Quality Disclosures, Transparency & Valuations Matter

Recently, Calvert Investment Management agreed to settle charges brought against them by the SEC that stemmed from the improper valuation of an illiquid bond held in numerous Calvert mutual funds from 2008 to 2011. The valuation led to overstated net asset values, which in turn caused inaccurate performance numbers and inflated asset-based fees. When Calvert discovered the improper valuation and tried to remedy it by paying the Calvert funds and underlying shareholders, the SEC determined they did not properly calculate or disclose the losses to all shareholders.

Calvert will pay a civil penalty of $3.9 million.

Anthony S. Kelly, co-chief of the enforcement division’s asset management unit, has stated that VALUATION AND DISCLOSURE WILL BE ENFORCEMENT PRIORITIES IN 2017. It is no secret that the SEC has been striving for transparency and full disclosure when it comes to the valuations of private funds.

For example, this past April, the SEC’s rule changes in connection with unlisted REITs and DPPs became effective. FINRA RN 15-02, which amends National Association of Securities Dealer Rule 2340 (Customer Account Statements) and FINRA Rule 2310 (Direct Participation Programs), promotes greater transparency for shareholders and investors regarding valuations and customer statements. These amendments modify the requirements for inclusion of per share estimated values of DPPs and non-traded REITs. The motive behind such amendments is to increase transparency pertaining to the costs associated with these types of investments and to prevent overstatement of the valuations shown on customer account statements. This should lead to a more fully disclosed and unbiased reflection of the investment’s estimated value.

The message is clear. The SEC is going to continue to strengthen their efforts and focus on valuations, conflicts of interest, and how fees and expenses are allocated to provide as much transparency and disclosure to investors and shareholders as possible.

While the use of an independent third-party valuation provider has heretofore been viewed as precautionary, it is now becoming best practice and even a requirement in some cases.

Houlihan Capital has the expertise and experience to provide an independent valuation for all types of situations.

For instance, in June 2015, when the Greek markets closed, Global X FTSE Greece 20 ETF (GREK) remained open and performed as expected. Global X and Houlihan Capital worked together to make sure that ETF investors had as much transparency and disclosure as possible to understand the valuation methodology that the fund adopted. The result was that when the markets reopened over a month later, the fund’s trading was surprisingly stable. Houlihan Capital helped Global X “fair value its security holdings for which current market valuations were not currently available using fair value pricing pursuant to the pricing policy and procedures approved by the Fund’s Board of Trustees”.
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Houlihan Capital is a leading valuation advisory firm whose clients include some of the largest active asset managers in the world. We are SOC-compliant and committed to the highest levels of professional ethics and standards. For more information on independent third party valuation services, please email pclark@houlihancapital.com or contact Paul Clark at 312‐450‐8656.

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