Corporate & Securities Law

In the guidance on mark-to-market accounting mentioned below, the SEC advised on the use of broker quotes and valuation involving "disorderly" transactions. The SEC advised that in a liquid market, a broker quote should reflect market information from actual transactions. In less active markets, however, broker quotes may be based more on models with information available only to the broker. Less reliance may be placed on quotes that do not reflect the result of market transactions.

With regard to "disorderly" transactions, the Commission advised that these results "are not determinative when measuring fair value." A key component here is the Commission's assertion that an orderly transaction "allows for adequate exposure to the market." While such transactions may not be disregarded, the SEC advised that the use of judgment is appropriate in valuing distressed or forced deals. A privately negotiated sale not adequately exposed to the market would not necessarily be determinative of fair value.

Transactions in an inactive market may affect fair value measurements, advised the SEC. Quoted prices in an active market for the identical asset are representative of fair value and generally must be used, in most cases without adjustment. Transactions in inactive markets may be inputs, advided the SEC, "but would likely not be determinative." The spread between the ask and bid price should be considered, along with the number of bidding parties. According to the SEC, "the determination of whether a market is active or not requires judgment."

The SEC guidance may be found here.

Full post as published by Jim Hamilton's World of Securities Regulation on October 01, 2008 (boomark / email).