Fair Value Pricing

Marchetti International Fund holds Japanese and Australian equities whose home markets close many hours before the New York Stock Exchange. On a day when a major economic announcement moves US markets sharply after those foreign exchanges have closed, the fund board pricing policy should call for:

1. A.charging every redeeming shareholder that day a 2% redemption fee in place of revaluing the portfolio.A redemption fee addresses trading costs. It is not a substitute for valuing the portfolio correctly.
2. B.fair valuing the foreign holdings in good faith under board-approved procedures, because the stale closing quotations no longer reflect current value.Correct. A significant post-close event makes the local quotation unreliable and triggers fair valuation.
3. C.using the last local closing prices unchanged, since those are actual market quotations.A quotation must be reliable, not merely real. Using it unchanged is exactly what invites stale-price arbitrage.
4. D.suspending the calculation of net asset value for that day.A fund must compute NAV on each business day; a difficult valuation is not grounds to skip it.

Why: Under the Investment Company Act valuation rules, a fund uses market quotations when they are readily available, but when a significant event occurs after a foreign market closes the last local quotation is no longer a reliable measure of current value. The board, or its designee acting under board-approved procedures, must then fair value those holdings in good faith. The purpose is to keep short-term traders from exploiting stale foreign prices at the expense of long-term shareholders.

Silverbrook International Fund holds Japanese equities that stop trading at 2:00 a.m. Eastern time. On a day when U.S. markets fall sharply after the Tokyo close, Silverbrook's pricing committee replaces the stale Tokyo closing prices with fair values before striking the 4:00 p.m. net asset value. Why does the Investment Company Act support this?

1. A.Funds may substitute any valuation they prefer as long as the method is disclosed in the statement of additional informationDisclosure does not create pricing discretion. Fair value must be determined in good faith under board oversight using a consistent methodology, not chosen at will.
2. B.A closing price that no longer reflects significant later events is not a readily available market quotation, so the security must be fair valued under board oversightCorrect. The statute conditions market-value pricing on a readily available quotation; when that condition fails, good-faith fair value governs, and it also deters time-zone arbitrage.
3. C.Foreign securities are always fair valued because foreign exchanges are not registered with the SECRegistration status of the exchange is irrelevant. Foreign securities are ordinarily priced at their closing market quotations; fair value applies only when those quotations are no longer reliable.
4. D.The fund is smoothing its net asset value to reduce day-to-day volatility for shareholdersSmoothing is not a permitted objective. Fair value estimates what the security would fetch in a current sale; deliberately dampening volatility would misprice shareholder transactions.

Why: A fund must value portfolio securities at market value when a readily available market quotation exists, and at fair value determined in good faith by, or under the oversight of, the board when it does not. A closing price from a market that shut hours earlier and no longer reflects significant later events is not a reliable current quotation. Fair valuing also blocks time-zone arbitrage, where traders exploit known stale prices. The clue is the sharp U.S. move after the Tokyo close. Review: fund pricing and net asset value. Trap: assuming any last printed trade automatically qualifies as a market quotation.