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Deloitte Valuation Report Finds Increased Focus on Fair Value Process

The latest Deloitte survey on fair valuation shows that recent SEC enforcement interest in valuation has mutual funds ramping up their focus on fair value pricing.  96 mutual fund firms, representing more than $10 trillion in assets under management, participated in Deloitte’s 11th Fair Value Pricing Survey this summer.

As expected, with the Morgan Keegan settlement case so recent, the study found that valuation was the most talked about topic among mutual fund directors during board meetings and discussions outside these meetings. The survey found that 78 percent of the respondents indicated that they changed their valuation policies and procedures in the last year.

Additionally, more than half of the participants have changed the types of valuation materials provided to the board and the level of detail provided in these materials. At least 80 percent of the respondents reported that the top three types of valuation materials provided to the board were: 1) back-testing results on foreign equities priced using a standardized fair value process; 2) written valuation memo regarding fair valuation decisions; and 3) information on the valuation controls.

The survey also found that about 51 percent of the mutual fund groups agreed that risk management remains a central part of their valuation equation. These firms stated that they identify valuation risks for “one or more specific investment types as part of their annual compliance reviews under rule 38a-1 or formal risk process.” More than 80 percent of firms’ chief compliance officers were reported to participate during the full length of the board meetings.

Apart from the SEC enforcement actions, 34 percent of the participants identified trading halts as the second most discussed subject among directors, as these disruptions can affect the availability of security prices, which in turn can trigger the need for fair value determinations.

Looking ahead to the next one or two years, the survey participants listed their main concerns as navigating future actions and guidance from the SEC. Firms were uncertain as to what the SEC’s next action in the valuation area will be, whether prescriptive guidance on valuation or more enforcement actions.

Other topics that participants said they would focus on in the next two years are:

• Pricing vendor oversight
• Managing the external audit process
• Derivative valuations
• Board reporting and oversight

The full report can be found here.


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