Alternative Investment
The SEC Has Proposed A Modernized Framework for Fund Valuation Practices
Articles by: Richey May, May 12, 2020
In April, the SEC announced it had voted to propose a new framework for fund valuation practices. It’s important that our clients understand this new framework, as it may affect fees, returns, and values of fund shares. It also clarifies board responsibilities.
The valuation practices under the Investment Company Act were last updated in 1969 and 1970 (the Investment Company Act was created in 1940). Markets and investors have changed a lot in the intervening years, and the SEC feels its time valuation practices caught up to market trends. The proposed rules include an increase in the variety of assets clauses funds hold and an increase in the volume and types of data used to determine valuation.
“The way a fund values its investments is critical to our Main Street investors,” said SEC Chairman Jay Clayton. “It affects the fees they pay, the returns they receive, and the value of the fund shares they hold. Today’s proposal would improve valuation practices, including oversight, thereby protecting investors and improving market efficiency, integrity and fairness.”
from the SEC’s press release, linked below
Crucially, the new rule would more clearly define the board’s role and responsibilities in determining fair value. Since most boards don’t actively price fund investments, the new rule takes the approach that the fund’s investment advisor can be tapped to determine fair value (subject to conditions and oversight requirements, detailed in the proposed rule, linked below).
The board is still ultimately responsible for:
- assessing and managing material risks associated with fair value determinations
- selecting, applying and testing fair value methodologies
- overseeing and evaluating pricing services used
- adopting and implementing policies and procedures
- and maintaining appropriate records.
The comment period for the proposal will open July 21, 2020 and the full proposal will be published in the SEC website soon.
Until then, you can see the full press release and fact sheet from the SEC here.
You can read the full proposed rule here.
Contact us if you have any questions about how this new framework applies to your business.