SEC Proposes Modernization Of Investment Adviser Custody Rule

Mondaq Business Briefing, October, 2002

During the course of recent investment adviser inspections conducted by the Securities and Exchange Commission ("SEC"), managers of private investment funds have been queried on methods used to price illiquid positions in a fund's portfolio. Examiners have pointed out that inappropriate pricing of portfolio positions could, when positions are overpriced, unfairly benefit a withdrawing investor and the portfolio manager receiving performance-based compensation to the detriment of investors electing not to withdraw or could, when positions are underpriced, unfairly dilute existing investors when new investors are admitted to the fund. Although issued in the context registered funds, SEC examiners have referred hedge fund managers to two no-action letters that provide some...