EVALUATING THE EVALUATORS: NEW(-ish) GUIDANCE ON PRICING FROM THE - - PowerPoint PPT Presentation

EVALUATING THE EVALUATORS: NEW(-ish) GUIDANCE ON PRICING FROM THE SEC

Mutual Fund Directors Forum Webinar Series

April 15, 2015 Presented by Stuart H. Coleman and Robert E. Plaze Stroock & Stroock & Lavan LLP

SECURITY PURCHASED – WHAT NOW? Basic Pricing Process Level 1 Level 2 Level 3

Readily Available Market Prices ("RAMP") Foreign Securities RAMP Adjustment

• Understand process
• Confirmatory testing

Evaluated Prices:

• Not a market price
• Standing alone, not

a fair value

• Can be/should be

thought of as a board approved methodology ("BAM") Board or Board Committee Prices Board Establishes a BAM Delegation, with Board "Embracing" the Price (When?) If a BAM:

• Implementation can be delegated

to a third-party

• Subject to due diligence*
• Confirmatory testing
• Continued skepticism (no setting

and forgetting)

________________________ * See next page

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• Reasonable reliance on third-parties
• Fund CCO
• Adviser-related personnel (e.g., accounting and legal departments)
• Pricing service presentation
• Qualifications
• Personnel
• Financial condition
• Process
• Inputs
• Methods
• Models
• Assumptions
• "Deep dive" analyses
• Challenge process
• Discuss weaknesses
• Confirmatory testing
• SSAE 16

ELEMENTS OF DUE DILIGENCE OF A PRICING SERVICE

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60-DAY PAPER

• ASR 219:
• Fund directors may, in good faith, determine that the fair value of such debt

securities is their amortized cost value "unless the particular circumstances dictate otherwise."

• 1999 Staff Letter to ICI:
• "Particular circumstances" means an "impairment to the creditworthiness of

the issuers or other factors vitiated the accuracy of such amortized cost valuations."

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60-DAY PAPER

• 2014 SEC Release:
• Only when a fund can reasonably conclude each time it prices a portfolio

security that the amortized cost value is approximately the same as its market- based value

• Fund should have readily available market-based data to assist it in monitoring

any deviations

• Intraday pricing
• Fund may rely on the last obtained market-based data to assist it when valuing its

portfolio securities using amortized cost

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IMPLICATIONS

• Requires all funds to "shadow price" 60-day paper valued at amortized

cost and to move to market-based valuation if the amortized cost value is no longer "approximately the same."

• Construct not unlike the one that money market funds have had to

follow under Rule 2a-7, except–

• Security-by-security determination; and
• No guidance on the maximum amount of allowable deviation.

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IMPLICATIONS

• Will funds continue to use amortized cost for 60-day paper?
• Bond and Equity Funds
• FNAV Money Market Funds
• SNAV Money Market Funds

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