A large mutual fund firm agreed to reimburse investors approximately $18 Million and pay a $3.9 Million fine for failing to properly remediate NAV pricing errors. According to the SEC, the respondent discovered that its fair valuation process under-valued certain illiquid securities over a 30-month period by failing to include required inputs. The firm attempted remediation by contributing $27 Million to the funds. However, the SEC argues that the contribution failed to examine the impact to every shareholder and ultimately understated the impact to investors. The SEC faults the firm for failing to follow its own fair valuation and NAV error correction policies in violation of the Advisers Act and the Investment Company Act.
OUR TAKE: There is no easy way to correct NAVs over an extended period of time. Re-processing trades is expensive and time-consuming and can lead to fairly significant reimbursement checks. However, trying to shortcut the remediation only leads to bigger problems, such as public enforcement actions. The compliance lesson is to work very diligently on the fair valuation process.