The SEC has sued the former members of the board of several closed-end and open-end registered investment companies. In short, the SEC alleges that the directors failed to properly fair value a majority of the funds’ holdings during an eight-month period in 2007.
The complaint is fact specific and should provide fund boards with some insight into how the SEC’s enforcement division will pursue cases against fund directors, and how the Division of Investment Management may be viewing directors’ fair valuation responsibilities.
The most significant issue presented in the complaint is to what extent a board can delegate its obligation to fair value securities for which no market value is readily available to an investment adviser or an administrator. It appears that the SEC’s view on that may be “to a much lesser extent that this board thought was appropriate.”
The challenge for board, of course, is that there is little recent guidance on how fund boards should approach their obligation to fair value certain portfolio securities. In fact, it’s been more than a decade since the staff issued any informal guidance on this topic, and significantly longer since any “formal” pronouncements have been made. In light of that, fund boards and their counsel should carefully review the complaint for hints about the SEC’s approach to this topic.
[EDITOR’S NOTE: The SEC subsequently announced a settlement in this case, see our June 14th post.]