Ares settles with SEC for $1m over inadequate policies around non-public information

Ares Management agreed to pay $1 million to settle allegations with the SEC in relation to a public company investment in which a member of the firm’s deal team sat on the company board and helped make trading decisions, SEC said. 

The SEC censured Ares, which did not admit or deny the allegations. An Ares spokesman did not return a comment request. 

The charges stem from a public company investment Ares made in 2016 through equity and debt. The investment allowed Ares to name two directors, one of whom as one of the firm’s investment professionals, SEC said. 

While Ares had policies governing the handling of material non-public information, the SEC said the firm did not do enough to avoid conflicts. The Ares professional, as a director, had access to material non-public information, the SEC said. The Ares director regularly shared information he learned on the board with members of the deal team, a situation that Ares policies did not address, SEC said.

And with the employee on the board, Ares began buying the company’s public stock, the SEC said. 

Ares did list the company’s share on a restricted stocks list, which meant trades in the shares were subject to first be reviewed and approved by compliance staff, the SEC said. Ares policy also dictated that, in situations where a professional served on a public company board, compliance staff would confirm with the portfolio company that its trading window was open and check with the Ares director for any material non-public information, the SEC said. 

However, compliance staff had discretion into how those policies were implemented, which is where issues arose, the SEC said. 

Identification of who possessed material non-public information, how staff followed up with them and the thoroughness with which confidential information issues were scrutinized were subject to compliance staff interpretation, the SEC said. 

Ares compliance staff was responsible for checking with the “Ares director for potential [material non-public information] but did not expressly require an assessment of whether the director shared information with others or confirmation of the full spectrum of Ares employees who could have acquired the potential MNPI,” the SEC said. 

The firm’s compliance staff also did not document sufficiently that it had questioned the Ares professional who served on the board as to whether they had received material non-public information, the SEC said. 

“This case … underscores that where there is greater risk – in this instance the fact that an Ares employee both served on the board of the portfolio company and was involved in Ares’ trading decisions with respect to the company’s securities – the SEC will apply greater scrutiny,” said Philip Moustakis, an attorney with Seward & Kissel.

“It also underscores the importance of advisers documenting thoroughly their compliance processes to ensure they get credit for the good work they have done.”

Action Item: Read the case here: https://bit.ly/2ZLkJ10