The SEC is expected to issue guidance soon on how mutual funds should value their securities, an issue of critical importance to the fund industry that the SEC has not systematically addressed in more than 25 years.

Paul Roye, director of the SEC's division of investment management, plans to offer fund executives and lawyers direction on when it is appropriate for funds to switch from using market prices to value securities to the so-called fair value method, according to industry lawyers and others familiar with Roye's current plans. The guidance also may discuss the role that mutual fund directors play in the valuation process, according to those familiar with the matter.

Roye is expected to outline his views in a letter to Craig Tyle, general counsel for the Investment Company Institute, according to those familiar with the matter. The letter could come as early as this week, those individuals said.

Roye declined to comment on the anticipated guidelines. The SEC staff has indicated that it may issue a letter on mutual fund valuation in the near future, said Chris Wloszczyna, an ICI spokesperson, in a statement. He declined further comment.

The SEC's plans come at a time when its guidelines could be of critical importance to the industry, particularly to those mutual funds that invest in emerging markets. There is some concern that foreign companies or, in some cases, foreign securities markets, may face disruption or short-term closings because of problems associated with the computer programming switch to the year 2000.

Roye, in a speech in October, was critical of some funds that invested in Taiwan securities for being too slow to switch from market to fair value pricing when an earthquake closed Taiwan markets for a week. Roye's letter is expected to put fund executives on notice that they should switch from market to fair value pricing when market disruptions make the accuracy of the most recent available market prices suspect, industry lawyers and others said.

Funds usually value the securities in their portfolios based on the securities' closing market prices. In instances where market prices are not available or are unreliable, federal securities laws require funds to assign a fair price to the securities based on their intrinsic value. How and when to do that is somewhat ambiguous, according to fund industry lawyers and accountants.

"It's an art, not a science," said Lawrence Friend, an accountant at PricewaterhouseCoopers of New York.

The primary guidance fund industry lawyers now have on valuation dates back to two SEC accounting pronouncements issued in 1969 and 1970, dealing with how to value restricted stock. Those so-called releases offer little in the way of guidance about how or when to switch to use fair value pricing for foreign securities, for example, when market prices appear unreliable or for derivatives that trade infrequently, industry lawyers said. An additional interpretive letter the SEC issued in 1981 about using fair value pricing for securities helps, but more guidance is needed, according to lawyers.

"In the area of fair pricing, any amount of guidance is good," said Barry Barbash, a lawyer in the Washington office of Shearman & Sterling of New York. "Industry members have been craving guidance for some time."

The issue of when and how to use fair value to price securities has been a pressing one for the industry in the past two years. The issue arose not only with the troubles in Taiwan, but also in August, when General American Life Insurance Company of St. Louis, Mo. was unable to meet requests to redeem the securities it had sold to money market funds, raising questions about the true value of those securities. The concerns were allayed after Metropolitan Life Insurance Co. of New York agreed to purchase General American.

And in October 1997, volatility in the securities markets here and abroad led some international funds to use fair value pricing for their securities while others used market value. The SEC examined the issue and concluded that arbitrageurs took advantage of pricing inefficiencies in funds that used market value.

The disparate practices among funds is one of the reasons that guidance on when to use fair value pricing for funds is important, said Richard Phillips, a lawyer in the Washington office of Kirkpatrick & Lockhart LLP of Pittsburgh, Pa.

"This is an area where there ought to be uniformity," Phillips said.

The issue of accurate valuations for securities is key to the fund industry, Phillips said. Fund net asset values are based on the values set on the securities in the fund's portfolio. Federal securities laws require that net asset values be accurate, Phillips said. Inaccurate net asset values are unfair to shareholders and attract hot money from arbitrageurs looking to move in and out of a fund, Phillips said. The fund industry has fought such short-term trading, saying it increases fund expenses and lowers returns.

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