Two recent SEC enforcement actions illustrate how participating in ad hoc creditor groups can expose lenders to material nonpublic information (MNPI), thereby creating risks in trading. Loan market participants should avoid construing these actions too narrowly. Lenders who participate in cooperation agreements and restructuring support agreements face similar MNPI risks and should implement appropriate policies and procedures to mitigate those risks.
Background
Last year, the SEC published two orders with broad implications for the loan market. Both orders concerned the handling of MNPI by registered investment advisers (RIAs) that participated in ad hoc creditor groups.
In one order, the SEC fined an investment manager $1.8 million for failing to implement written policies and procedures that would have prevented it from misusing MNPI that it obtained as a member of an ad hoc lender group when trading collateralized loan obligations (CLOs) that held positions in the same underlying loan. Specifically, by virtue of its committee membership, the manager received MNPI regarding a faltering asset sale and the borrower’s resulting need for rescue financing. According to the SEC, the manager sold CLOs that held positions in the same underlying term loans while in possession of the MNPI.
In a separate order, the SEC fined another investment manager L.P. $1.5 million for failing “to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of MNPI relating to its participation on ad hoc creditors’ committees.” The manager was a bondholder who participated in an ad hoc committee of unsecured creditors. Although the manager attempted to avoid receiving MNPI by postponing its entry into a confidentiality agreement with the issuer, it was ultimately exposed to MNPI contained in presentations and reports prepared by the ad hoc committee’s own financial adviser. According to the SEC, the manager traded bonds and credit default swaps while in possession of this MNPI.
The SEC determined that both investment managers violated Sections 204A and 206(4) of the Investment Advisers Act of 1940, as well as Rule 206(4)-7 thereunder. According to the SEC in one of the orders, Section 204A of the Advisers Act requires RIAs to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse of material, nonpublic information by such investment adviser or any person associated with such investment adviser in violation of the Advisers Act or the Securities Exchange Act of 1934 (Exchange Act) or the rules or regulations thereunder. Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder require registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act by the investment adviser or its supervised persons.
In July 2025, the LSTA updated its Statement of Principles for the Communication and Use of Confidential Information by Loan Market Participants to address the MNPI risks that may arise when loan market participants take part in ad hoc committees. The LSTA’s guidance does not distinguish between RIAs and other loan market participants.
Do RSAs and Cooperation Agreements Expose Lenders to MNPI Risk?
Restructuring support agreements (RSAs) have been common in the loan market for at least a decade. Cooperation agreements have become increasingly abundant in recent years as a response to liability management exercises. Despite this, the SEC orders do not specifically mention either collective action arrangement. Similarly, while the LSTA’s updated principles urge loan market participants to adopt MNPI policies tailored to manage the “specific MNPI risks that may arise from participation in an ad hoc committee,” the principles do not specifically discuss cooperation agreements or RSAs.
Nevertheless, lenders should not assume the SEC will take a different posture toward these arrangements, as they are similar to ad hoc groups. Like ad hoc groups and committees, cooperation agreements and RSAs involve groups of creditors that work together to negotiate a restructuring. These lenders may receive MNPI directly from the borrower during restructuring talks. They may also engage advisors to facilitate negotiations with the borrower and to prepare guidance based in part on confidential information disclosed by the borrower to the adviser under a confidentiality agreement.
How Should Firms Update Their Policies and Practices?
Based on the SEC’s recent enforcement actions and the LSTA’s updated guidance, lenders that enter into collective action arrangements with other lenders — whether in the form of an ad hoc group or committee, a cooperating lender group or as a consenting lender under an RSA — should make sure that their information policies effectively address how to manage the specific MNPI risks those arrangements can create.
When a lender joins an ad hoc group or other collective arrangement, it should assess the MNPI risks, adopt appropriate controls and document its mitigation efforts before anyone in the organization trades any debt or securities of the relevant borrower or issuer, regardless of the size of the position and regardless of whether the asset is held directly or through a CLO. In some cases, a lender may determine that they cannot effectively mitigate the risks and choose to forgo further trading. In other circumstances, a lender may conclude that information barriers and other controls provide a suitable level of comfort. Lenders should make these determinations after applying the specific facts to a thoughtfully prepared and consistently applied set of information policies and procedures.
In collective action situations, lenders can receive MNPI from a variety of external sources, including from the borrower, a sponsor, other members of the lender group or from the various parties’ advisers. With respect to advisers, lenders may mitigate some MNPI risk by requiring the advisers they engage to implement their own information controls and to promptly notify the lender group if the adviser inadvertently discloses MNPI to the group.
Lenders should also identify the potential ways that MNPI can spread within their own organizations and work to mitigate those risks through monitoring, documentation, barriers and training. For example, lenders that operate multiple trading desks or that issue or trade CLOs may wish to create a central repository for identifying which loans are traded by different groups and designate one person to ensure that MNPI risks are mitigated globally. Finally, lenders should periodically review and update their information policies to reflect market trends, changes in applicable law and regulatory postures and the evolving nature of their own businesses.
[View source.]
