SEC Adopts New Framework for Fund Valuation
On December 3, 2020, the U.S. Securities and Exchange Commission adopted new Rule 2a-5 under the Investment Company Act of 1940, providing a new framework for fund valuation practices and clarity on how fund boards may satisfy their statutory obligation to determine the fair value of fund investments. In particular, new Rule 2a-5:
- permits fund boards to designate the fund’s investment adviser (or, for internally managed funds, a fund officer) as the party that performs determinations of fair values of fund investments (in this capacity, the “valuation designee”), subject to board oversight, without any requirement that boards subsequently ratify any fair values so determined by the valuation designee;
- establishes a principles-based framework for determining fair values of fund investments that incorporates the assessment and management of material valuation risks, the establishment, application and testing of fair valuation methodologies, and enhanced oversight of pricing services;
- requires periodic reporting by the valuation designee to facilitate board oversight; and
- formally defines when market quotations are “readily available” for purposes of the 1940 Act.
In addition, the SEC issued significant new guidance concerning various aspects of Rule 2a-5, including, among other things, examples of specific sources of valuation risk. The SEC also set forth its expectations regarding fund directors’ oversight responsibilities with respect to valuation matters. Finally, the SEC also adopted new Rule 31a-4, which establishes certain recordkeeping requirements associated with fair value determinations under Rule 2a-5.
Rule 2a-5 applies to all investment companies registered under the 1940 Act, including investment companies structured as unit investment trusts, and business development companies. While Rule 2a-5 and the related recordkeeping requirements of Rule 31a-4 will become effective 60 days from publication in the Federal Register (anticipated in early 2021), compliance with the new rules will not be required until 18 months after the effective date.
Attorneys in Vedder Price’s Investment Services Group have prepared a more detailed summary of new Rule 2a-5, which is available here.
Vedder Thinking | Articles SEC Adopts New Framework for Fund Valuation
Newsletter/Bulletin
February 1, 2021
On December 3, 2020, the U.S. Securities and Exchange Commission adopted new Rule 2a-5 under the Investment Company Act of 1940, providing a new framework for fund valuation practices and clarity on how fund boards may satisfy their statutory obligation to determine the fair value of fund investments. In particular, new Rule 2a-5:
- permits fund boards to designate the fund’s investment adviser (or, for internally managed funds, a fund officer) as the party that performs determinations of fair values of fund investments (in this capacity, the “valuation designee”), subject to board oversight, without any requirement that boards subsequently ratify any fair values so determined by the valuation designee;
- establishes a principles-based framework for determining fair values of fund investments that incorporates the assessment and management of material valuation risks, the establishment, application and testing of fair valuation methodologies, and enhanced oversight of pricing services;
- requires periodic reporting by the valuation designee to facilitate board oversight; and
- formally defines when market quotations are “readily available” for purposes of the 1940 Act.
In addition, the SEC issued significant new guidance concerning various aspects of Rule 2a-5, including, among other things, examples of specific sources of valuation risk. The SEC also set forth its expectations regarding fund directors’ oversight responsibilities with respect to valuation matters. Finally, the SEC also adopted new Rule 31a-4, which establishes certain recordkeeping requirements associated with fair value determinations under Rule 2a-5.
Rule 2a-5 applies to all investment companies registered under the 1940 Act, including investment companies structured as unit investment trusts, and business development companies. While Rule 2a-5 and the related recordkeeping requirements of Rule 31a-4 will become effective 60 days from publication in the Federal Register (anticipated in early 2021), compliance with the new rules will not be required until 18 months after the effective date.
Attorneys in Vedder Price’s Investment Services Group have prepared a more detailed summary of new Rule 2a-5, which is available here.
