The Securities and Exchange Commission has made valuation such a priority that for the first time ever, it included a dedicated panel on the topic at its national outreach seminar earlier this year.
Speaking before a room full of industry compliance professionals and lawyers, SEC officials said they wanted adequate documentation on how marks were being calculated, and why certain assumptions were being made during the valuation process.
That seems like an obvious duty for the chief financial officer, or whoever it is that chairs the valuation committee. But there’s a clear role for the CCO here too. Compliance officers say their main job during the valuation process is that of an observer – checking that the valuation policy is being rigorously followed. And when different inputs, methodologies or assumptions are used to value a portfolio company from one period to the next, it’s their job to ask why, and to challenge responses that don’t provide enough justification for the changes made. Some even play the role of devil’s advocate, by contesting a mark when there’s too much consensus or not enough conversation about the company’s future prospects.
Others stress that their key responsibility is to keep investor relations and marketing staff far away from the valuation process (for obvious reasons related to conflicts of interest).
But either way, one thing CCOs say they’re unsure about is exactly how much of all this needs to be documented.
On the one hand, there needs to be some evidence that they have been asking the right questions and keeping the right people away from the valuation committee. On the other hand, the more documentation there is, the more chance of the SEC finding something wrong. Documenting every detail of the discussion that takes place during the valuation committee leaves the entire process open to an unprecedented level of scrutiny. It also throws up a consistency challenge: not every discussion about a particular mark will result in pages-worth of exposition, and that may make it seem as though some estimates were not given equal consideration.
There’s no easy solution here. But a number of CCOs tells us that in order to err on the side of caution, their records of valuation committee meetings will only include the highlights. And if the SEC wants to see more information about particular marks, they say, you should be ready to show all the data and projections supplied by the deal team for use during the valuation process. If a mark is moved significantly up or down, these papers should include a more detailed explanation of why.
It's still not entirely clear what the SEC expects of CCOs during the valuation process. But leaving a paper trail on any significant valuation movements – that can be produced on request – is fast becoming an established best practice.