Eight former directors of five mutual funds recently settled SEC charges that they failed to satisfy their fair valuation obligations under the 1940 Act. No monetary penalties were assessed, but the former directors agreed to “cease and desist” from future violations (a relatively easy task, since the funds are no longer in operation).
The SEC’s order provided it with the opportunity once again to state its views about mutual fund directors’ responsibilities to fair value securities. Among other things, the SEC criticized the directors for not specifying valuation methodologies or continuously reviewing those methodologies. They also chided the directors for their failure to provide “meaningful substantive guidance” on how fair valuation determinations were reached. The SEC didn’t save its criticism for the board: the independent auditors, outside counsel and fund accountants also took some heat for their contributions to the board’s failures.
The SEC staff says that fair valuation guidance continues to be a priority, and we hope that the staff will provide the opportunity for public comment before they implement that guidance. In the meantime, however, it seems that the SEC is regulating by enforcement. Funds, their boards and their service providers should carefully evaluate their policies in light of the “guidance” embedded in this order.