On December 10, 2012 the Securities and Exchange Commission announced charges against eight former member of the boards of directors overseeing five mutual funds for violating their asset pricing responsibilities under the federal securities laws. The funds are alleged to have overstated the values of portfolio securities during the housing market crisis in 2007.

The SEC alleges that the respective boards of directors, which delegated the responsibility for fair valuation of securities to a valuation committee, failed to provide meaningful substantive guidance on how fair valuation determinations should be made. Additionally, the SEC alleges that the directors failed to take meaningful efforts to learn how fair values were being determined and obtained insufficient information regarding how valuation committee determinations were made.

Investment company directors must adopt and implement meaningful fair valuation methodologies and procedures and maintain internal controls over financial reporting. Where such obligations are delegated to a valuation committee, directors must, at a minimum, “determine the method, understand the process and continuously evaluate the appropriateness of the [valuation] method used.”

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