Ares Management will pay a $1 million civil penalty to resolve charges by the Securities and Exchange Commission that the private equity firm and registered investment adviser failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI).
According to the SEC’s order filed Tuesday, 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. Ares’ compliance policies, however, “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 said.
Further, according to the order, Ares obtained potential MNPI about the company, including through Ares’ representative on the company’s board; relating to changes in senior management; adjustments to the company’s hedging strategy; and decisions concerning the company’s assets, debt, and interest payments. After receiving this information, Ares purchased more than one million shares of the company’s common stock, which was 17 percent of the publicly available shares. The stock purchase was approved by Ares’ compliance department, the SEC notes.
“Ares’ compliance staff failed, in numerous instances, to document sufficiently that they had inquired with the Ares Representative and the members of the deal team as to whether any of them had received potential MNPI from the Portfolio Company, or to apply a consistent practice to the inquiries made, resulting in ambiguity whether, or if, inquiries were made in certain instances,” according to the SEC.
Ares’ compliance policy and procedures did not properly address the situation regarding MNPI, the SEC notes.
“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 Bandy, associate director in the SEC’s Enforcement Division. “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.”
According to the SEC, 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. Without admitting or denying the findings, Ares consented to the entry of a cease-and-desist order and a censure, in addition to the $1 million civil penalty.
The SEC considered Ares’ cooperation in the case and acknowledged the company’s decision in 2019 (after the investigation had begun) to retain an outside consultant to evaluate the design and implementation of its compliance policies and procedures related to MNPI. Ares has also since expanded the size and authority of its compliance teams.