Ares Management LLC, a Los Angeles-based private equity firm and registered investment adviser, has agreed to pay $1 million to settle charges brought by the Securities and Exchange Commission, alleging that it failed to implement and enforce policies and procedures to prevent the misuse of material nonpublic information.
The SEC claims that in 2016, Ares 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. The company was not named in the SEC’s order.
The SEC alleges 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.
The SEC indicated that Ares obtained potential material nonpublic information about the company, including through their representative on the board, relating to changes in senior management, adjustments to its hedging strategy, and decisions relating to its 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 percent of the publicly available shares. The SEC claims 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 certain compliance policies and procedures requirements of the Investment Advisers Act of 1940. 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.