CHICAGO - The SEC will be focusing on issues concerning independent directors, a new audit guide, a two percent decrease in capital gains taxes, international SEC examinations and proper valuation, according to SEC officials and industry executives at the ICI tax and accounting conference here last week.

Fair valuation is one of the SEC's current priorities, said Brian Bullard, assistant chief accountant in the division of investment management at the SEC.

As after-hours trading becomes more prevalent, after-hours prices will also become a major issue, said Merele May, vice president, fund accounting systems, at American Century Investments of Kansas City, Mo.

"Every day is a new adventure in valuation," she said. It is impossible to respond to every development, given the economic, social and political climate we operate in today, May said.

American Century monitors other markets even after the close of the U.S. markets to look for price discrepancies, she said.

Fair valuation of a fund's net asset value is becoming so much of a challenge, that the time may have come for the SEC to update its 30-year-old valuation rules, May said.

The SEC has taken note of stock markets in Europe and Asia which impose a trading freeze on particular stocks if they have moved sharply on a particular day, Bullard said. These clearly are best practices worth noting, he said.

One accounting practice that the SEC opposes but that the Federal Accounting Standards Board has wavered on is blockage, Bullard said. Blockage is when an investment company applies a discount or a premium to a stock it expects to move in either direction, Bullard said.

"We don't think it's appropriate to use blockage to discard a readily available market price," Bullard said. " Most people at the SEC agree. The only time you can move away from a readily available quote is if it's a thinly-traded stock."

The accounting standards board is also considering allowing fund companies to quote prices net of commissions, said Richard Grueter, a partner with PricewaterhouseCoopers of New York.

This proposal is of grave concern to the SEC, Bullard said.

"We don't want people to be able to manipulate performance based on the price they decide to pick," he said.

The SEC will release its new rules on independent directors in October, and they will take effect immediately, said Kenneth Robins, assistant chief accountant of the division of investment management at the SEC. The final version will probably stick to the SEC's original proposal that independent directors retain their own, independent counsel, he said.

"While the issue of independent legal counsel has been controversial, the staff still sees this as a significant aspect of the proposal," Robins said.

The SEC might allow funds to automatically hire independent auditors, rather than require shareholder votes for them, Robins said.

The SEC may also follow the lead of a number of stock exchanges which have begun requiring members of their boards to be financially literate, said Gifford Zimmerman, vice president and associate general counsel at Nuveen Investments of Chicago.

It is also becoming more common for funds to have formal audit committee charters spelling out tasks and roles, said David Sturms, a partner with Vedder, Price, Kaufman & Kammholz of Washington.

"Every fund should have all forms of these documents in place," said Sturms. "They make sense, plus it is becoming an evolving best practice. If you get involved in litigation, you can not only say you met the technical requirements of the law, but that you exceeded it through best practices as well."

The accounting standards board will probably finish its review of the investment company audit guide within the next few weeks, said Alan Latshaw, a partner with Arthur Andersen of New York.

The new audit guide will allow two new affiliate and sponsor write-offs, Latshaw said. First, an investment adviser that bails out a fund will be able to deduct the expense, Latshaw said. Investment companies will also be allowed to write off penalties paid for violations of investment policies, Latshaw said.

The SEC believes that these are valid new accounting rules, said John Capone, chief accountant of the division of investment management at the SEC. However, the commission has not yet determined whether it will require investment companies to adhere to the new audit guide, he said.

There is another development in Washington that could have a big impact on fund accounting, said Robert Sherwood, a partner with PricewaterhouseCoopers of New York. The Clinton Administration's 2001 budget proposal would change the current practice of recording all redemptions to reduce taxable income so that only net redemptions could be deducted, Sherwood said.

"This would be a significant change," Sherwood said.

The IRS does not look favorably on funds deducting 12b-1 fee expenses or broker commissions, although it still allows these tax deductions to be made, said William Paul, a partner with Covington & Burling of Washington.

The IRS also does not like the fact that firms deduct fund start-up expenses, because these costs have future benefits, Paul said.

One development that could give the mutual fund industry a boost is the Taxpayer Relief Act of 1997, which will take effect on Jan. 1, 2001, Sherwood said. This will reduce short-term capital gains taxes from 10 percent to eight percent and long-term capital gains taxes from 20 percent to 18 percent, Sherwood said.

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