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Business Law Current Event Paper Essay

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Current Event Paper

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Current Event Paper

Event Description

McKinsey & Co. settled with the Securities Exchange Commission (SEC) for $18 million
regarding allegations of insider trading involving its partner companies and firms for which the
company consulted (Michaels, 2021). Investigations revealed that McKinsey partners access
material confidential information from SunEdison Inc. and Alpha Natural Resources Inc. through
consultancy work the firm conducted for these companies (Michaels, 2021). The SEC proved
that MIO Partners Inc. a unit of McKinsey, invested hedge funds that had invested in these
companies. The SEC asserted that McKinsey needed better policies to protect its clients against
misuse of their confidential information. The MIO unit settled but did not admit or deny
wrongdoing (Michaels, 2021). The SEC maintained that when McKinsey allowed its partners
access to material confidential information while giving them control over investment decisions
that would have benefits amounted to a misuse.

According to the article McKinsey Affiliate to Pay $18 Million for Compliance Failures
in Handling of Nonpublic Information. (2021), McKinsey’s affiliates did not have sufficient
policies to ensure its partners did not misuse confidential information obtained in their roles as
consultants to McKinsey clients when they simultaneously oversaw their investment decisions.
Evidence showed that MIO Partners Inc. invested hundreds of millions of dollars in McKinsey
client companies. Further, the SEC concluded that McKinsey partners had access to confidential


information including M&A’s, financial results, bankruptcy information, funding plans, and any
changes in senior management (McKinsey Affiliate to Pay $18 Million for Compliance Failures
in Handling of Nonpublic Information. 2021). In essence, the SEC concluded that MIO should
have addressed the dual roles that McKinsey consultants played. In one instance, a McKinsey
partner was privy to MIO investments which were risky to a McKinsey unit and could affect the
company’s Chapter 11 reorganization such that MIO benefited. The SEC found MIO was in
violation of Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)7 (McKinsey Affiliate to Pay $18 Million for Compliance Failures in Handling of Nonpublic
Information. 2021).

Relevant Law
Section 204A – Prevention of Misuse of Nonpublic Information

According to Leahy (2017), investment advisers like MIO are required to instituted antiinsider trading practices in accordance with Section 204A of the Investment Advisers Act of
1940 (“Advisers Act”). As a registered investment adviser, MIO had an obligation to create,
update, and implement written policies that would ensure partners did not violate the Act or the
Securities Exchange Act of 1934 and other associated regulations regarding ‘material nonpublic
information’ (MNPI) (Leahy, 2017). The company’s chief compliance officer (CCO) and MIO
and McKinsey in general must institute and effective compliance program (Leahy, 2017). For a
compliance program to be considered effective, it must have a Code of Ethics and Compliance
Manual updated annually. Employees must be trained when the Compliance Manual and Code of


Ethics are initially released (Leahy, 2017). The SEC establishes that the training should be
comprehensively sufficient to address all anti-insider trading that the adviser deals with. Further,
the training should cover recognizing MNPI and employees encouraged to report any concerns to
management (Leahy, 2017). The adviser is expected to inform traders to not act on their own
when they suspect they have encountered MNPI. In case of such an instance, the SEC
recommends that the CCO and outside counsel assess the facts and determine whether the
security qualifies as ‘restricted list’ (Leahy, 2017). Advisers should not trade in their clients or
personal accounts until the CCO determines the security.

Other than these basic requirements, CCOs are expected to exhibit professional
skepticism. CCOs should conducted enterprise risk assessments annually including determining
where the adviser is sourcing investment ideas (Leahy, 2017). Some of the issues the CCOs
should look into include who where traders get their ideas? Who they consult? Who they meet?
Whether there are catalogues of such meetings? How traders speak with experts and consultants?
Whether traders have other forms of employment? Whether the adviser reminds traders about
MNPI? What documentation the adviser has on consultants and experts? (Leahy, 2017). With
knowledge of where traders get their information, who they contact in public entities, and their
experts or consultants, the CCO can assess…


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