MIO Partners, a subsidiary of management consulting firm McKinsey & Company, has agreed to pay an $18 million fine for failing to have written policies and procedures that would prevent MIO from benefiting from inside information, the SEC stated in a filing Friday.
According to the filing, from at least 2015 to 2020 MIO, which provides investment options exclusively to current and former McKinsey partners and employees, had no policies in place to prevent the misuse of material non-public information. Active McKinsey partners who were on MIO’s Investments Committee had access to non-public information gleaned from their consulting work on behalf of clients, and those same partners had information on MIO’s investments when working with consulting clients.
“Allowing active McKinsey partners, individuals who had access to MNPI (material non-public information) about issuers in which MIO funds were invested, to oversee and monitor MIO’s investment decisions presented an ongoing risk of misuse of MNPI,” the filing stated. “MIO did not have policies and procedures reasonably designed to address the risks associated with its organizational structure.”
A prepared statement issued by an MIO spokesperson said the company “is pleased to have resolved this matter relating to the design and implementation of its historical policies and procedures. It is important to note that the order does not identify any misuse of material non-public information by either MIO or McKinsey.”
MIO has been a registered investment advisor since 1992 and reported total regulatory assets under management of $31 billion as of the end of 2020, the filing said. McKinsey is a global management company headquartered in New York that provides consulting to public companies and other entities that issue securities, as well as to broker-dealers and investment advisors.
Although 90% of MIO’s assets are invested indirectly through third-party managers who invest at their own discretion, 10% of assets are invested directly through the buying and selling of securities, directed by an investment committee made up of active McKinsey partners, according to the SEC.
“As McKinsey consultants, investments committee members were routinely privy to MNPI relating to, for example, financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management,” the SEC filing said. “Investments committee members also possessed and had access to MIO MNPI as a result of their participation on the board and its committees. ... [They] were aware of MNPI regarding MIO’s investment strategies, concentration limits, risk limits and third-party manager allocations, and had access to MIO’s holdings.”
This situation left the firm vulnerable to the risk inherent in not having written policies and procedures that were reasonably designed to prevent misuse of non-public information, whether it flowed from McKinsey clients to MIO or from MIO to McKinsey clients, according to the filing. In some examples, the investment committee approved allocation changes to some of the third-party managers amounting to tens of millions of dollars when it was known that the managers were heavily invested in companies McKinsey was providing consulting services to, the SEC said.