In yet another case of negligence in regulatory internal controls, the Securities and Exchange Commission (SEC) sanctioned GLG Partners L.P., a UK-based hedge fund adviser, and its US-based holding company, GLG Partners Inc., with failure to implement the “proper controls” that would have prevented overvaluation of fund assets and inflated fee revenues among both firms. In a press release about the charges, the SEC detailed how an investigation and sanctions lead to GLG Partners L.P. and GLG Partners Inc. agreeing to pay close to $9 million in consequence of the repercussions suffered by investors of the funds involved. The firms have been ordered to retain an independent compliance consultant to draft new valuation policies and procedures and to test the effectiveness of such once implemented.
Specifically, the SEC found violations of Sections 13(a), 13(b)(2)(a), and 13(b)(2)(b), as well as Rules 12b-20, 13a-1, 13a-11, and 13a-13, of the Securities Exchange Act of 1934 by GLG Partners L.P., which were caused by GLG Partners Inc. The GLG firms also controlled a private fund, GLG Emerging Markets Special Assets 1 Fund, and it was found that the lack of internal control efforts between 2008 and 2010 caused an overvaluation in a part of the fund’s assets devoted to a 25 percent equity stake in a coal mining company. This overvaluation led to inflation of fees for both firms, while GLG Partners Inc. over-reported its assets under management (AUM) to the SEC. The policies and procedures (P&P) of GLG required that the coal mining company’s assets were to be evaluated monthly by an independent pricing committee, a measure which became confused in delegation among fund management and financial personnel internally, therefore preventing the timely release of information to the pricing committee for monthly review.
This case highlights the immense importance of not only diligent implementation of appropriate policies and procedures regarding valuation, but also the more essential issue of implementing internal controls to help ensure such policies and procedures are properly administered.
For more information, or for assistance on other compliance topics, please contact us at (619) 278-0020 to schedule a consultation.
GENERAL DISCLAIMER: Information contained within this blog does not create a business-client relationship, and none of the content of this blog can be deemed to be consultive business advice.