The Securities and Exchange Commission recently provided a long-promised and needed update, in the form of a proposed rule, to guidance on determining the fair value of securities held by registered investment companies. Although the Investment Company Act of 1940 tasks the boards of directors of these funds with determining in good faith the fair

In our previous post, we reviewed how the financial markets’ reaction to the COVID-19 pandemic requires mutual funds to review, and possibly reclassify, the liquidity of their investments. As liquidity and valuation are often two sides of the same coin, factors that may lead to reclassifying a security’s liquidity may also raise questions concerning how to value the security for purposes of calculating a mutual fund’s net asset value (“NAV”). This post discusses when this may be the case.
Continue Reading Navigating Mutual Funds in Rough Markets—Valuation

I. DERIVATIVES ISSUES

1. Inventory “relationship level” considerations in legal documentation that governs your derivatives trading relationships (ISDA Master Agreements, Futures Customer Agreements, Master Securities Forward Transaction Agreements, etc.)

a. Example: Decline in Net Asset Value Provisions (Common in ISDAs)

i. Identify the trigger decline levels and time frames at which transactions under the agreement can be terminated (25% over a 1-month period – is that measured on a rolling basis or by reference to the prior month’s end?)

ii. Confirm whether all or only some transactions can be terminated (typically, it is all transactions)

iii. Identify the notice requirements that apply when a threshold is crossed

iv. Identify whether the agreement includes a “fish or cut bait clause” that restricts the ability of the other party to designate the termination of the transactions under the trading agreement


Continue Reading Market Volatility Regulatory Outline for Asset Managers

In the first part of this post, I explained how trading odd lot MBS can create the same valuation issue as trading PIPEs. I also touched on some important differences between MBS and PIPEs. In this part, I’ll examine why these differences may make the valuation of odd lot MBS more problematic than the valuation of PIPEs. The Order is significant for investment advisers as well as investment companies, insofar as the SEC asserted that PIMCO’s valuation procedures violated Rule 206(4)-7.
Continue Reading “Odd Lots” and Valuation Déjà Vu–Part 2

The SEC’s recent settlement (the “Order”) with Pacific Investment Management Company (“PIMCO”) reflects a new twist on an old issue: buying securities at bargain prices and then marking them up when calculating NAVs. The SEC first addressed this issue in 1969 in the context of what we now refer to as “PIPEs.” The first part of this post examines the similarities and differences between PIPEs and the mortgage-backed securities (“MBS”) addressed in the Order. The second part explains why “odd lot” MBS may be more problematic than PIPES.
Continue Reading “Odd Lots” and Valuation Déjà Vu–Part 1