Last year, as banks saw many of the assets on their books spiral down in value, many people in the industry, and in Congress, began to wonder if marking assets to market was such a good idea.

When Congress passed the Emergency Economic Stabilization Act, it required the Securities and Exchange Commission to look into fair value accounting rules to see if mark-to- market requirements were the real villains behind the economic collapse. The SEC’s verdict: not guilty.

“Fair value and mark-to-market accounting do not appear to be the ‘cause’ of bank and other financial institution failures,” the SEC said in the 211-page report it made to Congress at the end of December. “Fair value and mark-to-market accounting has been in place for years and abruptly removing it would erode investor confidence in financial statements.”

But, while fair value rules may have been exonerated from causing America’s financial collapse, a new accounting rule, FAS 157, comes into full effect this year, clarifying how “fair value” is to be determined. Many hedge funds, already under the gun from poor performance and investor redemptions, are scrambling to comply.

“There’s certainly a lot of concern among hedge funds, and even more so among funds-of-funds,” says Espen Robak, president of the valuation firm Pluris Valuation Advisors.

In writing FAS 157, the Financial Accounting Standards Board (FASB) described three different levels of assets, with each level more difficult to price than the previous one. Robak says there is particular concern about how to distinguish between one level and the next. Pricing for Level 1 assets is fairly simple, since there is sufficient market data available to determine what their value would be if sold on the open market. For Level 2 assets, there might be some market data available, but that data is unreliable.

Level 3 assets might have broker quotes available for them, but no actual sales, so any valuation involves some sort of guesswork.

“One of the things about FAS 157 is that it requires so much more disclosure,” Robak says, “particularly when you have Level 3 assets.”

According to Chris Mears, principal-in-charge of auditing firm Rothstein Kass’ New York Metro financial services group, some hedge funds are ending up with more assets in Level 3 than they anticipated. That is partially due to the drying up of liquidity in certain sectors, he says.

Managers of these funds might have to do a little extra investor education this year. Otherwise, when investors get their financial statements, they might be understandably confused.

“There’s certainly a lot among funds-of-funds.”