The Flow Report - 3 Myths about MNPI in Data
Many data users are concerned that alternative data brings significant potential risk if it relates to a public company and might qualify as material, non-public information (or "MNPI") under US law. This risk is understandably difficult to assess; a complete analysis of these terms of art (and their application to a particular dataset) requires sophisticated legal counsel. We do, however, also see some common misunderstandings among buyers and sellers of data on this topic, which may serve as a starting point in understanding this complex risk.
Several helpful industry guides and similar materials have recently addressed this risk at a high level. The Securities Exchange Commission also published a related risk alert in April 2022. And yet MNPI - and data that is "too" accurate - remains a pervasive concern in the data industry.
Here are three common misconceptions in the data market:
Trading risk only applies to data that reflects company revenue - Data can present many other facts or events related to a company that do not directly reflect revenue but may still be material to the company (from the perspective of a potential investor). Putting aside the case law, it's not hard to imagine many kinds of events that might qualify - such as details of an acquisition, a cyber breach, or an unfavorable government action.
Data that reveals less than 5% of company revenue is not "material" - The 5% revenue threshold is widely known and even considered a "rule of thumb" by some for measuring materiality. The SEC has published substantial guidance cautioning against reliance on this rule of thumb, which comes from a public company accounting perspective.
A data vendor’s assurances are the only check on MNPI risk – While it is typical to include related representations in contracts with regulated data buyers, buyers can do more. A few examples of best practices to improve diligence:
Ask the vendor if it has adopted a relevant code of ethics or employee manual,
For data derived from a mobile app, test the app and the registration process for appropriate disclosures and consent language,
Review copies of a vendor’s agreements with its underlying data sources, and
Adopt a written policy codifying ongoing monitoring practices which may include services such as Glacier.
Related links
· Schulte Roth & Zabel in Bloomberg Law
· FISD Alternative Data Learning Point
· SEC Staff Accounting Bulletin
©2024 Glacier Network LLC d/b/a Glacier Risk (“Glacier”). This post has been prepared by Glacier for informational purposes and is not legal, tax, or investment advice. This post is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. This post was written by Don D’Amico without the use of generative AI tools. Don is the Founder & CEO of Glacier, a data risk company providing services to users of external and alternative data. Visit www.glaciernetwork.co to learn more.