Advisers Can Borrow From Banking's Model Risk Playbook

Law360 (August 13, 2019, 4:03 PM EDT) -- In April 2019, the U.S. Securities and Exchange Commission fined Prosper Funding LLC, a privately held marketplace lender, $3 million for violating Section 17(a)(2) of the Securities Act of 1933. The violation resulted from an error in the quantitative model Prosper used to generate performance data, which led it to miscalculate and materially overstate the annualized net returns it reported to more than 30,000 investors.

Prosper failed to identify and correct the error, even though its employees acknowledged they no longer understood how the underlying code that calculated the annualized net returns operated, and investors complained about possible errors in their...

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