(Opalesque) A recent action where the SEC focused on the presumably conservative undervaluation of assets suggests that it is more than willing to use valuation as a hook to deter “smoothing” of returns. As we previously noted, while the SEC consistently announces that valuation is a “key area of focus,” it is uncommon for regulators to second guess valuation determinations in the absence of other potential violations. However, failure to adhere to stated valuation policies/procedures is one situation that may lead to heightened regulatory exposure and disputes.
Earlier this month, the SEC announced a settled action against Deer Park Road Management Company, LP, a hedge fund that focuses on distressed securities (in particular, pre-2008 residential mortgage-backed securities). The SEC’s order focused on two technical violations:
