Private Equity Firm Failed to Verify Valuations in Pitchbook
A private equity sponsor has agreed to pay $2.8 million to settle charges that its compliance policies and procedures failed to ensure that its marketing materials did not include misleading valuations. The firm did have policies and procedures whereby the compliance department reviewed all marketing materials. The firm’s pitchbook asserted that the fund, a private equity fund-of-funds, valued all underlying funds at the value provided by the underlying managers. While this was true on the date that compliance reviewed the pitchbook, the SEC charges that the portfolio manager and his team changed the value of the largest underlying holding immediately after compliance approved the book, which resulted in a much higher valuation based on par value as determined by the portfolio manager. The book was never re-submitted for compliance approval. In addition to charging the respondent with violations of the anti-fraud provisions, the SEC charges that the firm violated the compliance rule (206(4)-7) because the firm’s policies and procedures did not verify the accuracy of the valuations presented in the pitchbook.
OUR TAKE: This case provides significant guidance to firms and compliance officers with respect to valuation. Firms cannot merely rely on the numbers provided by the portfolio management team. There must be some process whereby a third party (e.g. valuation committee, management, compliance) engages in a process to verify the numbers. In other words, compliance officers are not allowed to assume the truthfulness of valuation data provided by portfolio management.