SEC Charges Alternative Asset Manager with Failing to have Sufficient Policies to Prevent Use of MNPI

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In 2016, Ares Management LLC, a subsidiary of a global alternative asset manager, invested several hundred million dollars in client funds in a portfolio company in the form of debt and equity. Confidentiality provisions in the loan agreement remained in effect between Ares and the portfolio company on a going forward basis. The equity investment allowed Ares to appoint two directors to the portfolio company’s board.

As one of its two representatives on the board, Ares appointed a senior member of the Ares “deal team” involved in the debt and equity investment, referred to as the Ares Representative. From time to time following Ares’ investment, the Ares Representative, along with other members of the deal team, received information from the portfolio company that posed a risk that it could be material non-public information, or MNPI. This information was sometimes then shared more widely within Ares, as contemplated by the aforementioned confidentiality provisions. The information concerned, among other things, potential changes in senior management, adjustments to the portfolio company’s hedging strategy, efforts to sell an interest in an asset, the portfolio company’s desire to sell equity and use proceeds to retire certain debt, and the portfolio company’s election, as allowed under the terms of the loan agreement, to pay interest “in kind” and not in cash.

While the Ares Representative sat on the portfolio company’s board, Ares began to purchase the portfolio company’s publicly-traded stock. The stock purchase orders had been approved by Ares’ compliance department and occurred during open “trading windows” at the portfolio company.

An Ares investment committee had approved the purchases, as well as a recommended purchase limit price and then several subsequent increases in the recommended limit price. During 2016, Ares purchased more than 1 million shares of the portfolio company’s stock on the public market.

Ares maintained certain written policies and procedures relating to the treatment of MNPI. The procedures set forth, among other things, circumstances under which securities should be subject to trading restrictions and tracked on a “restricted list.” Where Ares had an employee-representative sitting on the board-of-directors of a publicly-listed company in its investment portfolio, Ares’ written procedures required that that company’s stock be placed on Ares’ restricted list and that any trades in the stock be preapproved by Ares’ compliance staff. In such circumstances, Ares’ compliance staff were required to confirm with the subject company that any restrictive trading window applicable to directors was open, and to “check with Ares director for MNPI.”

Notwithstanding that Ares placed the portfolio company’s stock on its restricted list, according to the SEC Ares did not sufficiently take into account the special circumstances presented by the Ares Representative’s dual role as both a member of the portfolio company’s board and an Ares employee who continued to participate in Ares’ trading decisions concerning the company. Although Ares’ compliance staff confirmed with the portfolio company that the relevant trading windows were open, Ares’ policies and procedures did not provide specific requirements for compliance staff concerning the identification of relevant parties with whom to inquire regarding possession of potential MNPI and the manner and degree to which the staff should explore MNPI issues with these parties. Moreover, according to the SEC, Ares’ compliance staff failed, in numerous instances, to document sufficiently that they had inquired with the Ares Representative and the members of the deal team as to whether any of them had received potential MNPI from the portfolio company, or to apply a consistent practice to the inquiries made, resulting in ambiguity whether, or if, inquiries were made in certain instances.

According to the SEC, and taking into consideration that Ares predictably received potential MNPI by virtue of having confidentiality provisions in place with portfolio company issuers and appointing employees to the boards of directors of such issuers, including the portfolio company, Ares did not sufficiently implement and enforce its written policies and procedures for preventing the misuse of MNPI, in violation of the Investment Advisers Act, the Exchange Act, and the rules and regulations under each Act.

Ares did not admit or deny the findings in the SEC order.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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