Alternative Data and the SEC: Navigating Compliance in Investment

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Predictive Analytics Tools

Valued at $4.9 billion in 2023 and forecasted to grow by 28% annually through 2032, the alternative data (AD) market is reshaping investment strategies. To adapt to this technological shift, the Securities and Exchange Commission (SEC) is refining its focus on alternative data compliance. This article delves into the SEC’s regulations on alternative data and their implications for investors integrating AD into their portfolios and strategies.

SEC’s Stance on Alternative Data

The SEC permits the use of alternative data by investors and advisers under certain conditions:

Vetting of AD providers: AD providers must undergo proper vetting and comply with data privacy regulations.

Documentation of due diligence: Advisers must record and document the due diligence process regarding AD providers.

Periodic review: The due diligence process should be periodic and adaptable to changes in data acquisition by providers.

Investors can discern the SEC’s stance toward alternative data from several recent sources, including the 2022 Risk Alert, the 2021 charging of AD provider App Annie, and the 2022 Examination Priorities announced by the SEC’s Division of Examinations (EXAMS). In all cases, the SEC underscores the importance of Material Non-Public Information (MNPI) in financial regulation.

Understanding MNPI

MNPI is confidential information influential in an investor’s decision-making process, regulated by the SEC to prevent insider trading. The SEC plans to treat alternative data akin to other information sources used by investors.

SEC’s Enforcement and Oversight

The SEC’s enforcement actions against SAC Capital Advisors for insider trading illustrate its commitment to combating financial misconduct. In April 2022, the SEC issued a Risk Alert highlighting deficiencies in investment advisers’ policies regarding alternative data, emphasizing the need for robust frameworks to mitigate the risk of misusing MNPI.

The App Annie Case

The SEC’s case against App Annie and founder Bertrand Schmitt set a significant precedent, marking the first charge against an alternative data provider for securities fraud. App Annie used detailed, individual data despite promising to anonymize and aggregate customer data, leading to misleading practices and false statements.

2022 Examination Priorities

The SEC’s 2022 Examination Priorities report emphasizes the examination of firms using alternative data or non-traditional sources, focusing on compliance with MNPI regulations. This signals a need for investors and advisers to ensure compliance with evolving regulatory expectations.

Best Practices for Using Alternative Data

To maintain compliance with SEC rules, investors should follow best practices, including:

– Developing comprehensive written policies.

– Conducting thorough due diligence on alternative data providers.

– Understanding legal obligations associated with alternative data usage.

– Establishing clear escalation channels and conducting regular reviews and updates.

Future Considerations

The SEC’s regulations around alternative data will continue to evolve, likely emphasizing transparency, ongoing due diligence, and the adoption of technological tools for monitoring compliance.

As the regulatory landscape evolves, adherence to SEC guidelines will bolster investor confidence in alternative data-driven investment strategies.