SEC Proposes Modernized Framework for Fund Valuation

The SEC announced it has voted to propose a new rule that would 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 Mutual Fund Directors Forum is reviewing the proposed rule and its implications for the role of fund directors. According to the SEC, the rule proposal aims to reflect the changes in the markets, business practices, and regulations that affect how market participants and boards address valuation since it last addressed valuation practices in a pair of releases issued in 1969 and 1970. Proposed rule 2a-5 under the 1940 Act would establish requirements for satisfying a fund board’s obligation to determine fair value in good faith for purposes of the 1940 Act. 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. 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, including 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 Commission’s website and in the Federal Register. The comment period for the proposal will be open until July 21, 2020.