On December 3, 2020, the SEC adopted new Rule 2a-5 (Rule) under the 1940 Act addressing valuation practices and the role of the board of directors/trustees (board) with respect to determining the fair value of the investments of a registered investment company or business development company (fund).
Section 2(a)(41) of the 1940 Act requires funds to value their portfolio investments using the market value of their portfolio securities when market quotations are “readily available,” and, when a market quotation for a portfolio security is not readily available or if the investment is not a security, by using the investment’s fair value, as determined in good faith by the fund’s board. The Rule:
1. provides requirements for determining fair value in good faith with respect to a fund for purposes of Section 2(a)(41);
2. permits a fund’s board to delegate the fair value determination to a “valuation designee,” subject to board oversight and certain other conditions; and
3. defines when market quotations are readily available for purposes of the 1940 Act.
The Rule also contains other requirements addressing valuation practices.
The SEC also adopted a separate rule, Rule 31a-4, which governs the recordkeeping requirements associated with fair value determinations.
The Rule and Rule 31a-4 become effective 60 days after publication in the Federal Register, which has not occurred as of the date of this blog post. Compliance with the Rule and Rule 31a-4 is required 18 months after they become effective.
A Seward & Kissel client alert discussing the Rule, Rule 31a-4 and other items included in the Adopting Release is available at: Please Click Here
The Adopting Release is available at: Please Click Here