group. We briefly list and describe some valuation verification tools and techniques that a valuation oversight group should make use of. II We offer a few words about a supervisory body, the valuation committee, that should determine and ratify appropriate valuation policies and procedures. II Finally, we illustrate some potential consequences of mispricings in the context of mutual funds to underscore the significance of the valuation process. VALUATION OVERSIGHT PHILOSOPHY: SOME CONCEPTUAL CORNERSTONES The principal objective of the pricing function is to ensure that assets are priced fairly. Fair pricing should reflect those pricing levels where, at a particular point in time, assets could be liquidated in the normal course of business. Proper valuations and pricing are not only important information content for various reporting functions such as client reporting, performance measurement, and risk analysis. They can be even more critical where they become the basis of contractual financial transactions between investing parties. As an example, open-end pooled vehicles such as mutual funds or hedge funds allow investors to join or leave the investment pool by transacting at the pool's NAV per share.2 Needless to say, any inaccurate valuations would lead to an unfair and inappropriate wealth transfer between transacting parties. In other words, valuations need to be fair to all-purchasing, redeeming, and remaining investors.3 Let us begin with some high-level themes and principles to describe the framework and objectives in which a valuation oversight function should be positioned. Statutory Valuation Guidelines It is important to distinguish between price and value. These two concepts do not always have to agree. For example, an investor purchasing an asset believes that the asset's value exceeds its current price. The converse holds for an investor selling an asset. For liquid markets, prices reflect the current market consensus view regarding value. Since the bid/ask spread for liquid assets is typically small, there is a narrow confidence interval around the market consensus of economic value. For less liquid markets, this condition does not hold. These markets are characterized by wide bid/ask spreads, suggesting less market consensus regarding economic value. A statistician would describe this situation as being one in which there is a wide confidence interval around the true economic mark. By definition, every point on this wide interval is possible. Hence, if a subsequent transaction takes 2In the case of mutual funds, the proper fair value of the assets (often hundreds of security positions), as represented by the NAV, needs to be determined on a daily basis within a few hours, which creates operational and logistical challenges. As we will see, to get this right, the devil is-as is often the case-in the details. 3For example, if a fund's NAV is understated and a new investor joins the investment pool, existing investors are inadvertently forced to give up a part of their wealth to the new investor. The same is true when a fund investor redeems and the NAV happens to be overstated.