Investment funds use actual trading market prices to value their portfolio investments where possible and “fair valuations” (estimated values) when actual market prices are not available. The methods used to “fair value” portfolios recently have come under scrutiny. SEC inquiries and enforcement actions and shareholder lawsuits have revealed significant problems in the ways in which fair valuations of the portfolios of investment companies, as well as private investment funds are conducted. Congress and academic commentators are beginning to question fund valuation methods. Despite the importance of the issue to investors, there is little uniformity of practice among funds, no generally accepted means to conduct fair valuations, and little disclosure by funds of the methods by which fair valuations are conducted, who conducts them, when they are conducted, or how much fair valuation affects portfolio or unit valuations. The SEC has never conducted a public study or rulemaking, or issued a significant report on fair value practices. Instead, it is the stuff of a pair of short, 30‐year‐old SEC accounting bulletins and a few cryptic references in periodic revisions to Form N‐1A. Yet, in a letter the SEC staff sent to the Investment Company Institute (ICI) in April 2001, the SEC staff dramatically expanded the use of fair value pricing for use with securities for which actual trading market prices are available.
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