The Securities and Exchange Commission is in the midst of conducting “presence exams” of investment advisers to private funds that recently registered with the SEC. This is part of a two-year initiative—started in October 2012—designed to examine five areas the SEC sees as “high-risk.” Valuation is one of those high-risk areas (the others are marketing, portfolio management, conflicts of interest, and safety of client assets).

Watch out: During a presence exam, the SEC will interview the personnel responsible for implementing valuation policies and procedures, and that’s when the big trouble can start. “The number-one trip-up is when the different people involved are not all on the same page with respect to the valuation policies,” said Craig Ter Boss (Eisner Amper), speaking at the recent Current Topics in Business Valuation conference presented by the New York City chapter of the ASA. “If one person has a very different story than someone else, it’s likely that the SEC will issue a deficiency notice.” Therefore, everyone—at all levels—needs to be consistent when it comes to the fund’s valuation policies and procedures.

The SEC has conducted approximately 250 audits and is within reach of its goal of visiting 25% of the firms during the course of this initiative, according to Ter Boss. He also pointed out that the SEC has issued deficiency letters in about half of the exams it has conducted.