SEC: Many Funds Don’t Use ‘Fair Value’ Pricing

Many U.S. mutual funds are not using a “fair value” pricing method that market regulators have been urging the fund industry to adopt for years as a way to combat abusive market timing, officials said Wednesday.

Nearly a third of 960 mutual funds surveyed by the Securities and Exchange Commission hadn’t used “fair value” pricing in the 20 months ended last September, the SEC said.

Half the funds surveyed said they had only used the pricing method five times or fewer over the same period, according to the SEC survey.

The SEC estimated that market timers, taking advantage of pricing discrepancies, reduced the assets of about 15% of the funds surveyed by 2% or more annually per fund.

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

“Fair value” pricing calls for funds to adjust their NAVs more frequently based on estimates of the effect of certain market developments on the values of underlying shares.