Stephen Culhane and Jonathan Green Discuss Regulation of Alternative Funds in The Wall Street Journal
The Wall Street Journal reports that regulators have been scrutinizing the valuation methods of alternative investment funds, such as hedge funds, when it comes to their most illiquid assets. According to the Financial Accounting Standards Board’s rules, there are three levels for measuring assets’ value. The first level consists of assets that are simplest to value, including listed stock and bonds, while the third level covers more illiquid assets where there is no observable market pricing.
According to Kaye Scholer Investment Funds Partner Stephen Culhane, the aim with an illiquid asset is to figure out "what would it get in a sale between a willing buyer and a willing seller." Determining this amount can involve substantial judgment and be "susceptible to abuse,” he said.
The Securities and Exchange Commission (SEC) has been investigating such abuse, focusing on the overvaluation of assets that can occur when these funds are being marketed to investors. Kaye Scholer White-Collar Litigation & Internal Investigations Partner Jonathan Green noted, “Because in some cases it's difficult to prove whether a valuation is accurate or fair, the SEC has tended to pursue allegations that an adviser isn't adhering to stated valuation practices.”