by T. GormanPosted on Posted in SECActions

Compliance procedures have long been a key matter when it comes to material non-public information or inside information. This is particularly true for regulated entities that are required to have such systems. And, the systems can effectively constitute the first line of defense for the firm if there is a violation.

Even a good system may not save the company for a violation. Indeed, in some instances the system may in fact become the predicate for an enforcement action. This is precisely what happened in the Commission’s most recent case involving the handling of potential material non-public information – the firm failed to follow its own procedures. While apparently that did not result in insider trading it did end with the payment of a large fine and a cease and desist order. In the Matter of Ares Management LLC, Adm. Proc. File No. 3-19812 (May 26, 2020).

Ares is a global alternative asset manager whose clients are pooled investment vehicles. In some instances, the clients are public firms; in others they are not. Ares had over $149 million in total assets under management at the end of 2019.

In 2016 Ares had in place a comprehensive set of procedures governing the handling of material non-public information. In that year the firm invested several hundred million dollars in Portfolio Company. The investment gave the adviser the right to appoint two directors to the board of Portfolio Company creating the risk that Ares would obtain material non-public information. During the period the firm did receive inside information with respect to a Portfolio Company loan.

Over time, Areas also received a variety of information that was potentially material inside information such as changes to senior management, mid-quarter hedging adjustments, efforts to sell a passive interest in a specific assets and similar matters. All of the information was later disclosed. All of the purchases were approved by the investment committee. As a result of the purchases Ares acquired over 1 million shares representing about 17% of the float.

Although Ares placed the Portfolio Company stock on its restricted list, the compliance team failed to properly follow the firm procedures which governed the situation –that is, where the firm held shares in an entity where its employees had board seats. In those instances the procedures required that the staff make prepare written entries for entry into the mangement system sufficiently documenting if prior to approving the trade inquiry was made to determine if the deal team had inside information.

Here in numerous instances, the compliance staff failed to make entries in the order management system sufficiently documenting if prior to the approval of the trade it had inquired if the deal team had obtained inside information. And, to the extent such entries were made, they lacked consistency and detail. Accordingly, despite the increased risk resulting from the relationships between Ares and Portfolio Company, the compliance staff failed to properly adhere to and apply the firm’s systems.

After the Commission’s investigation began in 2019 however, the firm retained a consultant and reviewed and evaluated its policies and procedures. The Order alleges violations of Advisers Act Sections 204A and 206(4).

To resolve the matter the firm consented to the entry of a cease and desist order based on the sections cited and to a censure. Ares also agreed to pay a penalty of $1 million.

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by T. GormanPosted on Posted in SECActions

The Commission will return to a holiday shortened week during which segments of the country will continue to emerge from the pandemic shutdown. The agency continued to modernize its rules last week, approving new regulations regarding select acquisition/disposition transactions. The regulator also moved forward, announcing a municipal securities conference for mid-June.

The Commission’s enforcement program continued to expand its focus from offering fraud cases into those involving COVID-19. A number of preliminary investigations have been opened related to the virus. One group of inquiries centers on company claims about products related to the pandemic. Another is tied to the funds being made available under the recent virus-related legislation.

Stay safe, stay healthy.

SEC

Muni securities: The Commission announced on May 22, 2020, a virtual conference on municipal securities. The event will be held on June 16, 2020. The discussion will focus on secondary market disclosure practices (here).

M&A: The agency adopted rules designed to improve disclosure concerning the acquisition and disposition of businesses on May 21, 2020 (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and 3 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.

Offering fraud: SEC v. Montgomery, Civil Action No. 5:20-cv-99598 (W.D. Tcx. May 18, 2020) is an action which names as defendants Paul Montgomery, Jr., Michael Fisher and James Willingham. Over a period of about two-and-one half years, beginning in June 2016, Defendants solicited investors to purchase limited partnership interests in oil and gas projects. Investors were told the funds would be used to drill new wells and rework existing ones. They were also promised a return of 32%. Investors were not told that a court injunction over the property effectively precluded work for drilling or reworking the wells. They also were not told that much of the money raised – about $2.7 million from 15 investors – was spend on solicitation commissions. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24821 (May 18, 2020).

Ethics: In the Matter of John Donovan, CPA, Adm. Proc. File No. 3-19805 (May 18, 2020) is an action against a former big four audit partner alleging ethical violations. Specifically, in 2018 the former engagement partner shared answers to three and received answers to seven questions on training exams administered by the firm with junior members of his engagement team. PCAOB and AICPA rules require that members act with integrity with respect to the rendering of professional services. The Order alleges violations of PCAOB Rule 3500T. To resolve the matter, Respondent consented to the entry of a cease and desist order based on the Rule cited and to the entry of an order denying him the privilege of appearing and practicing before the Commission as an accountant with a right to apply to resume practice after one year. See also In the Matter of Michael Bellach, CPA, Adm. Proc. File No. 3-19804 (May 18, 2020)(same except the reapplication cannot be filed for two years); In the Matter of Timothy Daly, CPA, Adm. Proc. File No. 3-19803 (May 18, 2020)(same except reapplication is after three years).

CFTC

COVID-19: The regulator issued an advisory waring investors about unique risks associated with investment decisions during the pandemic with regard to exchange-traded products and exchange traded funds or mutual funds that invest in stocks, bonds or other asset classes. The advisory essentially warns main street investors to focus on understanding the mechanics of the products before investing (here).

FinCEN

COVID-19: The regulator issued an advisory to alert financial institutions to rising medical scams related to the pandemic (here).

Australia

Remarks: James Shipton, Chair, Australian Securities and Investment Commission delivered remarks to the Financial Services Institute regarding the its regulatory priorities on May 21, 2020 (here).

Hong Kong

Compliance: The Securities and Futures Commission of Hong Kong fined Convoy Asset Management Ltd. $6.4 million and reprimanded the firm for certain regulatory failures. Specifically, the firm failed to conduct adequate due diligence before recommending certain bonds. In addition, the firm did not have an effective compliance system, adequate documentation, a copy of its written advice and effective internal controls

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