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Due Diligence on Valuation: IAFE Comment Period Closing

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NEW YORK (–The public comment period for the International Association of Financial Engineers’ white paper on valuation concepts expires Feb. 27.

The IAFE released the working copy of the report, from its investor risk committee, in November. It plans to prepare a final version on the basis of the comments received.

As the working report observed, valuation now is extremely controversial in several contexts. The U.S. Securities and Exchange Commission has suggested that rule making may be necessary to ensure proper valuation of hedge funds that underlie registered funds of funds, the Internal Revenue Service is wrestling with the reliability of valuations by financial institutions, and New York’s attorney general has focused attention on the stale pricing of mutual funds.

The body of the report is a list of questions that investors should ask managers in the context of due diligence and that managers periodically should ask themselves. The questions fall into 12 general categories, concerning: the controls a firm employs to promote correctness and integrity in its valuations; checks and balances in the marking of the portfolio; the specific individuals with oversight responsibility for pricing; the valuation procedures; the valuation committee; reliance upon pricing services; identification and monitoring of events that could have effect on value; pricing overrides; stale pricing; fund of funds managers–how do they ensure that they’re receiving correct prices from their underlying funds?; issues relating to debt securities; and procedures of the auditors and/or outside administrators.

The IAFE created its investor risk committee in 2000. It is composed of fund managers, institutional investors, fund of funds managers, regulators, prime brokers and others active in the fund arena. Earlier documents prepared by the IRC address the issue of the right level of disclosure and transparency for funds.

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