In the adopting release for the recent money market fund rule amendments, the SEC provided guidance for the valuation of short-term debt securities and thinly-traded holdings that is applicable to all registered investment companies and business development companies. The SEC’s guidance focused on two issues: amortized cost valuation and the use of evaluated prices from pricing services. The guidance states that, in order to use amortized cost to value a security (including debt securities with remaining maturities of 60 days or less), a fund must be able to reasonably conclude each time it makes a valuation determination that the amortized cost is approximately the same as the fair value of the security as determined using market-based factors. Accordingly, the guidance notes that it would not be appropriate to evaluate the use of amortized cost on just a quarterly basis or when preparing financial statements.
The SEC also reminded directors that a fund board “has a non-delegable responsibility to determine whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value for a fund’s portfolio security.” The SEC’s guidance includes the following matters for fund boards to consider with respect to the use of evaluated prices from a pricing service to assist in determining fair value:
- the inputs, methods, models and assumptions used by the pricing service to determine its evaluated prices, and how those inputs, methods, models and assumptions are affected (if at all) as market conditions change;
- the quality of the evaluated prices provided by the pricing service and the time at which the pricing service determines its evaluated prices as compared to when the fund calculates its net asset value; and
- the appropriateness of using evaluated prices provided by a pricing service as fair values for the fund’s portfolio securities where the board does not have a good faith basis for believing that the pricing service’s pricing methodologies produce evaluated prices that reflect what the fund could reasonably expect to obtain for the securities in a current sale under current market conditions.