Deloitte’s most recent annual Fair Valuation Pricing Survey found that “the mutual fund industry continues to improve its procedures in an effort to better manage valuation risk, enhance the governance process, and expand time and resources to strengthen the valuation process.” The firm suggests that funds “need to double down on this front, as it is conceivable that the recent bouts of volatility may be more a feature than an abnormality over the coming months.”
The survey found that 73 percent of respondents had updated their valuation policies and procedures in the last year, most commonly to add “more pricing sources and investment types, enhancing language for certain hard-to-value investments, and updates and changes to pricing committee composition, responsibilities, frequency of meetings, and due diligence procedures over pricing vendors.” According to the survey, the revisions increasingly include requirements for independent trustee involvement where a new pricing source or methodology is first used (17 percent compared to 7 percent last year) and “[w]hen an unforeseen country, industry, or issuer event occurs that requires management to challenge the validity of the existing valuation policies and procedures” (25 percent compared to 14 percent last year).
Fifty-seven percent of respondents said that their board spent 6 to 15 percent of its time on valuation, while 34 percent spent less than 5 percent. For approximately half of boards, the time dedicated is increasing, and only 1 percent responded that the time spent is decreasing. The survey found that more boards have determined to deal with valuation oversight at the full board level (21 percent of boards take this approach versus 16 percent from last year’s survey), though 69 percent of boards still assign the topic to a committee.
The survey highlighted the valuation guidance that the SEC included in the money market fund reforms and noted that a combined 51 percent of respondents felt that either the guidance in the release or the accompanying FAQs would be the “predominant force for change.” Deloitte noted that nearly a quarter of boards made changes to their valuation policies in response to the guidance. However, 32 percent of respondents “would find additional SEC guidance on the clarification of the delegation responsibilities between the mutual fund Board and the mutual fund management most helpful.”
On the topic of liquidity, the survey found that two-thirds of respondents have a formal liquidity monitoring program in place and an additional 9 percent are developing such a program. Regarding the SEC’s recent proposal on reporting modernization, only 38 percent of respondents believe that the proposed liquidity disclosures would be helpful to investors, 33 percent believe that the disclosures would only be helpful to regulators, and 29 percent believe they provide no additional value
Deloitte offers several takeaways from the survey. It suggests that the SEC will continue to focus on valuation issues and will continue its sweeps. Deloitte foresees that fund boards “will be expected to be diligent and proactive in. . . identifying those valuation ‘moments that matter’ when they need to meet and deliberate valuation considerations and document governance actions.” It suggests that “a trend of marrying risk intelligent governance and Board reporting” will improve the valuation process. Lastly, due to the continued use of third-party vendors, boards and advisers will need to “review their emergency plans in anticipation of the next valuation disruption and work to get a better handle on their extended enterprise.”