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Wells Corrects ‘Significant’ Fund-Pricing Errors

October 7, 2013

Wells Fargo has corrected the net asset values for two international funds for Sept. 18: the $79 million Wells Fargo Advantage Diversified International Fund and the $385 million Wells Fargo Advantage International Value Fund.

While fund pricing errors are common, they do not usually rise to the level of disclosure to investors. Wells Fargo may have made the disclosure because the NAV errors are substantially more than a few pennies, according to sources.

Valuation practices have been of increased interest to the Securities and Exchange Commission of late, and firms have taken notice following action taken against eight former Morgan Keegan directors.

Wells Fargo said in a product alert that the error was identified on Sept. 20, and the prices for each share class of the funds was updated.

“Following the fund’s pricing error policy, purchase transactions for trade date September 18, 2013, will be adjusted on the funds’ books and records to reflect the correct number of shares purchased,” according to the product alert.

Wells Fargo did not provide an explanation of the NAV errors in the product alert, and a spokeswoman for the firm declined to comment beyond what had already been disclosed.

The Sept. 18 NAV of the Class A shares of the Diversified International Fund was $12.27, and the corrected NAV was $0.25 less at $12.02.

The error was bigger for the International Value Fund. On Sept. 18, the Class A shares NAV was $15.51. The corrected NAV is $0.82 less, at $14.69.

“The pricing errors were quite significant,” says Niels Holch, executive director and founder of the Coalition of Mutual Fund Investors.

“Since these pricing errors are so significant, both funds should have provided their investors with a more detailed explanation of what occurred, instead of only referring to it as a pricing error,” adds Holch.

In the case of NAV errors, the fund is typically made whole and then there is some “sorting out” as to who is paying for it, says Marguerite Bateman, partner at Schiff Hardin.

Bateman notes that the disclosure by Wells Fargo does not mention redemptions of the two funds.

“[I]t could be they decided they’re going to correct the purchases but not going to go back to shareholders who redeemed out and collect any excess that they were provided,” says Bateman.

Every fund company has pricing errors from time to time, says Hubbard Garber, managing director at Barrington Partners. They are inevitable, he says, given the complexity of the process, the number of parties involved and the fact that fund prices are released a short time after the market closes.

The errors at the Wells Fargo funds could have occurred in many different areas; they could stem from a foreign exchange pricing issue, a missed corporate action or fair valuation issues, among other possible problems. Or the NAV errors could be the result of problems in several areas, he says.

Garber notes that Wells Fargo caught the problem fairly quickly. It was a “wise decision” for the firm to disclose the information, he adds.

Valuation has been a key area of focus for the SEC’s Office of Compliance Inspections and Examinations. The SEC’s enforcement action against eight former Morgan Keegan directors over their valuation practices has led many firms to reevaluate their own policies and procedures in this area. The former directors reached a settlement with the SEC in June.

A recent Deloitte survey found that 78% of participants said they had changed their valuation policies and procedures in the past year.

It is unclear whether the SEC would be concerned about the NAV errors disclosed by Wells Fargo.

“Whether the SEC would be terribly interested in this depends on the explanation,” says Paul Huey-Burns, partner at Shulman Rogers.

“The bottom line is that not every pricing adjustment is a major problem. It all depends on what was the cause and what was the response.”