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News May 15, 2006 Issue

Fund Boards Weigh T vs. T+1 NAVs

Should funds try to calculate NAVs on T?

Or should they stick with the traditional T+1 approach?

Both options are permitted by Rule 2a-4 of the Investment Company Act. But earlier this year, a group of economists released a study questioning the commonly-used practice of T+1 NAV calculations (applying today’s prices to yesterday’s portfolio).

Using "live prices and stale quantities," said the authors, can lead to significant NAV distortions (see IM Insight, February 20, 2006).

In recent weeks, the study has been a hot topic in board meetings. Directors are considering whether their funds should move to T processing, or, if not, whether their current practice of calculating NAVs on a T+1 basis should be disclosed in fund registration statements.

So far, funds don’t seem to be taking action either way. "There is a wait-and-see attitude about this," reported one fund lawyer.

Bingham McCutchen partner Roger Joseph suggested that boards, when weighing the costs and benefits of moving to T pricing, consider "whether the difference between processing on T and T+1 is likely to materially improve the accuracy of the NAV calculation and whether that possible increase in accuracy is outweighted by the risk of error." By rushing to determine NAVs on T, explained Joseph, "the opportunity for reconciliation and double checks and the like may be somewhat more limited." He also pointed out that the process "may be more complicated" for certain funds, depending on their service provider structure. For example, "if you have a sub-advisory relationship or people in different time zones, it could be more difficult to achieve reporting on the trade date," he said.