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Ask Doug: How Often Should Our Club Create Valuations?

5/3/2021

An investment club member asks "When should our club security valuations be done?"

John H. writes to ask:

Besides at the end of each month and when someone leaves our investment club, when should valuations be done? Just wondering if a valuation should be done the day of member deposits or the day after?

The quick answer is that you only prepare a securities valuation as specified in your club’s operating documents (partnership agreement and/or bylaws).

Digging deeper, my best practices policy is that clubs should only create 13 valuations a year – one just prior to each monthly club meeting, and one year-end valuation for tax purposes on 12/31. If you were to hold meetings on a different schedule (such as quarterly or every other month, and were only collecting payments from members on that schedule), then you wouldn’t necessarily need to create monthly valuations.

The club’s official monthly valuation determines the number of units that each member payment can purchase at that meeting or at any point until the next meeting’s valuation. I suggest that clubs adopt a policy about how they will process member payments received after the meeting date or with a certain grace period after the meeting date, and then hold the recording of those payments until the next meeting. For instance, a club might hold its meeting on Monday, but any member who misses the meeting can still deliver a payment until Friday and purchase units at the missed meeting’s valuation. Any payment after that is held until the next meeting. This a compromise that encourages timely payments and allows for the kinds of minor life events that get in the way of good intentions, but discourages payments that are very late.

The valuation presented at a club’s meeting should be prepared as close to that meeting date as possible. This provides the most meaningful reporting of the club’s current conditions. Some treasurers like to prepare valuations at month-end to facilitate reconciling the club’s books with the brokerage and bank accounts. I don’t think that this is strictly necessary – it should be fairly straightforward to balance a typical club’s books without resorting to creating a valuation. If a treasurer feels that this is imperative, I would suggest moving the club’s monthly meeting to the first week of the month (so that they month-end valuation is still relatively current).

Another alternative that some treasurers employ is to generate a temporary month-end valuation which is used to reconcile the books and then deleted. However, I don’t encourage this practice since it creates one more possible source of potential problem (the treasurer has to remember to delete the valuation, then has to delete the right valuation, then has to remember not to enter transactions using the temporary valuation, for example).

You do not need to create separate valuations for member withdrawals. The exact procedures for determining the value of a member’s withdrawal should be outlined in your operating documents, but my best practices recommendation follows the BetterInvesting & ICLUBcentral sample partnership agreement, that the withdrawal is valued as of the valuation created at the next meeting after the meeting at which the withdrawal is announced to the club. This provides the club with 30 days in which to figure out how to process the withdrawal. Cash should be paid within 10 days after that point, and a request to transfer any shares of securities should be made as soon as possible after that valuation. (Side note: the valuation date used for the withdrawal is the date upon which the withdrawing partner becomes the owner of any transferred shares of securities, regardless of how long it takes for them to actually receive the shares.)

The above timeline is intended to provide a reasonable balance between processing the withdrawal in a timely fashion and providing the club with enough time to determine the best way to process the withdrawal. There is generally no reason to create additional valuations for the purpose of processing a withdrawal.

These guidelines also aim to keep things as simple as possible for the club and especially the treasurer. More importantly, they provide a consistent set of rules for members and treasurers alike. Not adhering to your club’s operating documents can create legal liability for the club. For example, if a treasurer prepares a separate valuation that is used to prepare a member’s withdrawal contrary to a club’s official policies, and that causes a member’s withdrawal amount to be reduced by several hundred dollars or more, that member may well have recourse to legal remedies.

If your club’s current bylaws or partnership agreement are unclear, or if the club has been operating in a contrary manner with respect to its operating documents, then the club should address the discrepancies as quickly as possible.

 - DOUG GERLACH