On November 19, 2021, the US Securities and Exchange Commission announced a settlement with MIO Partners, Inc.,* a wholly-owned subsidiary of US-based management consulting firm McKinsey & Company. The settlement resolves the SEC’s investigation into compliance failures that allowed employees with access to material nonpublic information to have oversight over investment decisions that could benefit them directly.
MIO, a registered investment advisor headquartered in New York, provides investment options to McKinsey partners and employees. According to the SEC order, between 2015 and 2017, MIO invested hundreds of millions of dollars – either directly or indirectly, through third-party managers -- in securities about which MIO Investments Committee members had access to material non-public information. The investments involved the securities of both commercial issuers and municipal bond issuers who were clients of McKinsey. Additionally, the SEC found that McKinsey had provided consulting services to clients in which MIO funds were invested, while McKinsey partners and employees had access to potentially relevant material non-public information pertaining to MIO, and did not disclose potential conflicts in bankruptcy court submissions.
In light of these findings, the SEC concluded that MIO’s policies and procedures were not reasonably designed to prevent the misuse of material non-public information in the possession of either McKinsey or MIO. The extant written policies did not address the fact that MIO board members, who were also McKinsey personnel, were privy to material non-public information in their roles as consultants to public issuers that they could have applied to their roles on the MIO board. Moreover, until September 2020, MIO’s written policies did not effectively identify whether members of the Investments Committee had material non-public information relevant to MIO’s investment decisions; nor did MIO’s policies and procedures provide for the recusal of McKinsey personnel where relevant. According to the SEC, these failings constituted willful violations of Sections 204A and 206(4) of the Advisers Act, and Rule 206(4)-7 thereunder.
The SEC order requires MIO to cease and desist from further violation. The order censures MIO, and requires the company to pay a civil monetary penalty of $18 million. MIO consented to entry of the order but neither admitted nor denied its findings.
*MIO Partners, Inc. is also known as McKinsey Investment Office.