On May 26, 2020, the United States Securities and Exchange Commission released documentation detailing an enforcement action against a Los Angeles private equity firm and registered investment adviser, Ares Management, for its misuse of material nonpublic information (MNPI).
The violation stems from a several million-dollar loan and equity investment Ares made in a publicly traded company. The investment allowed appointment of a senior Ares employee to the company’s board; the appointee was also part of the firm’s “deal team” which makes decisions about Ares’ investments.
Although Ares had a confidentiality agreement in place with the public company, the senior employee board member periodically received and shared potential MNPI with other members of the deal team. The shared MNPI included information about changes to the company’s senior management and the company’s financial strategies.
In 2016, while the Ares employee served on the board, Ares purchased over one million shares of the company’s public stock, amounting to nearly 17% of the available shares. These transactions were approved by the firm’s compliance staff.
Ares had policies and procedures in place specifically to address MNPI concerns, including a restricted securities list and the establishment of information walls. However, the publicly traded company was never added to the firm’s restricted list and creation of an information wall was never pursued, among other deviations from the firm’s compliance policies and procedures.
Due to Ares’ failure to properly implement its policies and procedures, and the subsequent misuse of the public company’s MNPI, the SEC found that the firm violated sections of the Advisers Act addressing the adoption and implementation policies and procedures written to prevent insider trading. As a result, Ares was ordered to cease and desist from violating the Advisers Act, censured, and ordered to pay a fine of $1 million. Ares neither confirmed, nor denied the findings, but agreed to pay the SEC’s fine.
WHAT DOES THIS MEAN FOR ME?
If your firm, or its employees, engage in investments or outside business activities which may involve the exchange of MNPI, it is important that policies and procedures are implemented, and followed, to prevent insider trading and other misuse of sensitive information.
If you require assistance with drafting and implementing your firm’s compliance manual or have questions about insider trading policies, Code of Ethics reporting, or other MNPI-related concerns, Fairview can assist. Contact us today for more information about how we can help your firm maintain compliance.