The SEC discusses valuation in the Division of Examinations' 2024 Exam Priorities.
The SEC’s Division of Examinations (the “DOE”) has announced its 2024 examination priorities. The annual report provides insights into the Division’s risk-based approach, including the areas it believes present potential risks to investors and the integrity of U.S. capital markets(1).
Valuation was discussed in the following sections:
Examinations of Investment Advisers
The Division will, among other things:
- Focus on compliance policies and procedures, which may include one or more of the following areas, as discussed in the adopting release for the compliance rule (Compliance Rule) under the Investment Advisers Act of 1940 (Advisers Act)2: (1) portfolio management processes; (2) disclosures made to investors and regulators; (3) proprietary trading by the adviser and the personal trading activities of supervised advisory personnel; (4) safeguarding of client assets from conversion or inappropriate use by advisory personnel; (5) the accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction; (6) safeguards for the privacy protection of client records and information; (7) trading practices; (8) marketing advisory services; (9) processes to value client holdings and assess fees based on those valuations; and (10) business continuity plans. Compliance program reviews will also assess whether the policies and procedures are sufficient to support compliance with advisers’ fiduciary obligations.
- Focus on compliance policies and procedures as outlined in the Compliance Rule under the Investment Advisers Act of 1940 (Advisers Act)(2), which includes processes to value client holdings and assess fees based on those valuations.
- Focus on valuation assessments regarding advisers’ recommendations to invest in illiquid or difficult to value assets, such as commercial real-estate or private placements.
Examinations of Investment Advisers to Private Funds
Advisers to private funds remain a significant portion of the SEC-registered investment adviser population. The Division will continue to focus on advisers to private funds and prioritize specific topics, such as:
- The portfolio management risks present when there is exposure to recent market volatility and higher interest rates. This may include private funds experiencing poor performance, significant withdrawals and valuation issues, and private funds with more leverage and illiquid assets.
- Accurate calculation and allocation of private fund fees and expenses (both fund-level and investment-level), including valuation of illiquid assets, calculation of post-commitment period management fees, adequacy of disclosures, and potential offsetting of such fees and expenses.
Investment Companies
The Division continues to prioritize examinations of registered investment companies, including mutual funds and ETFs, due to their importance to retail investors, particularly those saving for retirement.
- The Division will review registered investment company valuation practices, particularly for those addressing fair valuation practices (e.g., implementing board oversight duties, setting recordkeeping and reporting requirements, and overseeing valuation designees), and, as applicable, will assess the effectiveness of registered investment companies’ derivatives risk management and liquidity risk management programs.
- Derivatives risk management assessments to review whether registered investment companies as well as business development companies have adopted and implemented written policies and procedures reasonably designed to prevent violations of the Commission’s fund derivatives rule (Investment Company Act Rule 18f-4). Review of compliance with the derivatives rule may include review of the adoption and implementation of a derivatives risk management program, board oversight, and whether disclosures concerning the registered investment companies or business development companies use of derivatives are incomplete, inaccurate or potentially misleading. Examinations may also cover the associated registered investment companies’ or business development companies’ procedures for, and oversight of, derivative valuations.
Crypto Assets and Emerging Financial Technology
Given the continued volatility of, and activity around, the crypto asset markets, the Division will continue to monitor and, when appropriate, conduct examinations of registrants.
- Examinations of registrants will focus on the offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto assets or related products. Specifically, reviewing whether such registrants involved with crypto assets: (1) meet and follow their respective standards of conduct when recommending or advising customers and clients regarding crypto assets, with a focus on an initial and ongoing understanding of the products, to the extent required by the applicable standard of conduct, particularly when the investors are retail-based (including older investors) and investments involve retirement assets; and (2) routinely review, update, and enhance their compliance practices (including crypto asset wallet reviews, custody practices, Bank Secrecy Act (BSA) compliance reviews, and valuation procedures), risk disclosures, and operational resiliency practices (i.e., data integrity and business continuity plans), if required.
How Houlihan Capital Can Help:
Houlihan Capital can help with the valuation process, including reviewing your valuation policy and with the process of determining fair value of your illiquid investments. The firm has extensive experience in providing objective, independent and defensible opinions of value that meet accounting and regulatory requirements. Houlihan Capital is SOC-compliant, a Financial Industry Regulatory Authority (FINRA) and SIPC member and committed to the highest levels of professional ethics and standards.
For questions regarding this summary or valuation inquiries, please contact:
Daniel Sill
Vice President
dsill@houlihancapital.com
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(1) https://www.sec.gov/files/2024-exam-priorities.pdf
(2) https://www.sec.gov/rules/2003/12/compliance-programs-investment-companies-and-investment-advisers
