Current Topics in Valuation

April 10, 2013

The Investment Company Act of 1940, as amended (the “1940 Act”) requires that mutual fund boards of directors (each a “Board”) act to monitor the conflicts of interest that may arise between an investment adviser and shareholders. While a Board typically functions in an oversight capacity, a Board has direct responsibility for determining the fair value of any security in a fund’s portfolio for which a market quotation is not readily available.

Valuation represents a critical responsibility of the Board as proper valuation of a fund’s portfolio securities is necessary for the calculation of the fund’s current net asset value (“NAV”) per share. Because the 1940 Act requires that mutual funds offer and redeem their securities at a price based on the fund’s current NAV, improperly determined valuations may cause adverse consequences (e.g., dilution of fund shares, creation of arbitrage opportunities, and in improperly computing asset-based fees). Proper valuation of portfolio securities ensures that all transacting fund shareholders pay or receive a price that represents their proportionate share of the fund’s portfolio.

Recent regulatory attention, coupled with little regulatory guidance and a challenging market environment, has resulted in increased attention to the valuation process. It is essential that Boards understand the legal standards and potential problems in this area. To that end this outline summarizes the: (i) applicable statutory requirements; (ii) applicable accounting and Securities and Exchange Commission releases and guidance; and (iii) regulatory actions involving valuation.

To keep reading, download the full outline.