Mutual Fund Foreign Holdings Could Be Mispriced – SEC Official

Douglas Scheidt, chief counsel of the SEC’s division of investment, told Bloomberg that the SEC is expected to caution US mutual funds that they can’t always rely on market quotes to value a stock traded on a foreign exchange.  Instead, they might have to price the securities after evaluating their fair value, Scheidt said in the interview.

Time Can Be Money

As an example, since Japan is 14 hours ahead of Eastern Standard Time and US funds calculate their net asset value at about 4 p.m., EST, their Japanese holdings could have gone for more than a half a day without being updated.  During that gap any number of significant market events could have transpired that could drive the underlying stock prices significantly higher or lower.

Under current SEC standards, funds that don’t correct values in such cases could be charged with miscalculating net asset value (NAV), violating pricing provisions in the Investment Company Act of 1940.  If the funds knowingly use inaccurate prices they could be charged with securities fraud.

Guidelines On the Way

The SEC expects to release guidelines that outline methods funds can use to put fair value on their international holdings within the next ten days, according to the report.

As of January, 962 U.S. registered funds said they invest primarily in overseas stocks and bonds, according to the Investment Company Institute, with $540 billion in assets, according to Bloomberg.