McKinsey-affiliated investment fund resolves SEC claim it lacked sufficient safeguards against misuse of inside information
A multibillion-dollar private equity fund affiliated with McKinsey & Co., the giant consulting firm, has settled regulatory claims that it failed to put in place adequate policies to prevent the misuse of inside information gleaned from its extensive business advisory activity, according to documents filed today by the Securities and Exchange Commission.
Although the SEC did not claim that the fund had in fact misused confidential information, it cited the dual role played by McKinsey partners who oversaw the massive fund’s investment choices even though they had access to it. to non-public information about customers. “These partners were regularly aware of confidential information such as financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and financing efforts, as well as significant changes in senior management at these companies, ”the SEC said in its complaint. The failures of the investment fund began in “at least 2015” and continued until 2020, the regulator said.
The McKinsey investment fund, known as MIO Partners, agreed to pay $ 18 million to settle the case, without admitting or denying the allegations. The fund invests on behalf of current and former McKinsey employees and had assets of $ 14.6 billion as of December 2020.
“Allowing those who may own or have access to material non-public information to also have oversight over investment decisions that may be of economic benefit to them presents an increased risk of abuse,” said Gurbir S. Grewal, Director of the Division of Enforcement at the SEC. “It is essential that investment advisers have strong compliance policies and procedures in place to deal with the risks inherent in their organizational structures. ”
Concluding the settlement, the MIO said in a statement, “The historical issues identified in the SEC order have been resolved by the MIO through strengthened policies and procedures, and the order does not identify any misuse. confidential or non-public material information by the MIO. or McKinsey. MIO and McKinsey are operationally separate and follow strict policies to limit information sharing between the two organizations.
McKinsey’s use of an internal investment fund to manage employee pension funds is unusual. Most large companies, including large consulting firms, hire third-party companies like Fidelity and Vanguard to oversee their employees’ retirement accounts. These companies typically offer employees a handful of reputable mutual funds to choose from, allowing them to make their own investment decisions. The holdings of these mutual funds are transparent.
The holdings of the MIO fund are more opaque. It invests in private investment vehicles, including hedge funds, and only identifies its holdings once a year in Ministry of Labor records. MIO Partners oversees its investments with a staff and a board of 12 from former McKinsey partners and independent directors, according to regulatory documents.
One example highlighted in the SEC complaint involved McKinsey’s concurrent bankruptcy advisory work for and investments in coal company Alpha Natural Resources, a case previously explored in the Wall Street Journal.
In November 2015, the MIO had placed money in a hedge fund that was heavily invested in the debt of Alpha Natural Resources, even as RTS, the bankruptcy advisory arm of McKinsey, provided restructuring advice to the miner of coal, the SEC said. RTS’s chairman was on MIO’s investment committee at the time, the SEC noted, and by June 2016, MIO had increased its total investment in the external hedge fund to $ 272 million. At that time, the external hedge fund held $ 80 million in ANR debt.
The Chapter 11 bankruptcy process is meant to be transparent, and advisers should be selfless advocates for their clients. McKinsey had not disclosed his investment in the hedge fund that held the ANR debt.
A bankruptcy adviser who owns an undisclosed stake in a company is in conflict because that adviser would also have an interest in the outcome of the restructuring of the company, said the trustee of the United States, a unit of the Department of the Department of the United States. Justice.
The US trustee oversees bankruptcy courts across the country and cited McKinsey’s bankruptcy work as problematic. The company paid $ 15 million to settle allegations by the US trustee that McKinsey made insufficient disclosures about its clients and its investments in entities related to companies that hired McKinsey to provide advice on their bankruptcy reorganizations. McKinsey made no admission of liability in the matter.
McKinsey has come under heavy criticism from lawmakers and has faced legal challenges over alleged conflicts of interest in other areas.
The company agreed this year to pay $ 573 million to settle claims by 49 states that its work for opioid makers helped “turbocharge” drug sales, contributing to a deadly epidemic of drug addiction. At the same time the company was working for pharmaceutical companies, McKinsey was advising the Food and Drug Administration on its prescription drug policy, according to court documents. In the settlement, McKinsey said he believed his past opioid work was “lawful” and accepted the settlement “without finding or admitting any wrongdoing or liability of any kind. “
And, as NBC News reported last week, McKinsey works simultaneously for Chinese state-owned companies and the Pentagon. McKinsey told NBC News that he follows US federal contracting laws and has detailed house rules to prevent conflicts of interest and protect customer information.