SEC Fines Ares for Portfolio Company Compliance Failures

Published On July 2, 2020

Amidst heightened scrutiny of the financial industry, the US Securities and Exchange Commission (SEC) fined Ares Management LLC one million dollars for its failure to implement policies to prevent the misuse of material nonpublic information. The Los Angeles-based private equity firm faces charges for purchasing stocks of a portfolio company without properly documenting inquiries surrounding material nonpublic information.

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. According to the SEC’s order, Ares’ compliance policies didn’t account for the fact that while the employee was serving on the board, this person continued to participate in trading decisions regarding the portfolio company. Through this board member, Ares obtained material nonpublic information about the company concerning senior management changes, adjustments to hedging strategies, and decisions with respect to the company’s assets, debt, and interest payments.  

With this information, Ares purchased more than 1 million shares of the company’s common stock, which was 17% of the publicly available shares. However, prior to approving the trades, Ares’ compliance staff failed to “sufficiently inquire and document whether the board representative and members of his Ares team possessed material nonpublic information relating to the portfolio company.” Consequently, the SEC found 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. 

According to a spokesperson, Ares cooperated with the SEC’s investigation and “have significantly enhanced our controls since then.” Without admitting to the findings, Ares consented to a cease-and-desist order and a censure, in addition to the monetary penalty. “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,” said Anita B. Bandy, the SEC’s Associate Director in the Division of Enforcement.