The SEC imposed a $100 Million penalty against a fund sponsor and censured and fined a portfolio manager and fund accounting head for allowing incorrect bond valuations.   The SEC alleges that the fund sponsor allowed the portfolio manager unchecked discretion to override broker quotes for securities backed by subprime mortgages.  Although Fund Accounting was responsible for the fair valuation process, the SEC alleges that Fund Accounting left the work to lower level employees, blindly relied on the portfolio manager's price adjustments, failed to obtain written justifications for fair valuation decisions, and allowed stale values.  The SEC alleges that the head of fund accounting either knew of the failures or was reckless in his duties.  The SEC charges several violations of the Advisers Act and the Investment Company Act including violations of the compliance rules.  In a related action, the SEC, FINRA, and several state regulators ordered the firm to pay an additional $200 Million in fines and restitution in connection with sales of the funds. 

 

OUR TAKE: Fair valuation is about process.  While fair valuation decisions are necessarily subjective, firms must use a robust and documented process to demonstrate how they came to their subjective decisions.  The SEC requires accurate valuations because of the impact on performance, fees, and marketing.