Administration December 3, 2005

SEC: Many Funds Still Not Doing 'Fair-Value' Pricing

March 24, 2004 (PLANSPONSOR.com) - Despite the fact that market regulators have urged the mutual fund industry to rely on a "fair-value" pricing scheme to help combat market timing, many US funds still aren't doing so.

Reported by

Fred Schneyer

Nearly a third of 960 mutual funds surveyed by the U.S. Securities and Exchange Commission (SEC) hadn’t used “fair value” pricing in the 20 months ended last September, the SEC said, according to a Reuters news report. In fact, the SEC survey found that half the funds said they had only used the pricing method five times or fewer over the same period.

The SEC estimated that market timers – taking advantage of discrepancies that “fair value” pricing might have eliminated – reduced the assets of about 15% of the funds surveyed by 2% or more annually per fund.

“Fair value” pricing calls for funds to adjust their net asset values (NAV) more frequently based on estimates of the impact of certain market development on the values of underlying shares.

Probes showed timers profited by trading in stock fund shares whose prices – or NAVs – hadn’t been adjusted for the key market developments. This method of timing exploits a fund industry practice of setting funds’ NAVs only once daily, when the U.S. markets close.

The $7.5 trillion fund industry continues in the throes of a federal/state abusive trading investigation focusing on market timing, late trading, and certain sales practices.