Part 4 of the SEC is getting Serious

Valuation Committees

At the 100 women in hedge fund conference a question was posed; “What are the Areas that the SEC will focus on during an examination?”  The answer highlighted that since the financial crisis the member firm’s “valuation process and results” is an area of importance.

 

The SEC indicated that since the valuation of assets has a direct relationship to the performance that the member firm reports to its investors and to regulators and the fees it collects, the SEC will review the process that is in place at the member firm.  The SEC would like to see the member firm employ a formalized valuation process with a documented rational of pricing of its illiquid and/or hard to price securities. 

Though side pocket pricing might be less of an issue because they are usually held at cost until an event occurs or at realization, the SEC will be reviewing the pricing process to ensure that an other than temporary impairment is considered during the pricing cycle.    

The SEC will “take a lot of stock in good faith valuation procedures”. In my opinion this means the member firms should have a written policy for pricing each of its investment types, have an independent committee to compliment the business pricing and documentation/minutes of the valuation results. 

The SEC will also ensure that what is stated in the valuation policy  manual and at the valuation committee meetings are in fact actually occurring. The SEC stated that “Misrepresentations in valuation policies and procedures…will be taken very seriously”.