A Costly Mistake
Jake, a portfolio manager at Evergreen Wealth Advisors, had always prided himself on making smart investment decisions. One evening, over dinner with an old friend who worked at a publicly traded tech firm, he casually heard, “Big news is coming next week—keep an eye on our stock.”
Jake thought nothing of it at first. But later that night, curiosity got the best of him. He purchased shares before the announcement.
A week later, the stock skyrocketed. The SEC noticed.
Jake wasn’t just facing a career-ending mistake—he was now under investigation for insider trading. His firm? Under scrutiny for failing to enforce a proper Material Nonpublic Information (MNPI) policy.
Could this happen at your firm?
What RIAs Need to Know About MNPI & Insider Trading
If you’re a Registered Investment Adviser (RIA), you have a fiduciary duty under the Investment Advisers Act of 1940 to prevent improper use of MNPI. The Securities Exchange Act of 1934 and Rule 10b-5 prohibit trading based on MNPI, whether the information comes from a client, a corporate insider, or even an overheard conversation at a conference.
Failing to properly handle MNPI can result in SEC enforcement actions, hefty fines, and reputational damage.
So, how can your firm stay compliant? Let’s break it down.
Recognizing Material Nonpublic Information (MNPI)
First, what qualifies as MNPI?
MNPI is information that is:
✅ Material – Would a reasonable investor consider it important when making a decision?
✅ Nonpublic – Has it been widely disseminated to the public (press releases, SEC filings, etc.)?
Examples of MNPI:
- Upcoming earnings reports before public release
- Details of an unannounced merger or acquisition
- A pending SEC investigation into a company
- Changes in executive leadership
- Nonpublic government regulations impacting an industry
If your firm trades or recommends securities while in possession of MNPI, it could be considered insider trading—even if the information came from a client, consultant, or expert network.
What Would You Do?
💡 Scenario: You’re an RIA, and a client casually mentions they’re about to acquire a smaller competitor. You realize this isn’t public knowledge.
Can you trade on this information?
A) Yes, because the client didn’t explicitly tell you to keep it confidential.
B) No, because it is material and nonpublic.
C) Only if your firm has no insider trading policy.
🚨 Answer: The correct choice is B. Even if the client didn’t intend to disclose MNPI, trading on this information is illegal insider trading.
Best Practices for RIAs: How to Handle MNPI
To protect your firm and stay compliant, RIAs should implement a strong MNPI policy. Here are key steps:
1. Build a Strong Insider Trading Policy
- Define what constitutes MNPI and insider trading.
- Outline escalation procedures for suspected violations.
- Clearly state penalties for violations.
📌 Pro Tip: Have all employees review and certify this policy annually.
2. Use Information Barriers (a.k.a. “Chinese Walls”)
Prevent accidental MNPI leaks by:
- Restricting access to sensitive client information.
- Separating trading and research teams.
- Limiting who can communicate with corporate insiders.
🔐 Example: Analysts covering tech stocks shouldn’t have unrestricted contact with investment banking clients in the tech sector.
3. Maintain Restricted and Watch Lists
- Restricted List: Securities that cannot be traded due to MNPI exposure.
- Watch List: Securities that require heightened monitoring.
📌 Pro Tip: Compliance teams should regularly update these lists based on ongoing activities.
4. Train Employees on MNPI & Insider Trading Risks
Annual training isn’t enough. Make insider trading a recurring topic with:
- Live case studies (real SEC enforcement actions).
- Scenarios & quizzes (like the one above).
- Surprise audits to test adherence to policies.
🔍 Case Study: A hedge fund analyst received expert network insights about an upcoming FDA drug approval. The fund traded on the tip—and ended up paying a $40 million SEC fine.
5. Implement a Pre-Trade Clearance Process
- Require employees to pre-clear personal trades.
- Use trade surveillance tools to flag suspicious activity.
- Require employees and contractors to disclose brokerage accounts.
🚀 Bonus Tip: Firms with automated compliance systems (AI-powered trade monitoring, NLP for email review) have significantly lower risk.
6. Encourage a Speak-Up Culture
If employees suspect MNPI misuse, they should feel safe reporting it. Create:
✅ A confidential reporting mechanism
✅ A non-retaliation policy
✅ Clear internal investigation procedures
⚠️ Did you know? The SEC’s whistleblower program offers financial incentives to report MNPI violations. Some firms find out about violations from the SEC first because an employee reported them externally.
Final Thought: Don’t Let Compliance Be an Afterthought
For RIAs, handling MNPI properly isn’t just about avoiding SEC penalties—it’s about trust. Clients expect advisors to act with integrity, and regulators won’t hesitate to investigate firms with weak controls.
By implementing clear policies, proactive training, and robust surveillance, RIAs can confidently navigate MNPI risks while focusing on their core mission: serving clients responsibly.
🚀 What’s Next? If your firm hasn’t reviewed its MNPI and insider trading policy in the last year, now’s the time. Need a compliance training to refresh? Corporate Nerd has you covered.📢 What’s your take? Have you seen insider trading risks firsthand? Share your thoughts in the comments!
