By Anne Sherry, J.D.
The SEC filed a settled order against Sciens Diversified Managers, LLC, for compliance failures in the area of asset valuation. According to the order, Sciens advised private funds that primarily invest in assets that are difficult to value, but Sciens’ policies and procedures gave only minimal guidance. Sciens agreed to be censured and pay a $275,000 civil penalty (In the Matter of Sciens Investment Management, LLC, Release No. IA-6315, May 24, 2023).
Background. Most of Sciens’ U.S.-based advisory business involved providing discretionary investment management services to private partnerships, offshore funds, and other entities that primarily invest in private companies. Its largest private equity fund was Sciens Special Situations Master Fund Ltd. (“SSSMF”), accounting for more than half of Sciens’ total assets under management (either directly or indirectly through other private equity funds managed by Sciens).
Under SSSMF’s offering documents, Sciens was to charge two percent of net asset value as a management fee. The offering documents also described how NAV was to be calculated and that assets were to be valued in a manner that reflected the current fair market value. Virtually all of SSSMF’s portfolio investments were Level 3 assets for which market prices were not readily available and there were no significant observable inputs.
Policies and procedures. Despite GAAP and ASC provisions on fair value and Level 3 inputs, Sciens’ valuation policies did not provide sufficient guidance or parameters on how to value Level 3 investments. The only substantive guidance in its Compliance Manual relevant to Level 3 investments was that fair value is to be “based on available information and several non-exclusive factors which provide the best available estimate of a current market price that [Sciens] will take into consideration” and that Sciens would monitor developments affecting such assets to determine the continuing validity of the fair value using information sources “including news stories, financial wires, broker-dealer and other market contacts and market indices.” The manual did not mention techniques or methodologies applicable to Level 3 investments and lacked procedures designed to promote consistency and conflicts reduction.
While the Compliance Manual referred to the offering documents for the private equity funds and directed that valuation would be done in a manner consistent with the guidelines and requirements in the funds’ offering documents, those offering documents generally didn’t provide any further guidance on Level 3 investments. SSSMF’s offering documents said that the board and Sciens would establish valuation policies and procedures, but none were established beyond those in the Compliance Manual.
Because they were unable to obtain sufficient audit evidence, SSSMF’s auditors provided qualified opinions on SSSMF’s financial statements, putting Sciens on notice that its valuation procedures may have been insufficient. One auditor later withdrew even its qualified opinion, leading Sciens to write down SSSMF’s Level 3 portfolio by about $33 million.
Sanctions. Sciens agreed to retain an independent compliance consultant and report to the Commission. It was censured, ordered to cease and desist from future violations, and ordered to pay a civil penalty of $275,000.
This is Release No. IA-6315.