How the Documents Have Changed

Despite the changes in the loan market and regulatory environment, many of the concepts in the original Code of Conduct, MNPI Principles and Confidential Information Supplement are still relevant today. Still, the revised LSTA Guidance includes the following changes:

• The Code of Conduct is now applicable to all loan markets, not just secondary markets.
• The MNPI Principles and Confidential Information Supplement are combined into one document.
• The revised LSTA Guidance reaffirms the existing principles while enhancing suggested guidance for information controls, policies and procedures.

Summary of Primary Features of the MNPI Principles

Categories of Information

Information provided by borrowers to lenders in a loan syndication is often non-public, and such information may at times include material non-public information (“MNPI”). The MNPI Principles set forth four categories of information:

1. Syndicate Information is confidential information made available by a borrower to all members and potential members of a lending syndicate (this information is often non-public and may include MNPI).
2. Borrower Restricted Information is confidential information provided or made available by a borrower to some, but not all, members of the lending syndicate (this information is often non-public and may contain MNPI).
3. Bank Loan Non-Restricting Information is confidential information provided or made available by a borrower to all members and potential members of a lending syndicate that does not include MNPI, but may contain sensitive non-public information.
4. Public Information is information that has been broadly disseminated to, or made accessible by, the public.

Materiality

In determining whether confidential information is material (and may therefore constitute MNPI), the MNPI Principles advise LMPs to consider guidance provided under U.S. federal securities laws. Although there is no clear rule, according to the MNPI Principles, information is generally deemed to be material where there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision, or would view the disclosure of the information to have significantly altered the total mix of information made available, or if the disclosure of the information is reasonably certain to have a substantial effect on the market price. Materiality is determined based on the specific facts and circumstances.

“Public” vs. “Private” Side LMPs

The MNPI Principles distinguish between “private” and “public” side LMPs. Private side LMPs have or are deemed to have access to Syndicate Information. Public side LMPs have elected not to have access to Syndicate Information or MNPI, and have agreed to make decisions on the underlying loans without such information (even though it may be material).

Trading on Syndicate Information and Borrower Restricted Information

Pursuant to the MNPI Principles, LMPs may trade on Syndicate Information in a manner consistent with appropriate standards of professional integrity and fair dealing, and so long as it has either disclosed the Syndicate Information to its counterparty in accordance with the applicable confidentiality provisions, or the applicable counterparty has already received or had the opportunity to receive such Syndicate Information. In addition, the MNPI Principles provide that an LMP could trade on Syndicate Information without disclosing such information to its counterparty where the LMP has offered to provide such information, but the counterparty has declined the information, provided that the LMP reasonably believes that the counterparty is sophisticated, understands the nature and importance of Syndicate Information, and has evidenced (or is expected to evidence) in writing that the receiving LMP is not relying on the other LMP for investment advice or to provide the Syndicate Information. Evidence of such nonreliance is set forth in the standard terms and conditions of the LSTA’s Par/Near Par Trade Confirmation and Distressed Trade Confirmation.

The MNPI Principles provide that LMPs should generally not trade while in possession of Borrower Restricted Information, unless the LMP has obtained the Borrower Restricted Information without a breach of any duty owed by the LMP to the borrower, and the LMP reasonably believes that the counterparty is in possession of or has access to such Borrower Restricted Information. Exceptions may be made in certain circumstances. Any exceptions should be subject to the internal policies of the LMP and consistent with the Code of Conduct. Where an exception is being made, LMPs may consider using enhanced disclosure language and explicit acknowledgement of non-reliance.

Confidentiality Undertaking

Syndicate Information, Borrower Restricted Information and Bank Loan Non-Restricting Information are typically subject to specific confidentiality undertakings contained either in the applicable credit agreement, evaluation material, or stand-alone confidentiality agreements, and such information should be treated accordingly. LMPs should be aware that all lenders and prospective lenders, whether private side or public side, are subject to the terms of the applicable confidentiality undertakings regardless of whether or not the information contains MNPI.

Information Controls, Policies and Procedures

Information controls may be used within a financial institution to separate private and public side personnel or units. Where an LMP has established effective information controls, information in the possession of private side LMP personnel should not be imputed to public side LMP personnel.

The MNPI Principles set forth certain information controls, policies and procedures traditionally used by LMPs. Each LMP is advised, however, to implement internal controls, policies and procedures for handling MNPI that are tailored to the particular structure of the LMP and its business activities and operations. Commonly used tools include:

1. Information Barriers, referred to as “firewalls” or “information walls,” are used to separate public side personnel and units from private side personnel and units within an institution. Functional, technological and physical controls are necessary to establish effective information barriers.
2. Trading Restrictions, Restricted Lists and Watch Lists are used to establish the proper policies for receiving, using and communicating Syndicate Information and Borrower Restricted Information (which may include MNPI) and may be used as part of an LMP’s overall policies and procedures.Other Commonly Used Tools include (i) written policies and procedures, (ii) independent compliance and monitoring functions (which may include periodic review of procedures), (iii) procedures for communicating across information barriers, (iv) recordkeeping, (v) education and training, and (vi) review/approval of policies and procedures by senior management.

Special Issues Relating to Loan Market Activities

Certain additional considerations contained in the MNPI Principles include:

1. Private side LMPs in receipt of MNPI should have policies and procedures in place to restrict the inappropriate communication or misuse of MNPI.
2. Public side LMPs should have policies and procedures in place to ensure the public side personnel and units do not receive MNPI, and individuals who are not public side are appointed to receive and, where appropriate, act on such information.
3. LMPs involved in the arrangement of a syndicated loan should establish policies and procedures addressing the production of evaluation materials provided by the borrower, including preparation of information packages that only include Public Information and Bank Loan Non-Restricting Information to be provided to public side LMPs.
4. LMPs who are responsible for distributing evaluation materials should establish procedures pursuant to which the recipient of such information will make certain representations and agree to certain undertakings prior to the receipt of any information. Such representations and undertakings may include an agreement to maintain the confidentiality of the information and use any MNPI in accordance with the recipient's internal procedures and applicable law (among others). In addition, LMPs distributing evaluation materials should establish procedures for clearly identifying and separating information that is being made available to the public side LMPs, from that being made available to private side LMPs.

Conclusion

Although many of the basic principles in the new LSTA Guidance have not changed from the prior version, the revised documentation serves as a helpful reminder to LMPs of this very important issue affecting the loan market. In particular, an LMP and its personnel must be aware that MNPI will often be provided to, or accessible by, a lender in a syndicated loan absent proper controls.

The LSTA Guidance is entirely voluntary; however, the general market convention is that LMPs adhere to the LSTA Guidance to the extent possible. LMPs are reminded of the need for robust policies and procedures for the receipt, use and dissemination of confidential information. Moreover, education of employees, ongoing oversight and open communication is essential to ensure those policies and procedures are being adhered to and functioning properly.

Client Alert 2017-285