Failure to Ensure Portfolio Value Calculations Comport With Disclosed Methods May Bring SEC Enforcement Action, Even If the Valuation Method Would Otherwise Be Permissible

Hedge fund managers and other investment advisers that charge management fees based on a percentage of client portfolio values must be circumspect when calculating those values. If a manager’s calculations are inconsistent with the method specified in its documentation, such as its client advisory agreements, that manager risks disciplinary action, particularly as the SEC is currently focusing on adviser fee and valuation practices. See “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016). In a recent enforcement action, the SEC alleged that an investment adviser inflated its management fees by deviating from disclosed calculation methods for valuing client portfolios. This article summarizes the SEC’s allegations against the investment adviser, as well as the terms of the settlement order. This SEC enforcement action underscores the need for hedge fund managers and investment advisers to ensure that client agreements and other documents are always up-to-date and accurately reflect actual business practices. See also “Adhering to Disclosed Fee and Valuation Methodologies Is Crucial for Hedge Fund Managers to Avert Enforcement Action” (Jan. 28, 2016). For discussion of additional enforcement actions involving fee disclosures and practices, see “Full Disclosure of Portfolio Company Fee and Payment Arrangements May Reduce Risk of Conflicts and Enforcement Action” (Nov. 12, 2015); “Blackstone Settles SEC Charges Over Undisclosed Fee Practices” (Oct. 22, 2015); and “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure” (Jul. 9, 2015).

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