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SEC Will Issue Further Guidance on Valuation

WASHINGTON, D.C. - The SEC is planning to issue additional guidance to the fund industry sometime before April on securities valuations, said Douglas Scheidt, chief counsel for the SEC's division of investment management.

The guidance will amplify what was covered in a letter Scheidt sent to the Investment Company Institute, the industry trade association in Washington, D.C., in December 1999, he said. That letter outlined specific circumstances in which a fund must use fair value prices instead of market prices, how those prices should be determined and who is in charge of establishing and overseeing the prices, he said.

"The letter didn't attempt to cover the universe of questions that arise with respect to fair value," he said. "In fact, it was intended to come into play in connection with the possibility of Y2K problems. We thought that in the event of widespread Y2K problems, there might be a lot of fair valuation issues."

The upcoming guidance, to be provided in several letters to the ICI, is intended to address changes that have taken place in the industry since the early 1970's when the SEC last issued a comprehensive report on valuations, said Scheidt.

"We've had more time to think about it and there are a number of other areas that we would like to address to respond in part to the clamoring over the last number of years by many in the industry [who have said] the SEC has not provided much guidance on fair value since the late sixties and early seventies," he said. Scheidt spoke at a conference here last week on directors issues sponsored by the Mutual Fund Directors Education Council of Chicago.

One of the subjects to be addressed in the forthcoming guidance will be the pricing of foreign securities on the exchanges on which they are traded and a security's price at the time the fund that holds it closes, he said. In some cases, events that occur between the market's closing and the fund's valuation can have a significant effect on a security's value, Scheidt said.

"Any sort of event could occur between the two time periods that could affect the valuation of the security," he said.

Another possible topic in the letters could be block discounts, Scheidt said. There is a question as to whether funds should discount large holdings to anticipate the actual value of the securities in the event it has to sell a large portion of its holdings, he said.

"My personal position is that ... the law clearly would provide that the fund is required to use market quotations when they are readily available," he said. "There is nothing about that circumstance that would indicate that market quotations are not readily available or reliable. [Using anything other than a market valuation] would also penalize the fund for an event that is really not likely to occur."

The letters will also address directors' responsibilities in understanding their fund's pricing methodology, he said.

"We would highly recommend that the fund have procedures in place to periodically compare the fair values that they determine with actual sales prices [and] prices obtained from pricing services with any other reliable source of information," Scheidt said.

"I think it would benefit everyone if the commission ... expanded on what the good faith standard means, or what we think it means," he said. "The law, with respect to fair valuations, provides that share values are what the directors determine in their good faith."