SEC TAKES ACTION AGAINST FUND MANAGER FOR FAILING TO WRITE DOWN IMPAIRED ASSETS
The SEC commenced proceedings against the manager of three private investment funds for failing to write-down the value of impaired underlying investments, thereby misleading investors and collecting inflated fees. The SEC described several underlying investments clearly known to the Respondent as having fallen in value because the promoters were indicted or failed to make principal and interest payments. Nevertheless, the Respondent continued to value the investments at cost of purchase, calculate fees based on the inflated values, and report the initial cost valuation on client statements. The SEC argued that the respondent had a direct client relationship with the fund investors because only clients who had signed an investment management agreement could invest in the funds. The SEC charged violations of the Advisers Act’s anti-fraud provisions.
OUR TAKE: When valuing assets, the SEC has warned advisers that they need to continually monitor a security’s valuation and write down the valuation for reporting and fee-calculation purposes upon impairment. Although many advisers often wrestle with impairment decisions, clear-cut cases of default, fraud, or criminal indictment should prompt action. Separately, it is interesting that the SEC went out of its way to explain that the fund clients were also clients of the adviser because of the separate investment management agreement, although it does not appear that the harmed clients invested in anything other than the funds.