Valuation issues were a consistent theme during the February 8 and 9 Securities and Exchange Commission staff presentations at “The SEC Speaks in 2008” conference in Washington, DC. During the Division of Investment Management panel, Chief Counsel and Associate Director Douglas Scheidt announced that the staff was about to propose to the full Commission new interpretative guidance on fair value requirements and valuation procedures. This guidance would then be made available for public comment before being finalized. The goal of this guidance, Scheidt said, is to update and modernize prior SEC guidance and consolidate all of the SEC’s positions on valuation in one document.

During a later Investment Management Workshop session, the SEC staff highlighted the January 25 settlement the SEC reached with most of the remaining defendants in the Heartland Advisors, Inc. valuation case (Release Nos. 33-8884 & IC-28136). This case was said to illustrate the SEC's current concerns with fair valuation processes and the valuation of deteriorating securities positions. The case involved the “smoothing” of mutual fund value declines in the face of sharply deteriorated securities values. The staff stated that the fund manager’s decision to ignore indications of interest in the portfolio securities from third parties because the manager viewed them as “vulture funds” was a “big flag” to all involved in the fund’s valuation processes that there was something wrong with the portfolio’s carrying prices. Scheidt stated that a lesson to be taken from the Heartland case is, if a fund is going to ignore a sales price in the market between unrelated parties because the fund manager believes that it's a distressed sale, there must be something more than the manager’s opinion – some objective evidence – that it was a distressed sale.

During the Division of Markets and Trading panel, Director Erik Sirri noted that the sub-prime market disarray has prompted the Division to look more closely at the broker-dealer firm risk controls and the quality of internal pricing procedures and models being used when market pricing mechanisms have failed. The Accounting panel also highlighted fair valuation issues with Deputy Chief Accountant James Kroeker stressing that valuation is based on market participant expectations – “what can you get for [the security] today.”

 http://www.sec.gov/litigation/admin/2008/33-8884.pdf