SEC Settles Charges with Registered Investment Adviser over Valuation Policies and Procedures

Who may be interested: Registered Investment Advisers, Boards of Directors, Compliance staff

Quick Take: The SEC settled charges against a registered investment adviser (Adviser) for failing to adopt and implement reasonably designed written policies and procedures addressing the valuation of private fund portfolio investments in violation of Rule 206(4)-7 under the Advisers Act.

The SEC Order stated that the Adviser’s policies and procedures addressing portfolio asset valuations were not reasonably designed to prevent violations of the federal securities laws, though no such violations were alleged. The Order emphasized the importance of accurately valuing portfolio assets, as improper valuations can lead to inaccurate fee calculations and performance reporting.

The private funds managed by the Adviser held substantial investments in Level 3 assets – investments that require the use of unobservable inputs in determining their value. According to the SEC’s findings, the Adviser’s policies and procedures addressed the valuation of these investments in general terms, rather than incorporating specific guidance or parameters necessary for valuing the Level 3 investments in accordance with U.S. GAAP and with the investment mandates of the Adviser’s clients, as set forth in the offering documents of the private funds.

Without admitting or denying the findings in the SEC Order, the Adviser consented to a cease-and-desist order, a censure, and a civil penalty of $275,000. The Adviser also consented to hire an independent compliance consultant for a review of the Adviser’s policies and procedures.

The SEC Order can be found here.