On June 13, 2013, eight former directors of five mutual funds agreed to settle SEC charges that they failed to satisfy their fair valuation responsibilities under federal securities laws. No fines or penalties were assessed against the directors. In contrast, the funds’ investment adviser and others previously agreed to pay $200 million to settle related charges.
The SEC’s order makes clear that fund directors bear the responsibility to fair value securities for which market quotations are not readily available. Among other things, this may include:
- specifying a methodology for fair valuing various types of portfolio securities;
- continuously reviewing how portfolio securities are being valued;
- providing “meaningful substantive guidance” to any committee charged with determining fair value; and
- understanding how fair values are actually being determined.
In short, fund boards need to ensure that fair valuation procedures provide not only general guidance and the factors to be considered in making valuation decisions but also “meaningful methodologies or other specific direction on how to make fair value determinations for specific portfolio assets or classes of assets.”
In addition to outlining its concerns with the directors’ actions, the SEC’s order criticized the procedures employed by the fund accountants and the quality of the reports provided to the directors. The SEC also chided outside counsel to the directors in connection with their advice on adopting the funds’ valuation procedures and the funds’ independent auditors for advising the directors that the procedures are appropriate and reasonable.
Click here to read our alert about this order.