A valuation firm was censured and fined and its principal was fined and barred for misleading its investment firm client about how it valued European options. The valuation firm represented that it valued the options using independent data and Black-Scholes modeling. The SEC charges that the firm merely used the estimated valuations provided by the client and then applied formulaic ranges. The SEC asserts that the valuation firm acted as an unregistered investment adviser because it “provided advice…about the value of securities…in exchange for compensation.” Following therefrom, the SEC charged violations of Section 206(2) of the Advisers Act, which prohibits investment advisers form engaging in any fraudulent activity.
OUR TAKE: The SEC uses a tortured reading of the definition of “investment adviser” to hold accountable a third party valuation agent responsible for mis-pricing a fund. All service providers should beware that the SEC will seek to assert its authority through broad use of the securities laws.