The SEC released a two-question set of Frequently Asked Questions related to the valuation guidance that was included with the July 2014 Money Market Funds release. The release stated that the board “may want to consider inputs, methods, models, and assumptions” used by a pricing service to determine its evaluated prices and reminded boards that they have a non-delegable responsibility to determine if that evaluated price is a fair value of the security. The language led some to worry that the SEC staff expected boards to delve into the inner workings of pricing services.
The FAQ states that the release “was not intended to change the general nature of the board’s responsibility to oversee the process of determining whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value for a fund’s portfolio security or limit a board’s ability to appropriately appoint others to assist in its duties.” The FAQ clarified that boards may delegate “specific responsibilities intended to assist it in implementing the fund’s valuation policies and procedures, including its due diligence of pricing services.”
The FAQ also addresses the use of amortized cost method for valuing short-term debt securities that was embedded in the money market fund release, clarifying that SEC staff does not expect a fund to calculate the shadow price of the fund on a daily basis. The FAQ states that a fund should “have policies and procedures in place to allow the fund to reasonably conclude that a portfolio security’s amortized cost (when used) is approximately the same as the security’s fair value using market-based factors.”