Financial Services Alert

ICI Issues Paper on Mutual Fund Valuation Issues

The Investment Company Institute (the "ICI") published a paper (the "Paper") that updates its February 1997 publication on portfolio security valuation and liquidity determinations for registered investment companies. The Paper was prompted by subsequent guidance on valuation issues provided by the staff of the SEC's Division of Investment Management (Letters to Craig S. Tyle, dated December 8, 1999 and April 30, 2001 from Douglas Scheidt, Associate Director and Chief Counsel, Division of Investment Management (the "1999 and 2001 Letters")). The principal topics addressed in the Paper are regulatory requirements governing valuation, valuation of foreign and domestic portfolio securities in light of the 1999 and 2001 Letters and the responsibilities of fund boards in the valuation process.

The ICI identifies three important points in the 1999 and 2001 Letters concerning a fund board's duty to determine "in good faith" the fair value of portfolio securities for which market quotations are not readily available: (1) practical considerations limit the ability of a fund board to be involved on a daily basis in administering pricing procedures; (2) different funds with different boards may arrive at different prices for the same security consistent with the good faith standard due to the inherently subjective nature of the fair valuation process; and (3) well-considered, reasonable valuation procedures approved by a fund's board should be consistently applied and reviewed on a regular basis. Recognizing limitations on board availability and the specialized expertise often necessary to evaluate whether fair valuation should be undertaken and what fair value should be, the ICI suggests that fund boards may wish to adopt comprehensive pricing procedures to be implemented by fund management or a qualified third party. The ICI notes that, even with the adoption of pricing procedures, fund boards retain ongoing oversight responsibility for the valuation of fund assets and should regularly review the appropriateness of methods used in valuing portfolio securities.

SEC Releases Requirements for Arthur Andersen Auditing Clients

The SEC adopted rules and issued related orders to "assure a continuing and orderly flow of information to investors and the U.S. capital markets and to minimize any potential disruptions that may occur as a result of the indictment of Arthur Andersen LLP ["Andersen"]." The SEC's...