Positive Reactions to Valuation Proposal; Peirce Hits Reporting Requirements

SEC Commissioner Hester Peirce urged industry participants to comment on the SEC’s proposed rule, which provides requirements for determining fair value in good faith with respect to a fund under the 1940 Act and lays out a framework for board oversight. The proposed rule would permit a fund’s board of directors to assign the fair value determination to an investment adviser of the fund, who would then carry out these functions for some or all of the fund’s investments. This assignment of fair value functions would be subject to board oversight and certain reporting, recordkeeping, and other requirements designed to facilitate the board’s ability effectively to oversee the adviser’s fair value determinations. Initial industry reactions to the proposal have been largely positive so far. KPMG in a comprehensive review welcomed the rule proposal, saying it balances active board oversight with allowing the board to assign fair valuation determinations to the adviser. While Commissioner Peirce generally praised the proposal, she expressed concern about its potentially “overly prescriptive approach to ensuring adequate board administration of the fair valuation process.”  She pointed to the proposal’s requirements on how a fund board should oversee an adviser and the mandates governing the adviser’s reports to the board.  The rule calls for quarterly reports to the board, a report within three days on any matters associated with the adviser’s valuation process that have or could have had a material effect on the fair value of fund investments, among other requirements. “Boards are perfectly able to ensure that they have a full picture of their advisers’ valuation activities without the Commission imposing a series of one-size-fits-all requirements in a new regulation,” Peirce said, noting that fund boards already have the experience and the ability to oversee, and ensure the adequacy, efficacy, and accuracy of, an adviser’s valuation processes and that  proposed rule 2a-5 should reflect that reality rather than trying to overlay unnecessary duplicative requirements on top of it. Comments  on the proposal are open until July 21, 2020.