SEC Focuses on Fair Valuation in Recent Enforcement Cases


The U.S. Securities and Exchange Commission (SEC) issued an order commencing an administrative proceeding against the former members of the boards of directors (Boards) of five registered investment companies on December 10, 2012, charging them with alleged violations of the Boards’ responsibilities to fair value portfolio securities for which market quotations were not readily available (RMK Board Proceeding). This proceeding, which is currently pending, follows the recent settlement of another portfolio securities valuation case involving an internally-managed business development company (BDC), and the commencement of civil litigation against a hedge fund firm and its principals over, among other things, portfolio valuation issues.

These and other recent cases regarding valuation deficiencies highlight the priority put on asset valuation investigations by the Enforcement Division’s Asset Management Unit and provide insight into the SEC’s views as to the policies, procedures and practices investment company boards and investment advisers should follow in (i) adopting fair valuation policies and procedures and (ii) fair valuing portfolio securities when and as required by Section 2(a (41) of the Investment Company Act of 1940, as amended (1940 Act). The views of the SEC regarding such matters are also relevant to advisers to private funds and managed accounts where the adviser has responsibility for valuations and those valuations are used in setting the price of interests or in determining fees or presenting performance.

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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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