The SEC is Proposing a Modernization of the Framework for Fund Valuation Practices

This is huge news. We haven’t seen this addressed since 1970. The proposal reflects the vast changes that have taken place over the years. It also recognizes the important role that funds’ investment advisers may play and the expertise they may provide.

This new rule is designed to explain how fund boards can satisfy their valuation obligations in light of market developments, including an increase in the variety of asset classes held by funds and an increase in both the volume and type of data used in valuation determinations. The proposal would bring improvement to practices and protection to investors.

The rule would require a board to:

1. assess and manage material risks associated with fair value determinations;
2. select, apply and test fair value methodologies;
3. oversee and evaluate any pricing services used;
4. adopt and implement policies and procedures;
5. and maintain certain records.

Since most fund boards aren’t involved in the day-to-day process in the pricing of fund investments, the proposed rule would permit the board to assign the determination of fair value to the fund’s investment adviser, subject to additional conditions and oversight requirements. 

These conditions include:

1. specific reporting by the adviser both periodically and promptly;
2. clear specification of responsibilities and reasonable segregation of duties among the adviser’s personnel;
3. and additional recordkeeping.

The proposal will be published on the Commission’s website and in the Federal Register. The comment period for the proposal will be open until July 21, 2020.

If you have questions about fund compliance or starting your own fund, contact us today.