Private equity major Ares Management has agreed to pay a $1m settlement to settle charges it was exposed to potential insider trading issues after buying stock in a company with one of its employees on the board.
The US SEC said Ares invested several hundred million dollars in an unnamed US public company in 2016, through a loan and equity investment that allowed it to appoint a senior employee to the company’s board.
Its report said 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 said Ares obtained potential material nonpublic information about the company, including through Ares’s representative on the company’s board, relating to changes in senior management, adjustments to the company’s hedging strategy, and decisions with respect to the company’s assets, debt, and interest payments.
After receiving this information the firm purchased more than 1 million shares of the company’s common stock, which was 17% of the publicly available shares.
The SEC added 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.
Ares consented to the entry of a cease-and-desist order and a censure, and to pay a civil penalty of $1m, without admitting or denying the findings.
Anita Bandy, associate director in the SEC’s division of enforcement, said, “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.
“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.”
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