FINRA Expels Hedge Fund Manager over Valuation Issues
FINRA has expelled a hedge fund manager for over-valuing privately-offered securities, thereby inflating management and incentive fees. According to FINRA, the firm “assigned unjustifiably high values to the assets, rather than relying on independent or legitimate valuations or valuation methods.” In one instance, FINRA alleges, the firm used a valuation more than triple the price offered. In another, the firm nearly doubled the value of a security without a reasonable basis.
OUR TAKE: Generally, the SEC pursues these types of actions against hedge fund managers. Here, FINRA took the most drastic action it could i.e. expulsion of a member firm. If FINRA becomes the SRO for advisers, it would likely have the independent power to pursue securities fraud actions under the Advisers Act. This case also shows the importance of properly justifying and documenting valuation determinations.
Comments