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Valuation of Portfolio Securities and other Assets Held by Registered Investment Companies — Select Bibliography of the Division of Investment Management1

The Investment Company Act of 1940 (“Investment Company Act”) generally requires registered investment companies (“funds”) to use market values to value portfolio securities for which market quotations are readily available. When market quotations are not readily available, funds must value portfolio securities and all other assets by using their fair value as determined in good faith by the board of directors of the funds. Funds use these values to calculate their net asset values and the prices at which they sell and redeem their shares. Money market funds may value their portfolio securities on the basis of amortized cost pursuant to rule 2a-7 under the Investment Company Act.

The bibliography below lists select relevant provisions of the Investment Company Act and related rules and Commission guidance, which is intended to assist funds and their counsel in understanding and applying the valuation requirements under the Investment Company Act. Please refer to the referenced material for a complete understanding, including relevant context.

Also included in the bibliography are proposing releases, select staff guidance (including no-action letters), and enforcement actions in this area. Please refer to the referenced material for a complete understanding, including relevant context.

I. Investment Company Act of 1940
Provisions
Primary Details
Section 2(a)(41)(B) Definition of “value.” The value of securities held by registered investment companies (“funds”) is the market value when market quotations are readily available. When market quotations are not readily available, a fund must use fair values, as determined in good faith by the fund’s boards of directors, to value its portfolio securities and other assets. Addresses valuation of securities issued by controlled companies (as defined in section 2(a)(9)) using other than available market quotations.
Secondary Details
Section 22(c) Authorizes Commission to issue rules relating to redeemable securities issued by open-end funds.
Section 22(e) Open-end funds may not suspend the right of redemption, and open-end funds may not postpone the payment of redemption proceeds for more than seven days following receipt of a redemption request.
Section 23(b) Closed-end funds that issue common stock generally may not sell such stock at a price below the current net asset value of such securities.
II. Investment Company Act of 1940
Rules
Primary Details
Rule 2a-4 Definition of “current net asset value” that open-end funds use to calculate the price of fund shares.
Rule 2a-4(a)(2) An open-end fund must reflect changes in its holdings of portfolio securities in the first calculation of net asset value no later than the first business day following the trade date.
Rule 2a-7 A money market fund may value portfolio securities on the basis of amortized cost if the board determines, in good faith, that it is in the best interests of the fund and its shareholders to maintain a stable net asset value per share, and that the fund will continue to use amortized cost only so long as the board of directors believes that it fairly reflects the market-based net asset value per share.
Rule 22c-1(a) An open-end fund generally must sell and redeem its shares at a price based on the fund’s current net asset value as next computed after the receipt of a redemption, purchase or sale order.
Rule 22c-1(b) An open-end fund generally must compute its net asset value at least once daily, Monday through Friday. A fund is not required to calculate its net asset value on days on which changes in value will not materially affect current net asset value, days on which no redemption, purchase or sell orders for the fund’s shares are received and on holidays.
Rule 22c-1(d) Board of directors of open-end fund establishes initial time(s) of current net asset value calculation, and makes and approves changes as the board deems necessary.
Rule 38a-1 Funds must adopt and implement policies and procedures designed to prevent violation of the federal securities laws.
Secondary Details
Rule 17a-8 Exempts from section 17(a) certain mergers of funds and affiliated companies provided that, among other things, fund directors approve evaluation procedures that provide for the preparation of a report by an "Independent Evaluator," a person who has expertise in the valuation of securities and other financial assets and who is not an interested person of the Eligible Unregistered Fund or any affiliate thereof except the Merging Company.
Rule 17a-9 Exempts from section 17(a) the purchase by, among others, an affiliated person of a money market fund, or an affiliated person of such a person, of a security from such fund that (a) is no longer an “eligible security” (as defined in rule 2a-7(a)(12)), (b) has defaulted (other than an immaterial default), or (c) is “any other portfolio security.” The purchase price must be paid in cash and equal to the greater of the amortized cost of the security or its market price. The purchase of any other portfolio security is subject to a clawback provision.
Rule 22e-3 Exempts a money market fund from section 22(e) permitting the fund to suspend redemptions and postpone payment of redemption proceeds in an orderly liquidation of the fund if, subject to other requirements, the fund’s board determines that the deviation between the fund’s amortized cost per share and its current net asset value per share may result in material dilution or other unfair results to investors or existing shareholders.
Rule 23c-1(a)(6) Closed-end fund’s purchases in cash of securities the fund has issued must not exceed the lower of the market value or asset value of such securities.
Rule 23c-3 Closed-end funds that periodically repurchase their shares in reliance on rule 23c-3 must calculate the net asset values of such repurchased shares consistent with section 2(a)(41)(B).
Rule 30a-3 Funds, among other things, must maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.
Rule 30e-1 Fund shareholder reports required pursuant to section 30(e) must report the value of portfolio securities and other assets, and calculate net asset values, pursuant to section 2(a)(41)(B).
III. Commission Releases
Notice of Proposal to Adopt Rule 2a-4 Relating to Periodic Calculation of Net Asset Value of Redeemable Security, Investment Company Act Release No. 4006 (July 2, 1964); Adoption of Rule 2a-4 Relating to the Periodic Calculation of Current Net Asset Value of Redeemable Security, Investment Company Act Release No. 4105 (Dec. 22, 1964) (proposing and adopting rule 2a-4) Calculation of “current net asset value” of redeemable securities.
Pricing of Redeemable Securities for Distribution, Redemption and Repurchase and Time-Stamping of Orders by Dealers, Investment Company Act Release No. 5519 (Oct. 16, 1968) (adopting rule 22c-1) Forward-pricing requirement of rule 22c-1 is intended to protect investors from the harmful effects of dilution and frequent trading.
Statement Regarding “Restricted Securities,” Investment Company Act Release No. 5847 (Accounting Series Release No. 113) (Oct. 21, 1969) (Commission interpretive release) Definition of “restricted security” and “current sale.” Application of current sale test to fair value restricted securities. Addresses valuation concerns when valuing restricted securities at cost, at the market price for unrestricted securities of the same class or by applying a constant percentage or an absolute dollar discount. Board’s obligation to determine fair values of restricted securities, in good faith, entails continuous review of propriety of valuation methodology, consideration of relevant factors and retention of information on which the Board has relied. Board may delegate calculation of fair values pursuant to board approved methodologies.
Accounting for Investment Securities by Registered Investment Companies, Investment Company Act Release No. 6295 (Accounting Series Release No. 118) (Dec. 23, 1970) (Commission interpretive release) Addresses valuation of securities listed or traded on a national securities exchange and securities that are traded in the over-the-counter market, including the use of the last quoted sale price, published closing bid and asked prices and broker quotes. States that value can be determined fairly in more than one way for unlisted securities traded regularly in the over-the-counter market. Also addresses effect of infrequent sales or thin markets or concerns regarding the validity of quotations in considering whether market quotations are readily available.
 
Fair valuation of securities and other assets for which market quotations are not readily available. No single standard exists for determining the fair value of a security or other asset because fair value depends on the facts and circumstances of each situation. Addresses fund board’s obligations to determine fair values in good faith of thinly traded securities, review all appropriate factors relevant to the value of the securities and determine fair value methodologies (including general factors board should consider in determining appropriate methodologies). Board's obligations include continuous review of propriety of valuation methodology. Addresses review by independent accountant of security valuations.
In the Matter of Christiana Securities Company, et al., Investment Company Act Release No. 8615 (Dec. 13, 1974) (Commission order) Commission found that the proposed merger presented one of the "most unusual situations" in which it is proper to value restricted securities at the price assigned by the market to unrestricted securities of the same class.
Valuation of Debt Instruments by Money Market Funds and Certain Other Open-End Investment Companies, Investment Company Act Release No. 9786 (Accounting Series Release No. 219) (May 31, 1977) (Commission interpretation of rule 2a-4) Commission stated that it would not object if a fund’s board of directors determines in good faith that the fair value of debt securities that mature in 60 days or less is determined by using amortized cost valuation, unless the particular circumstances dictate otherwise.
Pricing of Investment Company Shares Generally, Investment Company Act Release No. 10691 (May 15, 1979); Pricing of Investment Company Shares Generally, Investment Company Act Release No. 10827 (Aug. 13, 1979) (proposing and adopting amendments to rule 22c-1) Open-end funds are required to compute current net asset value of fund shares on at least a daily basis at time(s) designated by the funds’ boards of directors.
Compliance Programs of Investment Companies and Investment Advisers, Investment Company Act Release No. 26299 (Dec. 17, 2003) (adopting rule 38a-1) Funds must adopt and implement policies and procedures designed to prevent violation of the federal securities laws, including the valuation requirements under the Investment Company Act. Funds are required to adopt policies and procedures that require monitoring for circumstances that may necessitate the use of fair value prices; establish criteria for determining when market quotations are no longer reliable for a particular portfolio security; provide a methodology or methodologies by which the fund determines the current fair value of the portfolio security; and regularly review the appropriateness and accuracy of the method used in valuing securities, and make any necessary adjustments. Funds may be required to fair value portfolio securities if an event affecting the value of the security occurs after the market closes but before the fund prices its shares. See n.42 (citing Pricing of Redeemable Securities for Distribution, Redemption, and Repurchase, Investment Company Act Release No. 14244 (Nov. 21, 1984) at n.7 (proposing amendments to rule 22c-1)).
Mandatory Redemption Fees for Redeemable Fund Securities, Investment Company Act Release No. 26375A (Mar. 5, 2004); Mutual Fund Redemption Fees, Investment Company Act Release No. 26782 (Mar. 11, 2005) (proposing and adopting rule 22c-2) Valuation requirements under the Investment Company Act are critical to ensuring that opportunities for arbitrage through short-term trading are diminished.
Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings, Investment Company Act Release No. 26418 (Apr. 19, 2004) (adopting amendments to Form N-1A and other registration forms) Funds generally must fair value portfolio securities for which market quotations are not readily available (including when they are not reliable).
Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) (adopting amendments to rule 2a-7 and Form PF)

Commission stated that it believed that a fund may only use the amortized cost method to value a portfolio security with a remaining maturity of 60 days or less when it can reasonably conclude, at each time it makes a valuation determination, that the amortized cost value of the portfolio security is approximately the same as the fair value of the security as determined without the use of amortized cost valuation. Existing credit, liquidity, or interest rate conditions in the relevant markets and issuer specific circumstances at each such time should be taken into account in making such an evaluation. See also Valuation of Debt Instruments by Money Market Funds and Certain Open-End Investment Companies, Investment Company Act Release No. 9786 (Accounting Series Release No. 219) (May 31, 1977), supra. Addresses valuation of thinly traded securities, including that funds holding debt securities generally should not fair value debt securities at par or amortized cost based on the expectation that the funds will hold those securities until maturity, if the funds could not reasonably expect to receive approximately that value upon the current sale of those securities under current market conditions. Also addresses fund use of evaluated prices provided by third-party pricing services to assist them in determining fair values of portfolio securities, including considerations in choosing pricing service and in using evaluated prices provided by a pricing service. See also Accounting for Investment Securities by Registered Investment Companies, Investment Company Act Release No. 6295 (Accounting Series Release No. 118) (Dec. 23, 1970), supra.

Illiquid Securities Details
Statement Regarding “Restricted Securities,” Investment Company Act Release No. 5847 (Oct. 21, 1969) (Commission interpretive release) Ten percent limit recommended on acquisition by an open-end fund of restricted securities or other assets not having readily available market quotations. If the fair value of such securities or assets exceeds ten percent of the fund’s net assets, the fund should consider appropriate steps to retain maximum flexibility. (The ten percent limit was subsequently increased to fifteen percent. See Revisions of Guidelines to Form N-1A, Investment Company Act Release No. 18612 (Mar. 12, 1992), infra.)
Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies (Money Market Funds), Investment Company Act Release No. 13380 (July 11, 1983) (adopting rule 2a-7) Ten percent limit on investment by open-end funds in illiquid securities or other illiquid assets applies to money market funds.
Acquisition and Valuation of Certain Portfolio Instruments by Registered Investment Companies, Investment Company Act Release No. 14983 (Mar. 12, 1986) (adopting amendments to rule 2a-7) Definition of “illiquid” security.
Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Investment Company Act Release No. 17452 (Apr. 23, 1990) (adopting rule 144A under the Securities Act of 1933) Funds must maintain high degree of liquidity to assure that portfolio securities can be sold and the proceeds used to satisfy redemptions in compliance with the requirements of section 22(e). Definition of “illiquid” security. Restricted securities generally regarded as illiquid. Board has ultimate responsibility to make liquidity determinations and to monitor liquidity of portfolio securities. Addresses factors that funds consider in determining liquidity.
Revisions of Guidelines to Form N-1A, Investment Company Act Release No. 18612 (Mar. 12, 1992) (Commission release) Open-end funds may invest up to fifteen percent of their net assets in illiquid securities and other illiquid assets.
Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 21837 (Mar. 21, 1996) (adopting amendments to rule 2a-7) The limit on money market fund holdings of illiquid securities is ten percent of fund assets. (The ten percent limit was subsequently reduced to five percent. See Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010), infra.)
Money Market Fund Reform, Investment Company Act Release No. 28807 (June 30, 2009); Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) (proposing and adopting amendments to rule 2a-7 and proposing and adopting rule 22e-3) Money market funds must hold securities that are sufficiently liquid to meet reasonably foreseeable shareholder redemptions. Money market funds cannot acquire illiquid securities if, after the purchase, more than 5 percent of the fund’s total assets would consist of illiquid securities. Money market funds must maintain a portion of their portfolio in cash and securities that are readily convertible into cash under a 10 percent minimum daily liquidity requirement (inapplicable to tax exempt funds) and a 30 percent minimum weekly liquidity requirement. Definition of “illiquid security.”
Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) (adopting amendments to rule 2a-7 and Form PF)

Addresses frequency of comparing security's amortized cost to its fair value determined using market-based factors in monitoring potential deviation between the two values and including monitoring mechanism in a fund's policies and procedures. See also Valuation of Debt Instruments by Money Market Funds and Certain Open-End Investment Companies, Investment Company Act Release No. 9786 (Accounting Series Release No. 219) (May 31, 1977), supra. Also addresses assessing current market conditions when fair valuing thinly traded securities, as well as considerations in choosing pricing service and in using evaluated prices provided by a pricing service when determining the fair value of a fund's portfolio security. See also Accounting for Investment Securities by Registered Investment Companies, Investment Company Act Release No. 6295 (Accounting Series Release No. 118) (Dec. 23, 1970), supra.

Money Market Funds Details
Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies (Money Market Funds), Investment Company Act Release No. 13380 (July 11, 1983) (adopting rule 2a-7) Commission authorized money market funds to value portfolio debt securities using either the amortized cost valuation method or penny-rounding pricing method to compute a fund’s current price per share. Addresses fund board’s reliance on information provided by pricing services, shadow pricing and ten percent limit on investment by money market funds in illiquid securities or other illiquid assets.
Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 18005 (Feb. 20, 1991)(adopting amendments to rule 2a-7) Application of amortized cost method to value portfolio securities.
Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 21837 (Mar. 21, 1996) (adopting amendments to rule 2a-7) The limit on money market fund holdings of illiquid securities is ten percent of fund assets. (The ten percent limit was subsequently reduced to five percent. See Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010), supra.)
Money Market Fund Reform, Investment Company Act Release No. 28807 (June 30, 2009); Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) (proposing and adopting amendments to rule 2a-7 and proposing and adopting rule 22e-3) Money market funds must hold securities that are sufficiently liquid to meet reasonably foreseeable shareholder redemptions. Money market funds cannot acquire illiquid securities if, after the purchase, more than 5 percent of the fund’s total assets would consist of illiquid securities. Money market funds must maintain a portion of their portfolio in cash and securities that are readily convertible into cash under a 10 percent minimum daily liquidity requirement (inapplicable to tax exempt funds) and a 30 percent minimum weekly liquidity requirement. Definition of “illiquid security.”
Unit Investment Trusts Details
Form N-7 for Registration of Unit Investment Trusts Under the Securities Act of 1933 and the Investment Company Act of 1940, Investment Company Act Release No. 14513 (May 14, 1985); Form N-7 for Registration of Unit Investment Trusts under the Securities Act of 1933 and the Investment Company Act of 1940, Investment Company Act Release No. 15612 (Mar. 9, 1987) (proposing and reproposing Form N-7) Proposing and soliciting comment on staff guidance concerning the valuation of unit investment trust portfolio securities, including the valuation of debt securities by reference to matrix pricing and existence of shelf registration as a factor in valuing restricted securities. Part I.B. of the proposing release provides background information on evaluators in valuing the unit investment trust’s portfolio securities. 
Disclosure Details
Form N-1A, Items 11 and 23, and rule 6.03(d) of Regulation S-X Open-end funds are required to disclose in their registration statements and in their financial statements the valuation procedures that they use in determining their net asset value and the methods used in determining the value of their investments. An open-end fund (other than a money market fund) is required to briefly explain the circumstances under which the fund will use fair value pricing and the effects of using fair value pricing.
IV. Staff Guidance
Staff Interpretive Position Relating to Whether It Would Be Improper for a Board of Directors of a Registered Investment Company to Value Certain Securities at Market Value, Investment Company Act Release No. 6121 (July 20, 1970)(staff interpretation) Staff position that existence of shelf registration is one of many factors to consider in valuing a restricted security at the market price of unrestricted shares of the same security.
Paul Revere Investors Inc., (pub. avail. Mar. 22, 1973) (staff no-action letter response) Staff agreed not to recommend enforcement action to the Commission under section 2(a)(41) against a fund that establishes a valuation committee to value its portfolio securities consistent with its procedures, and to advise the fund’s board as to the ongoing propriety of the valuation methodologies used.
Putnam Growth Fund and Putnam International Equities Fund, Inc., (pub. avail. Feb. 23, 1981) (staff no-action letter response) Staff agreed not to recommend enforcement action to the Commission under section 22(d) or rules 22c-1 and 2a-4 if a fund uses as the value of its portfolio securities which are principally traded on foreign exchanges the next preceding closing values of such securities on their respective exchanges except when an event has occurred since the time a value was established that is likely to have resulted in a change in such value.
Investment Company Institute, (pub. avail. Dec. 9, 1992) (staff letter to industry) Staff position that money market funds should continue to limit their acquisition of illiquid securities to ten percent of net assets.
Memorandum from the Division of Investment Management to SEC Chairman Levitt re Mutual Funds and Derivative Instruments (Sept. 26, 1994) (staff study undertaken in response to Congressional request for information) Staff memorandum that addresses procedures used by some open-end funds to ensure the validity of prices assigned to fund portfolio securities.
SEC Staff Generic Comment Letter for Investment Company CFOs (Nov. 1, 1994) (staff letter to industry) Staff guidance addresses audits of portfolio security valuations, including independent verification of the values of securities for which market quotations are readily available, securities that are fair valued and securities for which the number of market makers or broker dealers is few or only one.
Division of Investment Management:
December 1999 Letter to the ICI Regarding Valuation Issues (Dec. 8, 1999) (staff letter to industry)
Staff guidance on funds’ responsibilities for valuing portfolio securities. When the exchange or market on which a security is traded does not open for trading for an entire trading day, and no other market prices are available, market quotations for that security are no longer readily available. In such instances, funds holding securities traded on the closed exchange or market must fair value price those securities.
 
Addresses various factors fund board may need to consider, as relevant, in fair valuing portfolio securities (including securities traded on foreign markets). Notes that different fund boards, or funds in the same complex with different boards, when fair value pricing identical securities, could reasonably arrive at prices that were not the same, consistent with the boards’ obligation to fair value price in good faith. Addresses role of valuation committees in assisting the board in developing methodologies by which fair values are to be calculated, and implementing the board-approved methodologies. Fund’s board retains oversight responsibility for valuing fund assets and should receive reports that discuss the functioning of the valuation process and valuation problems.
SEC Staff Generic Comment Letter for Investment Company CFOs (Feb. 14, 2001) (staff letter to industry) Staff position on the use of block discounts (or mark-ups) to value portfolio securities for which market quotations are readily available.
Division of Investment Management:
April 2001 Letter to the ICI Regarding Valuation Issues (Apr. 30, 2001) (staff letter to industry)
Staff guidance on funds’ responsibilities for valuing portfolio securities and other assets. Requirement to fair value portfolio securities and other assets when market quotations are not readily available. If an event occurs which will affect the value of portfolio securities after the market (foreign or domestic) has closed, but before a fund calculates its net asset value, the fund must determine the fair value of such securities.
 
Funds should continuously monitor for events that might necessitate the use of fair value prices, and funds should establish criteria for assessing the availability of market quotations. Addresses disclosure of pricing policies, ongoing pricing responsibilities, good faith requirement, trading limits on individual foreign securities, and the inappropriate use of fair values when market quotations are readily available.
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting, SEC Press Release No. 2008-234 (Sept. 30, 2008) (joint staff/FASB staff statement)

Office of Chief Accountant staff and FASB staff jointly-issued guidance on practice issues concerning the fair value measurement guidance in FASB Statement No. 157, Fair Value Measurements.

V. Enforcement Actions

1 The sources of the valuation materials listed in the bibliography are the Commission and the Commission staff, with the exception of the guidance jointly issued by the Commission’s Office of the Chief Accountant and the staff of the Financial Accounting Standards Board (“FASB”), supra, in IV. Staff Guidance. Please note that the terminology used in the bibliography may differ from the terminology used by other entities that provide valuation guidance, such as the FASB.

This document has been prepared by the staff of the Division of Investment Management, and has not been subject to Commission review or approval. Funds should consult the actual authority set out herein, as well as any other applicable legal authority not included herein (both under the 1940 Act and under other laws).

http://www.sec.gov/divisions/investment/icvaluation.htm


Modified: 12/02/2014