Add fair pricing to the list of issues that fund firms should be worrying about. Doug Scheidt, general counsel of the Division of Investment Management, hit fund lawyers and accounts with the issue on Tuesday by releasing the results of an SEC study into the issue to a standing-room-only crowd at the ICI's annual Mutual Funds and Investment Management meeting in Palm Desert, California.
The SEC had asked 219 fund complexes about their use of fair value methods in 960 funds holding at least half of their assets in non-US securities. Scheidt told attendees that the results are "not pretty."
"It's one thing to have policies and procedures. It's another thing to use them," he noted.
The survey found that many funds are not using them. More than half of the funds had used a fair value pricing method fewer than five times in the last 20 months, said Scheidt. One third of the funds -- 277 in all -- had not used fair-value pricing even once.
The SEC survey also found that dilution is a real problem for the funds and that it is likely that arbitrageurs are targeting a significant minority of these funds. Nearly one in six funds reported turnover of more than 200 percent. Scheidt also reported that roughly 15 percent of the firms looked at reported a 2 percent dilution in their NAV because of arbitrage. Meanwhile, two percent of funds saw dilution exceed the two percent amount.
Because of the findings, Scheidt said that the commission is looking at whether it should offer further guidance on the matter.
The panel discussion on the issue quickly devolved into questioning the details of how and when funds should implement a fair-pricing method to value portfolio holdings, and to what extent fund directors should be involved in the process.
For the most part, Scheidt seemed agnostic on the issues being debated at the panel. When asked whether the SEC would prefer a top-down or bottom-up valuation process, for example, he answered that the regulations governing funds to not specify any types of method funds should use. He also let slip his own opinion on the issue, though.
Scheidt said he has his doubts about top-down methods, but he also believes that they can work well when used in conjunction with other methods.
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