SEC Focuses on Fair Valuation in Recent Enforcement Cases

December 20, 2012

The U.S. Securities and Exchange Commission (SEC) issued an order commencing an administrative proceeding against the former members of the boards of directors (Boards) five registered investment companies on December 10, 2012, charging them with alleged violations of the Boards’ responsibilities to fair value portfolio securities for which market quotations were not readily available (RMK Board Proceeding). This proceeding, which is currently pending, follows the recent settlement of another portfolio securities valuation case involving an internally-managed business development company (BDC), and the commencement of civil litigation against a hedge fund firm and its principals over, among other things, portfolio valuation issues.

Fund boards, advisers and their counsel should review the Complaint and the KCAP Proceeding and consider the developments in the RMK Board Proceeding as they consider their own practices, policies and procedures regarding fair valuation.