It has not taken the SEC long to make sure the mutual fund industry is following the practices outlined in a letter the agency issued in December.

SEC auditors are conducting examinations of the industry's bank loan funds to make sure the funds are valuing their assets in compliance with the agency's Dec. 8 letter on valuation, according to agency officials and industry lawyers. Examiners are interviewing fund personnel and reviewing fund documents to make sure that the loans held in bank loan, or so-called floating rate funds, are being valued appropriately, industry lawyers said.

The exams are intended to make sure that bank loan funds are complying with the guidelines the SEC provided on valuing securities in December, said Lori Richards, director of the SEC's office of compliance inspections and examinations. Richards declined to identify what the SEC had found in its exams so far.

Bank loan or floating-rate loan funds are portfolios that invest in loans that banks make to corporate lenders. The bank loans generally are secured, making bank loan funds attractive to investors seeking relatively conservative investments. But, the funds offer some interest-rate protection because the bank loans in which the funds invest usually reset their interest rate when the loans' benchmark, such as the prime rate, rises.

There are 11 floating rate funds with approximately $22 billion in assets under management, according to Wiesenberger Thomson Financial of Rockville, Md. Wiesenberger is owned by Thomson Financial, the publisher of Mutual Fund Market News.

In December, Douglas Scheidt, associate director of the SEC, sent a letter to the Investment Company Institute outlining how funds should deal with difficult valuation issues. The SEC issued the letter in part as a guide in the event funds had trouble pricing securities in foreign markets because of computer breakdowns associated with the transition to the year 2000.

The letter made no explicit mention of bank loan funds, but Scheidt told the ICI that funds should value their securities based on what those securities could generate in a current sale. Prior to December, some bank loan funds had been valuing their holdings based on their cost. Scheidt reiterated the SEC's view at an industry conference last month, saying funds must value illiquid securities based on what the securities would generate in a current sale, not their historical or potential future value.

SEC examiners in their current examinations are checking to make sure funds are using current market value for pricing securities, said Roberta R. W. Kameda, senior corporate counsel at the Franklin Templeton Group of Funds of San Mateo, Calif. SEC examiners are asking fund executives what steps they are taking to confirm the valuations they are assigning to securities, said Kameda, at a recent industry conference.

The examiners also want to see to what extent the pricing of bank loan funds is being done independent of the fund's portfolio manager, he said.

In the past, there has not been much liquidity in trading bank loans, said Paul Kraft, an accountant in the Boston office of Deloitte & Touche LLP of New York. Because there was no readily available market value for the loans, funds frequently were forced to assess the loans' value and establish a price for them, Kraft said. Bank loan funds frequently used the purchase price of the loans as a means to set their fair value, he said.

Liquidity in the trading of bank loans has increased recently, making it easier for funds to use market value as a method of pricing the loans, Kraft and fund lawyers said.

When there is no established market, pricing gets trickier because the funds are forced to use fair value pricing. That is more art than science, according to fund accountants and lawyers. Scheidt, in the Dec. 8 letter in fact, acknowledged that different fund boards using fair value pricing could arrive at different prices for the same security.

"There is no one perfect fair value formula," Kameda said.

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