SEC’s Dear CFO Letter Posted

Investment Management Division’s Views on Accounting Related Issues

By John M. Baker, Esq.

The accounting staff of the SEC‘s Division of Investment Management on Friday posted its annual “Dear CFO” industry comment letter (Feb. 14, 2001). The comment letter addresses several accounting-related matters in filings made by registered investment companies and investment advisers.

The letter settles a long-standing valuation issue: whether an investment company should value an unrestricted security at a discount or premium from a readily available market quotation based solely on the size of the investment company’s holding. Some have suggested that a holding of a large percentage of a portfolio company’s outstanding shares or public float should be discounted because it might be difficult to liquidate the holding without depressing the share value, or alternatively in some cases that a control premium may be appropriate. The letter states that the 1940 Act requires a registered investment company to value securities using market quotations when they are readily available, and the staff does not believe it is appropriate to discount or mark-up a readily available market price for an unrestricted security solely because an investment company holds a large quantity of the outstanding shares or holds a significant portion of the security’s average daily trading volume.

The letter also notes that the American Institute of Certified Public Accountants on November 21, 2000, revised its Audit and Accounting Guide, Audits of Investment Companies. The revised Guide codifies new accounting standards on several issues, and the staff reminds registrants that they must disclose the impact of new accounting standards that have been promulgated, but are not yet effective, in the footnotes to the financial statements.

The letter is available online at

Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

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