SEC Adopts Rule Clarifying Fair Value Determinations

April 24, 2020

On April 21, 2020, the SEC proposed Rule 2a-5 under the 1940 Act (Rule) that specifies what is required for a fund (or a business development company) to determine the fair value in good faith of the fund’s investments that do not have readily available market quotations for purposes of Section 2(a)(41) of the 1940 Act and Rule 2a-4 under the 1940 Act.
The Rule would provide, among other things, that determining the fair value in good faith for investments by a fund requires: (i) assessing and managing risks and conflicts of interest relevant to valuation; (ii) establishing and applying fair value methodologies; (iii) testing the appropriateness and accuracy of fair valuation methodologies; and (iv) evaluating pricing services. The Rule would permit the board of a fund to delegate the fair value determination for any or all of the fund’s investments to its adviser, in which case certain oversight, reporting and other responsibilities would need to be performed by the adviser (including adopting policies and procedures to address elements (i) – (iv) of the preceding sentence). To the extent that a board does not delegate fair value determinations to the fund’s adviser, the Rule would require the fund to adopt and implement policies and procedures regarding the fair value of its investments that address elements (i) – (iv) above. The Rule would also define the term “readily available market quotation” generally as a quotation that is a “quoted price (unadjusted) in active markets for identical investments” that is reliable.
The SEC also proposed to withdraw two accounting series releases (Statement Regarding “Restricted Securities,” Accounting Series Release No. 113 (Oct. 21, 1969) and Accounting for Investment Securities by Registered Investment Companies, Accounting Series Release No. 118 (Dec. 23, 1970), along with a number of no-action letters and other SEC staff guidance that funds historically have relied on with respect to their fair valuation practices.
The SEC’s deadline for public comments on the Rule is July 21, 2020.

The release proposing the Rule is available here: Click Here

This Seward & Kissel memorandum discusses the Rule in more detail: Click Here


Categories

Compliance, Investment Advisers, Investment Companies, Regulatory