The loan market should not underestimate the importance of the Loan Syndications and Trading Association's guidelines regarding the use of public/private information, lawyers at the Loan Syndication and Trading Association's annual conference in New York warned last week. The conference came just a week after the LSTA published principles to guide firms that trade both in loans and public securities on the procedures and policies they should follow to prevent the misuse of material non-public information.
Deborah Montick, senior counsel and director of Nomura Holding America, said during a panel discussion that the market needs to take the principles seriously. "I think people are understating how important these principles are," she said. Montick stressed the importance regulators are placing on the procedures institutions have in place to prevent the misuse of material non-public information.
"You should make procedures alive; they shouldn't be something you stick on your shelf," said Montick. She said institutional funds are also putting increased pressure on firms to show they have procedures to prevent the misuse of confidential information. "There is more pressure, not just from regulators, but also from pension funds and mutual funds. They want to see what you are doing. They come into your office to do due diligence. For an investment advisor, the code of ethics is important. The SEC wants to know how you handle this code."
Herbie Bohnet, an associate at law firm Ropes & Gray, who represented the interests of the buyside in the working group that helped form the principles, said firms, such as hedge funds and mutual funds, can face pitfalls when they receive material non-public information. "We see people wrestling with these issues," he said. "Everyone is aware they shouldn't trade securities on the basis of material non-public information. But for shops that are getting into the market we are constantly reminding traders and analysts. We need to reinforce this, not just for new employees," he said.
Montick said it can be difficult to handle a situation when an employee at a firm gets hold of material non-public information. "It is not a job for the faint hearted," she said. Montick said if confidential information comes into contact with an analyst on the public side, for example, the firm trains the analyst to go to a compliance officer to figure out what to do with that information. "You really need the support of management," she added. "You need to trust your compliance officer."
Peter Wasserman, managing director and JPMorgan associate general counsel, said, "We hear through the grapevine hedge funds are speaking to counsel; they are focused on this issue. To the extent small institutions need these flagged, we see [the guidelines] as a positive. It makes the loan product more robust."
