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Regulatory Sanctions

RIA/PE Firm Fined $1Mn for (‘Politically Correct’) Compliance Failures

June 2, 2020

by Howard Haykin



Though some may perceive the term, Chinese wall, to be politically incorrect, as used in the business world it describes a virtual barrier intended to block the exchange of information between departments if it might result in business activities that are ethically or legally questionable. The need for a Chinese wall in the financial industry became more common after 1999, with the repeal of federal regulations prohibiting companies from providing any combination of banking, investing, and insurance services.  [Investopedia]
Chinese wall is usually said to be a reference to the Great Wall of China, erected over 2000 years ago to protect inhabitants from invaders.



Ares Management LLC, a Los Angeles-based private equity firm and registered investment adviser, agreed to pay $1 million to settle SEC charges that it failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.


ACCORDING TO THE SEC.    In 2016, Ares invested several hundred million dollars in client funds in a public company through a loan and equity investment that allowed Ares to appoint 2 directors to the company’s board.  As one of its 2 representatives on the board, Ares appointed a senior member of the Ares “deal team” involved in the investment.


From time to time following Ares’ investment, the ‘Ares Representative’, along with other members of the deal team, received information from the company that posed a risk that it could be material non-public information. Specifically, 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, Ares purchased more than 1 million shares of the company’s common stock, which was 17% of the publicly available shares. 



COMPLIANCE POLICIES FAILURES.    Ares’s compliance policies failed to account for the special circumstances presented by having an employee serve on the company’s board while that employee continued to participate in Ares’ trading decisions regarding the company. So, even though Ares placed the company on its Restrict List, Ares’ compliance staff failed to comply with policies and procedures designed to prevent misuse of information arising from circumstances where Ares personnel obtained board seats for a public company. 


i.e., 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. 


Had Chinese Wall procedures been in place, the Ares' Representative would have had to limit his involvement in the firm's trading decisions as they pertained to this company. That limitation would likely have prompted Area to select someone else to serve on the company's board of directors.



[For details on this case, click on … SEC Press Release and SEC Order.]