Ares Management has agreed to pay $1 million to settle US Securities and Exchange Commission (SEC) charges that the private equity firm failed to implement and enforce policies and procedures designed to prevent the misuse of material nonpublic information.
According to the SEC’s cease-and-desist order, Ares invested several hundred million dollars in an unnamed public company through a loan and equity investment that allowed it to appoint a senior employee to the company’s board. The order said that Ares’ compliance policies did not take into account the “special circumstances” presented by the Ares representative’s dual role as both a member of the portfolio company’s board and an Ares employee who continued to participate in the firm’s trading decisions concerning the company.
The SEC said Ares obtained potentially material nonpublic information about the company, such as potential changes in senior management, adjustments to the company’s hedging strategy, efforts to sell an interest in an asset, and the company’s desire to sell equity and use proceeds to retire certain debt, among other things.
“Investment advisers and private equity firms that place employees on the boards of public companies bear heightened risks that they will obtain nonpublic material information through their representative occupying dual roles,” Anita Bandy, the SEC’s associate director of enforcement, said in a statement. “It is critical for firms like Ares to have proper policies and procedures in place to address these risks and prevent the misuse of information obtained under these special circumstances.”
The SEC’s order says that at the same time the Ares representative sat on the portfolio company’s board, the firm began to purchase the company’s publicly traded stock and acquired more than 1 million shares of the portfolio company’s stock on the public market during 2016, which represented 17% of its publicly available shares. An Ares investment committee and its compliance department had approved the purchases and recommended purchase limit price.
According to the SEC’s order, Ares’ written procedures require that a stock in its portfolio be placed on a restricted list and that any trading of it must be pre-approved by Ares’ compliance staff if there is an Ares employee sitting on the board of that company.
“However, Ares did not routinely establish information walls with respect to publicly listed companies in its investment portfolio on whose boards it had an employee-representative, and it did not do so here,” the order said.
The order does not accuse Ares of trading on insider information, but it found that its compliance staff failed “in numerous instances” to sufficiently document that they had inquired whether the Ares representative or the members of the deal team had received potentially material nonpublic information. The SEC said this resulted in ambiguity whether, or if, inquiries were made in certain instances.
Without admitting or denying the findings, Ares consented to the entry of a cease-and-desist order and a censure, and to pay a civil penalty of $1 million.
“Ares takes its fiduciary responsibilities very seriously and remains committed to operating with the highest standards of governance and compliance,” an Ares spokesman said in an emailed statement to CIO. “We have enhanced these compliance-related controls in this area, and we continue to seek ways to further enhance our policies, procedures, and practices to adapt to changes in regulation, our business, and the market.”