Deloitte Fair Valuation Survey Tracks Progress on Valuation Rule
Deloitte reports that its latest fair valuation survey was conducted and completed in an unusual year in which most fund personnel continued to primarily work virtually from their homes due to the pandemic and its ongoing effects. Yet, the most significant recent regulatory event affecting the valuation process was 1940 Act Rule 2a-5, Good Faith Determinations of Fair Value. “Given the new FV Rule reporting requirement that fund boards evaluate valuation resources, the final back-to-work model may continue to add complexity and uncertainty to the process,” Deloitte wrote, emphasizing the demand for talent to support the valuation of ever-more-complex mutual fund portfolios. “Risk managers will need to continue to assess and manage talent risks as fund groups look for opportunities to streamline the valuation process and leverage their current resources.” Deloitte’s report thoroughly reviews the valuation rule and its implications for fund boards’ oversight role. The report proposes that additional clarity from the SEC may be helpful, particularly relating to the definition of material; the risk assessment process and depth of analysis required; who can be the valuation designee (especially in a series trust and sub-adviser structure); the degree to which conflicts of interest need to be identified and monitored; and the active oversight and reporting necessary for level 2 securities, which are commonly evaluated by pricing vendors. Deloitte reports that only 25% of firms surveyed indicated that they will voluntarily comply with the FV Rule in advance of its compliance date. In terms of preparation for the implementation of the rule, Deloitte reports that of the firms it surveyed:
- 94% have already reasonably segregated fair value determinations from the portfolio management of the fund.
- 66% have already reassessed current valuation practices to assess whether any gaps exist between them and what is required under Rule 2a-5.
- 58% currently report that the adviser promptly reports to the board in writing on matters associated with the adviser’s process that materially affect, or could have materially affected, the fair value of the assigned portfolio of investments.
Deloitte experts will present a MFDF webinar on the survey on December 8, 2021.