SEC Staff Addresses Board Role in Valuing Securities
The staff of the SEC’s Division of Investment Management has sought to clarify the Board’s responsibility for fair valuation. The staff has indicated that despite seemingly contrary statements in the money market fund reform release, the staff did not intend to change the “general nature of the board’s responsibility” to oversee securities valuation. The Board has a “nondelegable responsibility” to evaluate prices and pricing services and has a “statutory duty” to determine fair value. However, the Board “may appoint others, such as the fund’s investment adviser or a valuation committee, to assist the board in determining fair value and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the directors.” The Board may “delegate to its appointee, subject to adequate oversight, specific responsibilities intended to assist it in implementing the fund’s valuation policies and procedures, including its due diligence of pricing services” but must “satisfy themselves” that all “appropriate factors relevant to the fair value of securities …have been considered and to determine the method for determining the fair value of each such security.”
OUR TAKE: The Board can delegate responsibility for determining prices. However, if a price turns out to be wrong, the Board must be prepared to defend itself that its reliance was reasonable based on its own due diligence of the process, the inputs, and the service providers.