On June 4, 2019, Deer Park Road Management Company, LP agreed to settle charges originating from its violation of Section 206(4) and Rule 206(4)-7 of the Investment Advisors Act of 1940, by agreeing to an SEC order imposing a U.S. $5 million penalty and other relief. The SEC had identified a series of flaws in Deer Park’s written policies for valuing client assets and in the implementation of those policies.
The order serves as a reminder to all investment advisors that great care should be taken to ensure all valuation policies for client assets are tailored to their specific businesses, conform to Generally Accepted Accounting Principles (GAAP), and are properly implemented in practice.
This particular order is noteworthy because it draws attention to the SEC’s increased attention to policies for valuing illiquid securities, and it indicates that the SEC has become increasingly willing to use the Compliance Rule as a serious enforcement mechanism.
Moving forward, asset managers are encouraged to:
- Ensure all valuation policies and procedures address which observable inputs must be considered
- Be mindful of the GAAP requirements to determine the fair value of securities
- Adopt guidelines for regulating traders’ communications with pricing vendors
- Ensure that any individuals who oversee valuation have properly specialized expertise
- Make certain that traders and portfolio managers adhere to the firm’s written policies
For more information detailing the specifics of the Deer Park case, click here to read the full SEC Order.
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This publication is provided by Caroprese & Company as a service to its clients and colleagues. The information and content included in this publication should not be construed as technical advice. Questions regarding any matters discussed in this publication should be directed to Brandon Caroprese whose contact information is listed below:
Brandon Caroprese, CPA, MST