SEC Charges Private Equity Firm with Compliance Failures

On May 26, 2020, the Securities and Exchange Commission (“SEC”) announced that Los Angeles-based private equity firm and registered investment adviser, Ares Management LLC (“Ares” or the “Firm”) agreed to a cease-and-desist order, censure, and to pay a $1 million fine to settle charges that it failed to implement and enforce policies and procedures designed to prevent the misuse of material non-public information (“MNPI”)[1] by its employees and by doing so violated Sections 204A and 206(4) and Rule 206(4)-7 of the Investment Advisers Act of 1940.[2]

Read the full SEC Press Release Here.


Background on the SEC’s Order

In 2016, Ares invested several hundred million dollars in client funds in the form of equity and debt into a publicly listed Portfolio Company. As part of the investment, the loan agreement between Ares and the Portfolio Company contained specific provisions governing confidentiality as well as affording Ares the opportunity to select two directors for the Portfolio Company’s board. As such, Ares appointed a senior member of the Firm’s “Deal Team” to the board (“Ares Rep”) as one of the directors.

Because of their position with the board, the Ares Rep, and by extension, the Deal Team,  would occasionally receive information that was classified as MNPI including information regarding changes to the Portfolio Company’s senior management, hedging strategy, asset purchases, sales of equity to pay down debt, and “in-kind” interest payments to Ares as indicated in the loan agreement.

Subsequently, this information was often shared within other departments of Ares and while the Ares Rep sat on the board during 2016, Ares purchased a million shares of the Portfolio Company. These purchases were approved by both the investment committee and the compliance department during open trading windows for the Firm.

Ares did have certain compliance policies and procedures (“P&Ps”) that contemplated the receipt of MNPI, including when certain securities should be placed on the Firm’s restricted list and restricted from trading. Furthermore, the P&Ps did consider instances in which members of the Firm sat on the board of publicly traded companies, trading restrictions for the purchase and sale of those securities, and the requirement for compliance approval of any transactions in the security.

With regards to the latter requirement, the compliance department was required to check with the public company regarding open trading windows and with the Ares director regarding the receipt of MNPI, according to the Firm’s P&Ps. The P&Ps also allowed for the creation of “information walls” within Ares regardless of whether security was restricted or not; however, these information walls were not applied in this instance.

Despite Ares’ compliance department placing the Portfolio Company stock on the restricted list, the compliance department failed to recognize the special circumstances surrounding Ares’ Rep position on the board and their role within the Firm’s Deal Team.

The compliance department failed to consistently apply the P&Ps when verifying the receipt of MNPI with the Ares Rep and the Deal Team, and document this verification, creating uncertainty about how often the receipt of MNPI was verified. Moreover, the Firm’s P&Ps did not consider the importance of identifying special circumstances in which Ares employees received MNPI and the extent to which the information should be verified.

Read the SEC Order Here


What Should I Consider When Evaluating My Firm’s P&Ps Regarding Receipt of MNPI?

Investment advisers need to ensure that their P&Ps clearly prescribe how their firms handle the receipt of MNPI not only under their Insider Trading Policy, but also under their Trading, Investment Management, Research, and Outside Business Activity (“OBA”) P&Ps.

P&Ps need to contemplate when, where, and how MNPI has been received; placement of the security on the restricted list while compliance personnel verifies the facts and circumstances in which the information was received; and, documentation regarding the verification of the receipt of MNPI with appropriate managers within the firm and the publicly traded company.

Additionally, the P&Ps should consider whether information walls need to be applied to receipt of MNPI regardless of whether the security should be placed on the restricted list and the appropriate channels for dissemination of that information.

P&Ps should also contemplate OBA in which employees of the firm sit on the boards of publicly-traded companies; when and how those employees would receive MNPI; how the receipt of MNPI by those employees is verified and documented; and, the level of restriction that is applied to those employees with respect to their own personal trading activity as well as the investment management and trading activity for the Firm.

Lastly, the P&Ps need to be applied consistently in order to ensure that receipt of MNPI does not result in ambiguous circumstances in which firms and/or their employees are potentially trading on MNPI. As indicated above, inconsistent application of the P&Ps can create significant risk for firms, and possibly lead to legal penalties and irreversible reputational damage.

Should you or your firm have questions regarding how MNPI is addressed in your P&Ps; how receipt of MNPI is verified and documented; and/or, assistance with drafting and customizing your Insider Trading, Trading, Investment Management, Research, or OBA P&Ps, please contact us at (619) 278-0020 to schedule a consultation. Our compliance experts are standing by to help you.

[1] “MNPI,” also known as “Insider Information,” is generally described as information regarding corporate events that have not yet been made public.  For example, certain officers of a firm know in advance if the company is about to be acquired or if the latest earnings report is going to differ significantly from information previously released.  If the information could reasonably influence the purchase, sale, or market value of a company’s securities and such information has not yet been publicized in a widely used medium, then it is considered MNPI.

[2] “Private Equity Firm Ares Management LLC Charged With Compliance Failures.”, U.S. Securities and Exchange Commission, 26 May 2020,

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