A private fund manager and its chief investment officer ("CIO") settled SEC charges for compliance deficiencies that resulted in inaccurate valuations of client assets.
According to an SEC Order, the various compliance deficiencies allowed traders to (i) undervalue securities in order to sell them later at a purported profit and (ii) provide inaccurate information to its pricing vendor and then use those prices to value bonds. The SEC claimed that this was caused by the CIO's failure to implement a requirement under its existing valuation policy in order to maximize the use of relevant observable inputs.
Specifically, the SEC found that the CIO oversaw and approved valuations that traders marked as "undervalued" with notes to "markup gradually." The SEC stated that the committee charged with overseeing the valuation included the principal's relatives and members, who had "[no] relevant expertise."
In addition to finding a failure to implement existing policy, the SEC determined that the fund manager's policies did not (i) conform to the Generally Accepted Accounting Principles (GAAP) or (ii) address potential issues in its business practices, such as potential conflicts of interest and "its use of valuation models and pricing vendors."
To settle the charges, the private fund manager agreed to pay $5 million and the CIO agreed to a $250,000 penalty.
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