SEC Expands Priorities – Focus on Valuation

The SEC's Office of Compliance Inspections and Examinations ("OCIE") previously named valuation practices as one of its areas of focus in both investment advisor and investment company examinations and recently again highlighted valuation as one of its examination priorities for 2014.

On January 9, OCIE published its examination priorities for 2014 under its National Examination Program (“NEP”). The priorities include general areas for all registrants, as well as industry-specific initiatives. NEP-wide initiatives include:

  • Fraud detection and prevention
  • Corporate governance, conflicts of interest, and enterprise risk management
  • Technology
  • Risks presented by dual registrants (broker-dealers and investment advisers)
  • New laws and regulation, including accredited investor status under Rule 506(c)
  • Sales practices involving retirement vehicles or rollovers

Among 12 examination priorities specifically targeted at investment advisers and investment companies, the NEP again shone a spotlight on valuation-related issues with respect to marketing and performance by stating their objective to review the accuracy and completeness of advisers’ claims.

In another demonstration of the SEC’s efforts to curtail deficient valuation processes, the SEC recently settled charges against GLG Partners Inc. The fund was alleged to have had inadequate internal controls that resulted in the overvaluation of an investment in a coal company. Specifically, the fund was lacking the proper policies and procedures to ensure that information relevant to the valuation of the investment was provided to the independent pricing committee in a timely manner. The fund settled all charges for nearly $9 million and agreed to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption.

The penalties in the GLG Partners case were limited to the fund itself, but the SEC has also begun to hold hedge fund compliance officers personally liable in certain instances when a compliance failure is found. SEC Chairman Mary Jo White remarked last fall that the SEC is “focusing on deficient gatekeepers—pursuing those who should be serving as the neighborhood watch, but who fail to do their jobs.” In fact, the SEC brought several administrative proceedings against hedge fund compliance officers in 2013.

Houlihan Capital has found that the following best practices and procedures of hedge fund and private equity funds can help meet greater investor, auditor and SEC regulation and scrutiny:

  • Adoption of written/documented valuation policies and procedures;
  • Improving internal systems for retaining and monitoring fund holdings data;
  • Establishing an internal pricing committee;
  • Maintaining an advisory board or committee;
  • Continuous investment monitoring; and
  • Appointing an independent third‐party valuation provider.

Houlihan Capital can prepare and review a fund’s valuation policies and provide clients with independent valuations of assets ranging from single investments to multi‐class portfolios. The firm has a history of working closely with regulators, auditors, third‐party administrators, investors, and some of the world’s largest private investment funds.

Houlihan Capital is a leading, solutions‐driven valuation, financial advisory and boutique investment banking firm committed to delivering superior client value and thought leadership in an ever‐changing landscape. The firm has extensive experience in providing fairness and solvency opinions, and objective, independent and defensible opinions of value that meet accounting and regulatory requirements. Our clients include some of the largest asset managers around the world, and private equity funds, hedge fund advisors, fund administrators, and other asset management firms benefit from Houlihan Capital’s comprehensive valuation and financial advisory services. Houlihan Capital is a Financial Industry Regulatory Authority (FINRA) and SIPC member, committed to the highest levels of professional ethics and standards.

For more information on independent third party valuation services, please visit or contact Paul Clark at 312‐450‐8656.

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