February 23, 1994
TO: SEC RULES COMMITTEE NO. 18-94
RE: SEC SANCTIONS BDC DIRECTOR FOR FAILURE TO EVALUATE
PORTFOLIO SECURITIES
__________________________________________________________
The Securities and Exchange Commission recently sanctioned a director of
a business development company ("BDC") for violations related to the valuation
of the BDC's portfolio securities. A copy of the Commission's order is attached.
Section 13(g) of the Securities Exchange Act required the BDC to file
periodic reports on Forms 10-K and 10-Q, and in those reports the BDC was
required to list and value its portfolio securities according to Section
2(a)(41)(B) of the Investment Company Act and Rule 2a-4 thereunder. Since market
quotations of the BDC's portfolio securities were not readily available, Section
2(a)(41)(B)(ii) required that the BDC's board of directors determine the "fair
value" of its portfolio securities in "good faith".
The Commission found that the director had a statutory obligation (along
with the BDC's two other directors) to determine the fair value of the securities
in good faith. The Commission found that the director failed to meet those
responsibilities during fiscal year 1989 and the first three quarter of fiscal
year 1990 by not having any involvement in the valuation process. The BDC's
board of directors alledgedly did not meet during those two fiscal years and the
director did not review any materials relating to the portfolio securities. The
Commission found that during this period, the director's participation was
essentially limited to signing the BDC's annual report and certificates of
corporate resolution.
The Commission found that as a result of the director's failure to fulfill
her statutory obligation, the periodic reports filed by the BDC for those periods
were materially deficient and false and misleading, since they represented that
the board of directors was responsible for determining the fair value of the
BDC's portfolio securities, and since they materially overstated the value of the
BDC's portfolio securities, net income, assets, and shareholders equity.
The Commission found that the director willfully aided and abetted and
caused the BDC's violation of Section 13(a) of the Securities Exchange Act and
Rules 12b-20, 13a-1, and 13a-13 thereunder. Without admitting or denying the
Commission's findings, the director consented to a permanent bar from association
with any broker, dealer, investment adviser, or investment company, and to an
order to cease and desist from committing or causing any violation of those
provisions.
Thomas M. Selman
Assistant Counsel
Attachment