The SEC adopted a new regulatory framework for fund valuation practices which clarifies how a fund's Board of Directors can satisfy obligations concerning fair value determination (see previous coverage). The final rulemaking goes into effect 60 days after publication in the Federal Register.
Fair Value Determinations
New Rule 2a-5 of the Investment Company Act ("ICA") sets forth required functions that must be performed in conducting fair value determinations, including:
- regularly conducting assessments;
- mitigating material risks related to fair value determinations (e.g., risks relating to material conflicts of interest);
- establishing and reviewing fair value methodologies; and
- monitoring and examining pricing services.
The rule will allow a fund's Board of Directors to designate the fund's investment adviser (or, if the fund is internally managed, an officer of the fund) to perform the valuation functions set out above, subject to additional conditions, including:
- oversight by the Board;
- an obligation for the designee to make periodic reports and prompt notification of "matters that materially affect the fair value of investments" to the Board; and
- a concise outline of responsibilities and delegation of duties to the designee's staff.
Additionally, the SEC adopted new ICA Rule 31a-4, which mandates that a fund or its adviser maintain documentation that supports fair value determinations.
Regularly Available Market Quotations
The SEC stated that fund investments must be fair-valued when market quotations are not "readily available." A market quotation would be regarded as "readily available" only if the quotation (i) is active in accessible markets for identical investments and (ii) can be regarded as reliable.
Commissioner Statement
Commissioner Hester M. Peirce supported the adoption of the rulemaking, describing it as an improvement over the proposal. Ms. Peirce said that she would have preferred a non-exclusive safe harbor or a rule that was less prescriptive. She asserted that the adopted framework should not be read as a basis for "enforcement actions rooted in inconsequential departures from the rule's requirements."
Ms. Peirce praised the adoption of new Rule 31a-4. She stated that moving recordkeeping obligations to a separate rule "centralizes investment company recordkeeping requirements" and prevents the possibility that a violation of recordkeeping requirements could lead to a determination that a board has failed in its statutory fair valuation responsibilities.
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