SEC Cracks Down on Sound Point Capital for Policy Gaps

The Securities and Exchange Commission (SEC) has imposed a $1.8 million civil penalty on Sound Point Capital Management LP, a New York-based registered investment adviser, for deficiencies in its compliance policies. The settlement addresses the firm's failure to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI) in its collateralized loan obligation (CLO) trading operations during the period from May 2018 to June 2024. Despite prior, inaccurate reports, the SEC did not find any evidence of insider trading or misuse of MNPI by Sound Point or its employees.

According to the SEC's order, Sound Point Capital's business involved managing and trading CLOs, including both its own and those managed by third parties. The firm also had a credit business that frequently involved participation in ad hoc lender groups or creditors' committees. This dual role occasionally put Sound Point in possession of MNPI regarding companies whose loans were held in the CLOs it traded.

The order details a specific incident in July 2019 where Sound Point sold two CLO equity tranches while in possession of MNPI about a media services company obtained through its participation in an ad hoc lender group. When this MNPI became public the next day, the value of the company's loans in these CLO tranches dropped by over 50%, materially decreasing the value of the CLO tranches Sound Point had sold by approximately $685,000. Sound Point subsequently paid about $350,000 to a counterparty who threatened litigation over the sale.

In response to this incident, Sound Point began conducting pre-clearance reviews to assess the potential impact of MNPI on loans in Sound Point-managed CLOs. However, the firm did not fully formalize these reviews into written policies until July 2022. Furthermore, Sound Point did not implement written policies or procedures for handling MNPI in third-party managed CLO trades until June 2024.

“We are pleased to enter into the settlement with the SEC on a “no admit or deny” basis," a Sound Point Capital spokesperson told the GRC Report. "We cooperated with the SEC in this matter, which relates to certain compliance policies and procedures, the majority of which were modified in 2019. We have enhanced our controls since then. This matter does not include any findings of insider trading or misuse of material nonpublic information by Sound Point or its employees. Sound Point takes its fiduciary responsibilities very seriously and remains committed to operating with the highest standards of governance and compliance. As an organization, we continue to seek ways to further enhance our policies, procedures and practices and to adapt to changes in regulation, our business and the market.”

The SEC's order found that these lapses violated Sections 204A and 206(4) of the Investment Advisers Act of 1940, as well as Rule 206(4)-7. In addition to the financial penalty, Sound Point agreed to a cease-and-desist order and censure.

The SEC acknowledged that Sound Point had undertaken remedial acts and cooperated with the Commission staff. Sound Point consented to the order without admitting or denying the SEC's findings.

This case serves as a reminder to financial firms, particularly those operating in complex sectors like CLO trading, to rigorously assess and update their compliance frameworks to address potential MNPI risks. As regulatory scrutiny remains high, especially in the evolving landscape of financial services, firms are likely to revisit and strengthen their internal policies to avoid similar pitfalls. The SEC's enforcement action against Sound Point Capital illustrates the agency's ongoing commitment to upholding market integrity, particularly concerning the management of sensitive information in interconnected business operations.

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