SEC Proposes Changes to Registered Fund Valuation Practices

The Securities and Exchange Commission (the "SEC") issued a press release on April 21, 2020 stating it has voted to propose a new rule that would establish an updated framework for registered fund valuation practices. The rule is designed to make clearer how fund boards can satisfy their valuation obligations in light of market developments since the last time the SEC addressed fund valuations under the Investment Company Act of 1940 (the "Investment Company Act"). Since the SEC last addressed fund valuations in 1969 and 1970, funds have significantly increased the variety of assets they hold as well as markedly increased the volume and type of data they use for valuations.

Many registered funds today engage third-party pricing services to provide valuation information, particularly with sophisticated and lightly-traded assets. Regulatory developments have altered how boards, investment advisers, independent auditors and others address valuations under applicable securities laws.

The proposed rule would establish clearer requirements for how a fund board can meet its obligation to determine fair value in good faith under the Investment Company Act. The updated rule would require a board to assess and manage material risks associated with fair value determinations and meet a variety of criteria when doing so. Significantly, the proposed rule recognizes that most fund boards do not play a day-to-day role in the pricing of fund investments and would permit a board to assign the determination of fair value to the fund's investment adviser (subject to specific oversight requirements placed on the board).

The comment period for the proposed rule is open until July 21, 2020. The proposed rule can be found here.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.