Fund managers and others transacting in the public securities markets generally have little difficulty staying out of harm's way with the Securities and Exchange Commission when it comes to textbook insider trading situations: If a company insider provides you with material nonpublic information (MNPI) about her company, don't transact in her company's securities until the MNPI is public or no longer material.
But increasingly, the SEC has employed insider-trading concepts in novel ways, raising the possibility that insufficiently wary fund managers and other traders will unwittingly step into the SEC's crosshairs.
So, for example, in 2020 the SEC brought an action against a private equity firm for failing to implement policies and procedures reasonably designed to prevent the misuse of MNPI.
The case was remarkable for what it lacked: any mention of insider trading. By imposing a seven-figure penalty on a PE manager for merely mishandling MNPI rather than trading on MNPI, the SEC signaled an intent to move aggressively in areas adjacent to insider trading.
In that vein, in September of this year, the SEC brought another MNPI case without mentioning insider trading. The case involved a so-called alternative data provider, a company that collected information from companies with mobile apps to assist in improving the performance of those apps.
The alternative data provider sold that data to subscribers for purposes of securities trading, telling the mobile apps companies and the subscribers that the data would be anonymized, aggregated, and run through a statistical model to approximate results.
In this way, the mobile app companies would be assured that their MNPI would not be made publicly available and the subscribers would be assured that they would not be "polluted" with MNPI for purposes of trading.
However, the SEC alleged that the alternative data provider in fact used actual, non-aggregated, non-anonymized data to improve the accuracy of the information provided to subscribers for trading. But the SEC did not (or at least hasn't yet) charged any of the subscribers with insider trading despite what appears to have been trading while in the possession of MNPI.
The absence of such insider trading charges against the trader/subscribers highlighted the importance for fund managers and others to obtain strong representations from information providers used to inform trading (even if it turns out after the fact that those representations turn out to be false).
