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Private Equity Firm Charged with Compliance Failures
Ares Management LLC, a Los Angeles-based private equity firm and registered investment adviser, has agreed to pay one million dollars to settle charges that it failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.
The SEC’s order finds that, in 2016, Ares invested several hundred million dollars in a public company through a loan and equity investment that allowed Ares to appoint a senior employee to the company’s board. The order finds that Ares’s compliance policies failed to account for the special circumstances presented by having an employee serve on the portfolio company’s board while that employee continued to participate in trading decisions regarding the portfolio company. According to the order, Ares obtained potential material nonpublic information about the company, including through Ares’s representative on the company’s board, relating to changes in senior management, adjustments to the company’s hedging strategy, and decisions with respect to the company’s assets, debt, and interest payments. After receiving this information, Ares purchased more than 1 million shares of the company’s common stock, which was 17% of the publicly available shares. The order finds that Ares did not require its compliance staff, prior to approving the trades, to sufficiently inquire and document whether the board representative and members of his Ares team possessed material nonpublic information relating to the portfolio company.
“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,” said Anita B. Bandy, Associate Director in the Division of Enforcement. “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 finds that Ares violated the compliance policies and procedures requirements of Sections 204A and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. 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 one million dollars. [Please