SEC Votes to Adopt Rule for Fund Valuation Practices

The SEC adopted an updated regulatory framework for fund valuation practices under new rule 2a-5 of the 1940 Act.  The SEC in a release said the rule is designed to clarify how fund boards of directors can satisfy their valuation obligations in light of market developments, including an increase in the variety of asset classes held by funds and an increase in both the volume and type of data used in valuation determinations. The rule requires a board or its valuation designee to assess and manage material risks associated with fair value determinations; select, apply and test fair value methodologies; and oversee and evaluate any pricing services used. The rule also permits a board to assign the determinations to a “valuation designee,” subject to additional conditions and oversight requirements. The valuation designee may be the fund’s investment adviser or, if the fund is internally managed, an officer of the fund. The rule defines when market quotations are “readily available” for purposes of the Act, the threshold for determining whether a fund must fair value a security. The SEC also adopted new rule 31a-4, which provides the recordkeeping requirements associated with fair value determinations. Finally, the SEC rescinded previously issued guidance on related issues, including the role of the board of directors determining fair value and the accounting and auditing of fund investments. Commissioner Hester Peirce in a statement praised the final rule, noting its flexibility on a number of other issues. For instance a valuation designee now will have 20 days to determine whether a matter is material and five days to report material matters to the board; also the final rule removed the proposed mandatory quarterly assessments of the entire fair value process that valuation designees were to send to fund boards and instead requires valuation designees to submit reports containing board-requested information and information about material events that occurred during the previous quarter. Peirce criticized the rule. however, for the extent of detail it requires regarding how a fund board must meet its statutory obligation. “The prescriptive nature of the rulemaking could stifle fund boards’ and advisers’ initiative and innovation. We should be creating opportunities for fund boards to find better ways to do their jobs and serve fund interests, not box them in and limit their ability to adapt and grow,” Peirce said.  In an upcoming  MFDF webinar on December 9, experts from Deloitte will discuss the highlights of the final rule.