SEC Proposes Rule to Modernize Fund Valuation Practices

May 5, 2020

SEC Proposes Rule to Modernize Fund Valuation Practices

WHAT HAPPENED?

Last month, the United States Securities and Exchange Commission released a proposed rule, Rule 2a-5, which would modernize valuation practices for funds. After significant changes to trading practices since the last releases on this topic over 50 years ago, the SEC is taking steps to improve the requirements. The rule intends to aid retail investors in gaining fair and complete information about their fund investments by making fund information more accurate and accessible. Highlights from the proposed rule are below:

KEY TAKEAWAYS

Under the proposed rule:

• A fund’s Investment Adviser (“Adviser”) will be permitted to determine the value of a fund with approval by the fund’s Board of Directors (“Board”) under certain conditions.
• Determining value in “good faith” will require meaningful oversight and ongoing evaluation of the determining party.
• Funds will be required to address fund valuation practices in applicable policies and procedures documents.
• A Board will be able to make good faith determinations about a valuation for a fund without readily available market quotations. The Board would also have the option to assign the task to a fund’s Adviser.
• If the fund’s Adviser performs the valuation, additional requirements will apply, such as prompt reporting to the Board and recordkeeping for the assignment.
• The parameters of a “readily available” market quotation will be made clear. Generally, these numbers will be considered “readily available” when they are an unadjusted quoted price in active markets for identical investments, which the fund can access at the measurement date.
• The SEC will rescind two previous releases addressing fund valuation practices and guidance.

WHAT DOES THIS MEAN FOR ME?

If you have questions about how fund valuation reform may affect your firm’s operations, Fairview is here to help. Contact us with inquiries about the SEC’s proposed rule. Fairview will keep you up to date with new information about the rule, as it is released.

The SEC is accepting public comments on the proposed rule until July 21, 2020. Comments can be submitted on the SEC’s website and via email at rule-comments@sec.gov.