Part of a private equity fund’s investment strategy is getting a seat at the table for a company they own. When that company’s shares also publicly traded, there are heightened compliance concerns. The fund’s management representative is likely to end up with material non-public information. The compliance challenge is to prove that the information does not make it to the fund’s trading desks.
Ares Management just got an SEC fine for failing to stop the information leak.
Based on the SEC order, Ares had invested several hundred million dollars in a public company and had two representatives on a public company’s board. One of those was a senior member of the investment team. This representative had access to:
- “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.”
All of that would reasonably be considered material non-public information. Ares compliance group had trades in the company’s stock under special watch. It had the power to impose information walls, but apparently did not do so in this case.
Ares made follow-on purchases of the company’s stock.
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.
This a classic compliance problem of proving that you don’t know something when the information exists within the firm. As a result, the SEC order takes the position that Ares’ compliance staff “failed to document properly whether they had assessed the extent to which Ares deal team members had any information that had the risk of being MNPI.”
Part of this appears to be the unusual circumstance. Ares does not commonly hold director seats on the boards of publicly-listed companies. The compliance policies and procedures didn’t adequately address the issue and the compliance staff did not adequately document an area of heightened risk.
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