EVALUATING THE EVALUATORS: NEW(-ish) GUIDANCE ON PRICING FROM THE - PowerPoint PPT Presentation

EVALUATING THE EVALUATORS: NEW(-ish) GUIDANCE ON PRICING FROM THE SEC Mutual Fund Directors Forum Webinar Series April 15, 2015 Presented by Stuart H. Coleman and Robert E. Plaze Stroock & Stroock & Lavan LLP

SECURITY PURCHASED – WHAT NOW? Basic Pricing Process Level 1 Level 2 Level 3 Readily Available Foreign Securities RAMP Board or Board Delegation, with Board Market Prices Adjustment Committee Prices "Embracing" the Price ("RAMP") Evaluated Prices: (When?) Not a market price • Standing alone, not • Understand process • a fair value Confirmatory testing • Can be/should be • Board Establishes thought of as a a BAM board approved methodology ("BAM") If a BAM: Implementation can be delegated • to a third-party Subject to due diligence* • Confirmatory testing • Continued skepticism (no setting • and forgetting) ________________________ * See next page 1

ELEMENTS OF DUE DILIGENCE OF A PRICING SERVICE  Reasonable reliance on third-parties Fund CCO • Adviser-related personnel (e.g., accounting and legal departments) •  Pricing service presentation Qualifications • Personnel • Financial condition • Process • Inputs • Methods • Models • Assumptions • "Deep dive" analyses • Challenge process • Discuss weaknesses • Confirmatory testing • SSAE 16 • 2

60-DAY PAPER  ASR 219: Fund directors may, in good faith, determine that the fair value of such debt • securities is their amortized cost value "unless the particular circumstances dictate otherwise."  1999 Staff Letter to ICI: "Particular circumstances" means an "impairment to the creditworthiness of • the issuers or other factors vitiated the accuracy of such amortized cost valuations." 3

60-DAY PAPER  2014 SEC Release: Only when a fund can reasonably conclude each time it prices a portfolio • security that the amortized cost value is approximately the same as its market- based value Fund should have readily available market-based data to assist it in monitoring • any deviations Intraday pricing • Fund may rely on the last obtained market-based data to assist it when valuing its • portfolio securities using amortized cost 4

IMPLICATIONS  Requires all funds to "shadow price" 60-day paper valued at amortized cost and to move to market-based valuation if the amortized cost value is no longer "approximately the same."  Construct not unlike the one that money market funds have had to follow under Rule 2a-7, except– Security-by-security determination; and • No guidance on the maximum amount of allowable deviation. • 5

IMPLICATIONS  Will funds continue to use amortized cost for 60-day paper? Bond and Equity Funds • FNAV Money Market Funds • SNAV Money Market Funds • 6