Month: March 2012

Compliance Bits and Pieces for March 2

These are some stories that recently caught my attention:

Behind the Crackdown on Insider Trading by Peter J. Henning in the NYtimes.com’s DealBook

One reason prosecutors have pursued it is the explosive growth of hedge funds and investment advisory firms, which trade billions of dollars worth of securities and have a voracious appetite for information about companies. The investment horizon for some firms can measured in hours or days, not years, and rapid-fire trading of large volumes of securities has become more of the norm as they try to squeeze out the last little bit of profit. Any informational advantage can mean enormous gains, and the pressure to perform is relentless, so trading on inside information is a short step for some.

Blackstone dominates 2011 PERE Awards

The flurry of investment and fundraising activity by The Blackstone Group last year has convinced the private equity real estate industry to vote the New York-based private equity and real estate titan to eight wins in the 2011 Global PERE Awards. Other winners include CBRE, Fortress and APG.

This 8-Word Social Media Policy Could Save Your Job by David Coursey in Forbes.com

Don’t lie, don’t cheat, don’t steal, don’t reveal.

Legislative Package Combines Financial Services Committee Bills into JOBS Act

The JOBS Act is designed to help startups and entrepreneurs get off the ground, access investors and create jobs. These initiatives are supported by bipartisan members on both sides of the Capitol, as well as the President’s Jobs Council and the business community.

  • H.R. 3606: Reopening American Capital Markets to Emerging Growth Companies Act
  • H.R. 2940, the Access To Capital For Job Creators Act
  • H.R. 1070, the Small Company Capital Formation Act
  • H.R. 2167, the Private Company Flexibility and Growth Act
  • H.R. 4088, the Capital Expansion Act
  • H.R. 2930, the Entrepreneur Access To Capital Act

[March 1 Was] the Deadline for MA Data Privacy Law  by John H. Lacey in Massachusetts Data Privacy law Blog

On March 1, 2010, two years ago, the regulations associated with the Massachusetts Data Privacy Law went into effect. The regulations, found at 201 CMR 17, require business who possess “Personal Information” (PI) of Massachusetts’ residents to protect that data in fairly specific ways. Arguably, the most important aspect of the regulations was the requirement that all businesses have a “Written Information Security Program” or WISP. …

March 1, 2012 is the deadline for those businesses who possess “PI” to address any third-party contracts where the third-party possesses or otherwise maintains PI on behalf of the business.

SEC Releases Risk Alert on Unauthorized Trading

The Risk Alert issued by the agency’s Office of Compliance Inspections and Examinations (OCIE) notes that although broker-dealers and investment advisers are subject to different regulatory requirements, both face similar risks of financial and reputational losses arising from unauthorized trading.

Valuations, Private Equity, and the SEC

The SEC has been poking around valuations for a while. First it was from the chaos of the 2008 financial crisis. The sudden illiquidity and drop in prices left many scratching their heads about the proper valuations for their assets.

That was the main charge against the Bear Stearns hedge fund managers. The Justice Department and the SEC brought parallel criminal and civil charges against former Bear Stearns executives Ralph Cioffi and Matthew Tannin in 2008. They were accused of lying to investors about the health of their hedge funds. The problem was that they were holding mostly complex securities backed by subprime mortgages that were hard to value.

Valuations are always difficult with private equity funds because by definition most of the assets are private securities, with little or no market to determine price. The difficulty is offset by the result of the valuation. That is, there is very little. It’s rare that a private equity fund limited partner/investor can redeem its interest. Private equity limited partners commit their capital long term to the fund since the fund makes long term investments that take many years to realize.

A private equity fund investor can be happy that the fund is performing well or be disappointed that the the fund is under-performing based on valuations. Either way, they are largely stuck as investor. But that’s okay because the investors true returns come when the investment is realized, not when there is a valuation.

There is some opportunity for malfeasance. Marketing would be the weak spot. A private equity fund manager might be inclined to overstate valuations on unrealized investments to make their track record look better when raising money for a new fund.

Federal regulators and the Massachusetts attorney general are investigating whether a private equity fund that was part of Oppenheimer Holdings Inc. overstated the value of one of its holdings. The result would be to make it look like the fund was performing better than it actually was.

According to the Wall Street Journal, the fund manager place a value of $9.3 million on an investment. Some other trading on that investment indicated a value of only $2 million, and an intermediary placed the value at $6 million. According to the Boston Globe, the result was to set the interim performance of the fund at 38 percent instead of a loss of 6.3 percent. I assume that the investigators are claiming that the fund manager used those inflated valuations to lure investors.

Valuations have clearly been a target for securities regulators for several years. The SEC sweep letter sent to several private equity firms was just a continuation of this investigative objective.

Part of the business model of private equity is that they are able to better value companies and re-structure them for success. That means that valuations of their underlying assets are going to vary from those of other firms and appraisers.

The key is documenting your approach and then documenting that you followed that approach.

Sources:

Image is Measuring by Jonathan Khoo