Jonathan Green and Lindsay Moilanen Discuss SEC Scrutiny of Asset Valuation Methods in FundFire
FundFire reports that the Securities and Exchange Commission (SEC) is increasingly scrutinizing the practices of alternative asset managers when calculating the value of their illiquid assets. Alternative investment funds, such as hedge funds, have a particular incentive to overvalue these assets, as they are compensated by management and performance fees and dealing with a recent increase in competition in the industry.
According to Kaye Scholer White Collar Litigation & Internal Investigations Partner Jonathan Green, “Firms may overprice their assets in order to increase their fees, avoid redemptions, attract additional investment, and avoid collateral calls with trade counterparties.”
The SEC does not usually focus on the value of a particular asset. Rather, it tends investigate asset managers who have not adhered to established procedures. However, as Kaye Scholer White Collar Litigation & Internal Investigations Associate Lindsay Moilanen pointed out, “That still leaves a lot of room for SEC action.”
Moilanen continued, “SEC actions regarding valuation have focused on several practices by firms, including: insufficient internal controls to ensure accurate valuations; insufficient oversight of valuation policies and procedures; and inaccurate disclosures to investors regarding valuation methodologies.” She added, “In almost every case that it brings, the SEC alleges that the result of these deficiencies are assets whose values have been deflated.”