SEC Sues Independent Directors for Failing to Oversee Fair Valuation Process
The SEC commenced an enforcement proceeding against eight registered fund Board members, including six independent directors, for failing to properly oversee the funds’ fair valuation process. According to the SEC, the funds’ invested a high percentage of their assets in structured finance securities that required fair valuation i.e. market quotations not readily available. The SEC alleges that the directors failed to (a) inquire about the fair valuation methodology utilized by fund accounting and the fair valuation committee; (b) request information about whether prices changed quarter to quarter; (c) establish guidelines regarding the use of price confirmations; (d) understand how management utilized an internal matrix for pricing; and (e) obtain meaningful explanatory notes for valuations. The SEC charges the directors with causing violations of Rules 22c-1 (calculation of NAV), Rule 30a-3(a) (internal control over financial reporting), Rule 38a-1 (compliance) and the anti-fraud rules.