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SEC Fines Ares for Compliance Failures Tied to Portfolio Company

The private equity firm should have done more surrounding compliance inquiries into material nonpublic information, according to the SEC.

Ares Management, a private equity firm based in Los Angeles, purchased the stock of a portfolio company without sufficiently documenting inquiries surrounding material nonpublic information, according the Securities and Exchange Commission.

An Ares employee sat on the board of the company while participating in trading decisions tied to it, the SEC said in a May 26 statement. The securities regulator found the firm violated compliance policies as it “failed to account for the special circumstances presented by having an employee serve on the portfolio company’s board.”

Ares agreed to pay $1 million to settle the SEC’s charges, without admitting to or denying the findings that the securities regulator laid out in its order

“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,” Anita Bandy, associate director in the SEC’s division of enforcement, said in the statement. “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.”

Ares purchased more than 1 million shares of the unnamed company’s common stock, or about 17 percent of the shares publicly available, in 2016. The private equity firm began to purchase the publicly-traded shares while its employee sat on the board, a seat obtained after Ares had invested hundreds of millions of dollars in the U.S. company’s loan and equity that same year, according to the SEC’s order. 

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Before approving the stock trades, the SEC said Ares did not require its compliance staff to “sufficiently inquire and document whether the board representative and members of his Ares team possessed material nonpublic information relating to the portfolio company,” which included changes in senior management, adjustments to its hedging strategy, and decisions about its assets, debt, and interest payments.

“In some instances, there was insufficient documentation that Ares’ compliance staff inquired at all,” the SEC said in the order. 

“We fully cooperated with the SEC in this matter, which relates to implementation of certain compliance policies and procedures in effect during 2016,” an Ares spokesperson said in an emailed statement. “We have significantly enhanced our controls since then.”

The matter “does not include any findings of misuse” of material nonpublic information by Ares or any of its employees, according to the private equity firm’s statement.

“Ares takes its fiduciary responsibilities very seriously and remains committed to operating with the highest standards of governance and compliance,” the firm said. “As an organization, we continue to seek ways to further enhance our policies, procedures and practices to adapt to changes in regulation, our business and the market.”

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