SEC Proposes Rule to Modernize Fund Valuation Practices
The Securities and Exchange Commission has voted to propose a new rule to establish a framework for fund valuation practices.
The Securities and Exchange Commission has voted to propose a new rule to establish a framework for fund valuation practices. The rule is designed to clarify how fund boards 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 SEC last addressed valuation practices in 1969 and 1970, and since then, markets and fund investment practices have evolved considerably. Many funds now engage third-party pricing services to provide pricing information, particularly for thinly traded or more complex assets.
In addition, regulatory developments have altered how boards, investment advisers, independent auditors, and other market participants address valuation under the federal securities laws.
“The way a fund values its investments is critical to our Main Street investors,” said SEC chairman Jay Clayton. “It affects the fees they pay, the returns they receive, and the value of the fund shares they hold. [This] proposal would improve valuation practices, including oversight, thereby protecting investors and improving market efficiency, integrity and fairness.”
The proposed rule would establish requirements for satisfying a fund board’s obligation to determine fair value in good faith for purposes of the Investment Company Act of 1940. The rule would require a board to assess and manage material risks associated with fair value determinations; select, apply and test fair value methodologies; oversee and evaluate any pricing services used; adopt and implement policies and procedures; and maintain certain records.
Recognizing that most fund boards do not play a day-to-day role in the pricing of fund investments, the proposed rule would permit a fund’s board to assign the determination of fair value to the fund’s investment adviser, subject to additional conditions and oversight requirements. These conditions include specific reporting by the adviser both periodically and promptly; clear specification of responsibilities and reasonable segregation of duties among the adviser’s personnel; and additional recordkeeping. The proposal makes clear that a board’s effective oversight of this process must be active.
The proposal will be published on the SEC’s website and in the Federal Register, and the comment period will be open until July 21, 2020.
