Mutual Fund NAV Correction and Settlement Distribution

Brief

The client, an investment firm, had previously identified a net asset value (NAV) pricing error for assets held in nine of its open-ended mutual funds. The pricing error occurred over three years, meaning that the daily mutual funds’ NAVs had to be corrected for the same three-year period.

The client conducted an internal analysis and distributed payments to account holders. However, upon review by the U.S. Securities and Exchange Commission (SEC), the client’s analysis and payments were determined to be improper and not equitable. The SEC’s findings were documented in an SEC order.

As part of the SEC order, the client was directed to reanalyze the pricing error and develop an appropriate distribution method. The client’s updated analysis and distribution method were subject to SEC approval.

What we did

Prior to the SEC order, the client and its outside counsel hired HKA to assist with resolving the SEC inquiry. HKA personnel developed a distribution plan that would reprice assets, reprocess all account holders’ mutual fund transactions, and make distributions to account holders with a net loss. HKA’s distribution plan was memorialized in the SEC order.

After the SEC order, HKA personnel implemented their plan (aka the distribution method), repricing the daily NAVs and reprocessing account holders’ transactions to determine economic harm. HKA reprocessed over 30 million records to implement the distribution method for over two million affected account holders.

HKA’s work included coordinating with the client and its other advisors (e.g., outside counsel, funds administrator, tax advisor) and presenting the new distribution method to the SEC for approval.

Outcomes

After the SEC approved HKA’s distribution method, the client and its advisors completed a settlement distribution to account holders. After completion, the client certified to the SEC that it had fulfilled the requirements of the SEC order.

The distribution method, developed by HKA personnel and memorialized in the SEC order, has become an industry precedent for NAV pricing errors.