, its failure to institute and follow compliance procedures to protect against the dissemination of information ripe for insider trading was what caused the violations.
While the penalty is substantial, the SEC has stronger enforcement tools and penalties at its disposal. This case was settled through the administrative settlement process, and the SEC did not allege the most serious possible charges against Marwood. The next SEC target might not be so fortunate.
Given the SEC's increased activity in this area and the potential for harsh penalties, it is all the more necessary for companies involved in policy and regulatory advisement to develop, adopt, and follow strong compliance procedures.
For further information regarding the topics discussed in this political law alert, please contact your Clark Hill political law attorney.
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