From: RegTech Analyst
Los Angeles-based private equity firm Ares Management has been forced by the Securities and Exchange Commission (SEC) pay $1m to settle charges that it failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.
The origins of the story dates back to 2016 when Ares Management invested several hundred million dollars in a public company through a loan and equity investment that allowed it to appoint a senior employee to the company’s board.
However, according to the SEC, everything wasn’t done right. The governmental body alleged that Ares Management’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.
The SEC claimed that the company had been able to get its hands on potential material nonpublic information about the company, including through Ares Management’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.
What happened next was, according to the the SEC, that Ares Management used this information to buy more than one million shares of the company’s common stock, which was 17% of the publicly available shares. And the claim is that Ares Management didn’t require its compliance staff to approve 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 claims of the SEC, Ares Management has agreed to obey the entry of a cease-and-desist order and a censure, and to pay a civil penalty of $1m.
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