In the case of foreign and domestic securities, funds must evaluate each security to determine the reliability of market quotations considering the securitys trading volume, according to the letter. Also, funds must monitor events that occur after a foreign exchange has closed in order to determine whether those events could have a significant impact on the value of a particular security, according to the letter.
Because the closing price of securities traded on foreign exchanges may be several hours old at the time funds calculate their net asset values at the close of U.S. markets, funds need to be aware of events occurring in those markets that could impact the value of the security, according to the letter.
A fund that frequently uses fair value pricing methodologies should consider disclosing its policies and procedures as well as the effects of fair value pricing in shareholder reports, according to the letter.
'Such disclosure may result in fewer shareholder complaints and also may discourage arbitrage activity,' the letter said.
The letter also clarifies a board of directors 'good faith' requirement that was raised in the 1999 letter. The SEC considers good faith as the determination to use fair value based on, 'the result of a sincere and honest assessment of the amount that the fund might reasonably expect to receive for a security upon its current sale, based upon all of the appropriate factors that are available to the fund,' according to the letter.
Good faith also requires the board to continuously review a funds pricing methodology, the letter said.