Determining the daily value of a mutual fund is a tricky business-never more so than when markets turn volatile. The recent turmoil in emerging markets put industry pricing practices to the test.

Some fund companies, concluding that the closing prices of stocks traded on Asian exchanges were too mercurial to be relied upon, instead used a "fair value" calculation to arrive at the price of a fund share. Some investors who bought shares overnight-before the funds' updated daily values were available-were dismayed not to receive the price they expected.

Prompted by complaints from these investors, the Securities and Exchange Commission in November held a series of special examinations of mutual funds. The aim: to assess whether fund companies were hewing to fair-value pricing procedures the SEC adopted in 1981, and whether these were properly disclosed to investors.

In a Dec. 4 speech to an Investment Company Institute gathering, the SEC's director of investment management, Barry Barbash, reviewed the findings. Excerpts follow.

Our examinations revealed a lack of uniformity among fund groups in the methods they used to price the same or similar types of portfolio securities.

Some fund groups used a fair-value procedure in pricing Asian securities held by all funds in the complex, whereas other fund groups used fair-value only in pricing the Asian securities held by certain of the funds in the complex. Still other groups determined their net asset values solely by reference to market quotations.

All of these procedures can be undertaken in accordance with the commission's fund pricing rules and the staff's interpretations of the rules.

Funds that determined not to use fair-value pricing at all or only in limited circumstances in October gave various reasons for their decisions. Some noted that fair-value pricing can involve complicated judgment calls that are susceptible to second-guessing. Others pointed out that fair-value pricing takes more time and is more costly to implement than pricing by reference to market quotations.

Moreover, these funds asserted, the possibility of significant dilution in the value of their shares was not high enough to warrant the additional costs of fair-value pricing.

The complaints of investors that they were left in the dark about the possibility of funds' using fair-value pricing procedures were not borne out in our review of fund disclosure materials. Documents we reviewed did explain the circumstances under which the funds could use fair-value pricing. Some of the explanations, though, were technical and legalistic and could stand a healthy dose of plain English.

Taken as a whole, the results of our recent exams and disclosure reviews have convinced us that we need to undertake a broader and more comprehensive analysis of fund pricing issues. We have decided to make such an analysis a priority of the investment management division for 1998.

As part of our review, we will look closely at the procedures funds follow in pricing their shares and will consider whether we should fine- tune some of our rules and current interpretations relating to pricing.

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