Donohue Urges Fund Directors to Focus on Fair Value

Speaking before the Investment Company Directors Conference last week, Andrew J. Donohue, director of the Securities and Exchange Commission’s investment management division, called on directors to be more meticulous about making sure fund investments are properly valued. He pointed to the subprime crisis as evidence of this importance.

“Funds must adopt policies and procedures that monitor for circumstances that may necessitate the use of fair value prices, [such as] when market quotations are no longer reliable for a particular security,” Donohue said. If fair valuation is needed, the fund should establish a methodology for determining a proxy price and regularly review the accuracy of this methodology, he said.

Directors should also determine whether the investments in a fund provide adequate liquidity for the manager. “If you are having difficulty pricing a security, or if securities pose liquidity challenges, query whether those securities belong in a mutual fund,” Donohue advised.

And should the SEC have granted an exemptive relief to a fund, the board must “be actively involved in overseeing the fund’s operation,” Donohue said.

Finally, he called on directors to ensure that if a fund accepts research through soft dollars that it is still vigilant about achieving best execution.