Originally published in CorporateLiveWire on February 21, 2013.

The last few years have witnessed tectonic shifts in U.S. laws and regulations that effect the management and operations of hedge funds, private equity funds and other forms of private funds. In one instance (in 2010) the U.S. Congress forced a huge swath of the private funds industry into a regulatory bear hug, and in another instance (in 2012) the U.S. Congress ostensibly granted the private funds industry heretofore unimaginable maneuverability in their fundraising activities in the U.S. by permitting general solicitation of investors via public advertising. Although these changes developed contemporaneous with even more significant changes to the regulatory landscape of the financial sector at large following the 2007 financial crisis, for the private funds industry these changes are unprecedented in nature and disorientating in effect.

The excited tone of more recent headlines heralding the Congress’s voiding the prohibition of general solicitations for private issuers, however, may create a trap for the unwary. Not only does the Securities and Exchange Commission (SEC) appear reluctant to usher in a new era of unfettered advertising for private funds, the SEC staff has grown increasingly critical of valuation practices of managers of private funds, which directly impacts their most important marketing attribute: investment performance. The SEC staff, by word and deed, is targeting valuations and performance presentation in exams of investment advisory firms at a heightened rate. In this brave new world of U.S. regulation of private funds, investment managers should be vigilant, in particular, about the valuation of illiquid securities.