The Securities and Exchange Commission plans to adopt a new rule that establishes what it claims is an updated regulatory framework for fund valuation practices.
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 SEC last addressed valuation practices under the Investment Company Act of 1940 more than 50 years ago. Now, many funds 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 SEC claims that the rule recognizes and reflects these changes, including the role that funds’ investment advisers may play.
“Main Street investors increasingly access our capital markets through funds and rely on them to value their investments properly,” said SEC chairman Jay Clayton. “[The] rule is designed to improve funds’ valuation practices, including by providing for effective board oversight, for the benefit and protection of fund investors.”
The rule establishes requirements for satisfying a fund board’s obligation to determine fair value in good faith for purposes of the Investment Company Act. 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 recognizes that most fund boards do not play a day-to-day role in the pricing of fund investments and permits boards to designate the determination of fair value to certain parties. This designation will be subject to detailed conditions and oversight requirements.
In addition, certain policies and procedures must be adopted and implemented in connection with the rule. Finally, the SEC adopted a related recordkeeping rule requiring funds or their advisers to maintain certain documents related to fair value determinations.
The rule will become effective 60 days after publication in the Federal Register and will have a compliance date 18 months following the effective date.