1. Legal Obligation to Adjust Frequency

India - SEBI:

• SEBI Mutual Fund Regulations, 1996, Reg 47 and 8th Schedule - Mutual Funds must value on truly fair basis. Circular dated 22.09.2020 and 17.09.2019 - On occurrence of credit event / market dislocation, valuation must be done on same day, not waiting for next cycle.
• SEBI Circular for AIFs: Clause 2.2 - AIF manager must ensure independent valuation at frequency not less than half-yearly, but on occurrence of material development, interim valuation required.

US - SEC:

• Investment Company Act Rule 2a-5 - Fund board must monitor valuation risks and adjust frequency when material events occur. Fair value must reflect what would happen in current market.
• FASB ASC 820 / FAS 157 - You cannot use last observable price if market is inactive.

UK/EU - FCA / AIFMD Article 19: AIFM must have policies that require more frequent valuation where assets are subject to increased price volatility.

Failure to adjust = 2 violations:

1. Violation of valuation procedure
2. Violation of fiduciary duty - as it causes inter-investor inequity. Redeeming investors get overpaid, remaining investors bear loss.

2. What Counts as Failure?

• Continuing to price private loans at par minus amortized fees during March-May 2020 when credit spreads had widened 400-600 bps.
• Keeping real estate fund at quarterly valuation when underlying property market fell 15% in a month.
• Debt fund holding thinly traded corporate bonds at amortized cost when bond yields spiked post IL&FS / DHFL crisis.
• Not triggering fair valuation committee meeting despite board risk reports.

3. Detailed Case Laws

A. SEC Enforcement Action Against Private Credit Adviser - 2024 [COVID-19 case]

The most direct case on this issue.
Facts: During onset of COVID-19, March-May 2020, Adviser managed affiliated private credit funds. It sold loans between funds using mechanical formula - par less unamortized fees. No adjustment for credit market stress.
Finding: SEC found violation of fiduciary duty - failure to reasonably determine fair market value. The Adviser did not reassess whether its pricing method remained valid after credit spreads widened significantly. Penalty was not for getting valuation wrong, but for failing to adjust process when market conditions changed.

Lesson: You cannot rely on static formula in stressed markets.

B. APRA vs HESTA Superannuation Fund - Australia 2024

Facts: HESTA, one of Australia's largest super funds, held unlisted assets valued quarterly. In March 2020 volatility, it did not do out-of-cycle revaluation.
Finding: APRA concluded HESTA's out-of-cycle valuation processes were inadequate and decision was unfair to certain cohorts of members, and required HESTA to make compensation payments to affected members.

This is now cited globally for pension / MF trustees.

C. SEC vs Morgan Asset Management [Morgan Keegan] - 2013

Facts: During 2007-08 subprime crisis, funds holding RMBS and below-investment-grade debt continued to be valued using stale dealer quotes and amortized matrix pricing, while market for those securities had frozen.
Finding: SEC charged 8 board members personally for violating asset pricing responsibilities. Court held board failed to fair value. $200m+ settlement. Established that board cannot delegate blindly to pricing vendor.

D. In the Matter of KCAP Financial Inc. - SEC 2012

First case where SEC alleged violation of FAS 157 for failing to adjust valuation for illiquid assets. KCAP valued its CLO and debt investments using outdated methodology despite market dislocation. Held to violate Investment Company Act.

E. SEBI vs Franklin Templeton India - SEBI Order WTM/KS/27/2020-21 dated 07.06.2021

Facts: 6 debt schemes wound up April 2020. SEBI investigation found:

• After IL&FS / Vodafone Idea / Essel defaults, Franklin continued to value securities using standard agency matrix instead of moving to more conservative / daily fair valuation.
• Failure to adjust valuation frequency after credit events, leading to inflated NAV and allowing exiting investors to leave at higher NAV.
  Finding: SEBI held violation of MF Regulations, failure to exercise due diligence, breach of Code of Conduct. Trustees fined, AMC banned from launching new debt funds for 2 years, ordered to refund Rs. 512 cr.

This is the Indian precedent for failure to adjust in stressed markets.

F. Woodford Equity Income Fund - FCA UK 2019-2024

Facts: Fund held 20%+ in unlisted / illiquid small caps but kept daily dealing and monthly valuation. When redemption pressure built, FCA found manager failed to increase valuation frequency and reclassify assets as illiquid.
Finding: FCA forced suspension, later fund closure. Link Fund Solutions fined £300m. New FCA rules now require daily liquidity stress testing and escalation to weekly / daily valuation for funds with >10% illiquid assets.

G. Open-Ended Real Estate Fund Case - German Regional Court 4 HK O 5879/24 [2024]

Court held risk indicator was misleading. Fund disclosed risk class 2 which under EU rules requires at least monthly reassessment of real estate values. But fund was valuing only quarterly. Investor awarded damages. Establishes that infrequent valuation in stressed real estate market = mis-selling.

H. Fischer vs IG Investment Management Ltd. - Ontario Superior Court 2023

Class action for market timing. Court held mutual fund managers have duty to take reasonable steps to prevent frequent trading but failed to do so. While not directly about valuation frequency, court ruled that failure to implement fair valuation / time-zone arbitrage adjustment on daily NAV breached fiduciary duty and caused dilution to long-term investors.

4. Liability if You Fail to Adjust

1. Regulatory: SEBI under Sec 11B, SEC under 206(2) Investment Advisers Act - penalty, disgorgement, debarment.
2. Civil: Negligence - Investors who remain can sue for dilution. Principle of inter-generational equity.
3. Criminal in extreme cases: If over-valuation used to attract fresh inflows.

Defense checklist to prove compliance:

• Document Fair Valuation Committee minutes on date of stress event.
• Show you switched from quarterly to monthly / daily, or triggered ad-hoc valuation.
• Show independent valuer report, not internal.
• Show swing pricing / anti-dilution levy applied.

If you are working on a specific fund - debt fund, REIT, AIF Cat II private credit - tell me