Modernising fund valuation practices across the industry
The U.S. SEC’s Rule 2a-5 – Good Faith Determinations of Fair Value – (the Rule) has a compliance date of 8 September 2022. The Rule provides a common valuation framework to be adopted by registered investment companies and/or business development companies. It also addresses valuation practices and the role of the board of directors (the Board) in ensuring the fair value of fund investments are determined in good faith.
Boards are permitted to identify a designee to perform the fund’s fair value determinations – subject to the board’s oversight. In conjunction with Rule 2a-5, funds are required to maintain appropriate documentation to support fair value determinations under the record-keeping requirements of Rule 31a-4. Further, high-quality pricing services should be an essential component of any SEC Rule 2a-5 compliance strategy for board directors. Robust pricing data - particularly for less-liquid or complex instruments - should underpin fair valuation compliance.
Challenges and solutions
What to consider when preparing for SEC Rule 2a-5
- Establishing a framework – Policies and processes should be created to support fund valuations, including managing risk, governance, conflicts of interest, and board reporting.
- Valuation risk – Managing valuations risk -- Inappropriate pricing methodologies, limited expertise in asset classes and unobservable inputs can all increase valuations risk. Boards (or designee) need to ensure valuations risk is being properly managed.
- Fair value methodologies – Supporting fair value methodologies -- Boards need to be comfortable with the approaches their firms use to determine fair value. This includes selecting, testing and applying methodologies, and specifying the methodologies that should apply to new types of investments.
- Pricing service – Overseeing pricing services -- Boards (or designee) are responsible for approving, monitoring and evaluating each pricing service used. Boards (or designee) should consider their expertise, the valuation methods used, and the service's price challenge processes.
Under Rule 2a-5, the valuation provider appointed by the board must deliver reporting to the board in two different forms: periodic and prompt reporting.
- Periodic reporting - Rule 2a-5 requires the valuation provider to give the board key information, including a summary of material fair value matters arising over the previous quarter, such as valuation risks, conflicts, or methodology changes. Annually, the provider must also deliver an assessment of the fair value process to the board.
- Prompt reporting - Rule 2a-5 also requires the valuation provider to deliver a written notification to the board about matters that materially impact the fair value of the fund or its NAV. These reports must be filed within five business days after the provider becomes aware of the issue.
Features & Benefits
What you get with our evaluated pricing services
Be supported by LSEG Evaluated Pricing Services, which has operations around the globe, providing extensive pricing coverage -- 2.7 million securities are priced daily.
Engage with experienced staff, who have an intimate understanding of financial markets and securities valuations, including methodologies and inputs.
Benefit from LSEG Real-Time –Optimized, which provides thousands of price quotes daily. Third party quote providers include Tradeweb, Trace, and MSRB.
Be confident as a result of the transparency into the methodologies, models and inputs we use. Customers can also request metrics reporting, deep dive analysis, and discussion on selected securities.
Work with a responsive team that assists clients with their due diligence requirements including meeting requests and supporting documentation. Clients can discuss valuation details directly with evaluators.
Trust an established oversight and controls structure which includes an annual SOC 1 audit by a top 4 audit firm. Dedicated compliance staff coordinate regulatory change implementation.
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