Fund Directions - What Really Is The Board's Role In Valuation?

What Really Is The Board's Role In Valuation?

George SilfenValuation has always been a hot topic for boards and the current credit crisis has only heightened its importance. The industry, and especially directors, have been waiting on guidance from the Securities and Exchange Commission and it is expected a proposal will be made in the near future. An enforcement action from the Commission last month was viewed by some as a precursor of what might come (see related story, page 1). Fund Directions spoke with George Silfen, partner at Schulte, Roth & Zabel, last month about what a board's duty really entails when it comes to valuation.

1. What is required of a board by law?

Section 2(a)(41) and Rule 2a-4 of the 1940 Act specify that fund portfolio securities must be valued at their market price, and if market prices are not readily available, then the securities must be valued at "fair value," as determined in good faith by the board of the fund. The SEC and its staff have interpreted these provisions to require fund boards to maintain oversight over a fund's valuation process.

2. To what extent could the board delegate this responsibility?

There is uncertainty. As a result, there are varying practices among fund groups. It is expected that the much-anticipated impending SEC guidance would address the lack of uniformity in this area, although many boards prefer to retain the flexibility currently in practice.

Some boards delegate day-to-day fair value determinations to a pricing committee appointed by the board, but which ...

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What Really Is The Board's Role In Valuation?