S4:E6 | What Do You Mean, Valuation? | Compliance In Context

Welcome back to the Compliance in Context Podcast! On today’s show, we take a comprehensive look at the ever-important topic of valuation, why it’s such a key topic for firms and regulators, and the role that compliance can play in the process. In our Headlines section, we review a recent risk alert from the Division of Exams on the New Marketing Rule. And finally, we’ll wrap up today’s show with another installment of Outtakes, where a recent enforcement action and settlement highlights the importance of valuation and having the right policies and procedures in place.

Show

Headlines

• SEC Division of Examinations issued a Risk Alert discussing the new Marketing Rule

Interview with Tracy Abbott and Ted McCutcheon

• What is valuation?
• Why is valuation such a key issue in the investment management space?
• What are some best practices that firms can use in this space?
• How does the role of compliance fit into valuation? What should and shouldn’t be included in the CCO’s purview?
• What is the impact of bad data on valuation?
• How can firms build proper governance around valuation?
• The importance of making sure employees understand the rules around valuation

Outtakes

• SEC settlement with investment fund to resolve claims that the fund failed to adopt and implement necessary written policies and procedures related to the valuation of fund portfolio investments.
• Having the right process and policies and procedures in place can be just as important as avoiding violative conduct

Quotes

12:09 - “To get a little more specific, the improper valuation or valuation impacts directly the calculation of fees—what investors pay for the services. Valuation impacts performance advertising and reporting, which is a huge selling point for advisors. You know, valuation impacts the funds share sale price. Misvaluation or valuation problems…can result in private or regulatory liability for fraud, negligence, breach of fiduciary duty.” – Ted McCutcheon

14:14 – “The first thing you need to look at is, what kind of assets does your firm trade in, right? So is it level one assets, which is just stocks and bonds? Is it level two assets, which are difficult to valuate but there are still pricing services? Or are they level three assets which are entirely illiquid and very difficult to process? So, I think, from a risk-based approach, it’s really important to just dig right in. First, what is your firm’s business?” – Tracy Abbott

24:40 – “It really is absolutely critical. Even though, sometimes if your policies and procedures are too specific, you’re a little bit limited so it is really difficult to juggle. It really is a balancing act. Especially with some of those level three assets and illiquidity.” – Tracy Abbott