Proposed SEC Rule Allows Boards to Delegate Fair Valuation
The SEC has proposed a new fair valuation rule that will allow the Board to delegate most responsibilities to the fund’s investment adviser. Proposed Rule 2a-5 makes the Board responsible for fair valuation of securities unless it assigns fair value determinations to the investment adviser. In such event, the Board must oversee the process by requiring written reports addressing the adequacy and effectiveness of the adviser’s process. Such reports must include an assessment of material risks including conflicts of interest, testing results of methodologies utilized, adequacy of resources, and material events. The Board must also consider how the adviser allocates individual responsibility in the process. The fair valuation process itself must include the use of appropriate methodologies, testing, recordkeeping, an ongoing review of pricing services, and market monitoring.
A specific rule that allows board delegation corrects an anomaly in the statute that has unfairly charged fund boards with valuation decisions (and liability). We would have preferred a more comprehensive rule that offered specific guidance on how to value securities, but, perhaps, this is a good first step. Although the proposed rule only applies to registered funds, we expect that the process utilized will be adopted by institutional managers and private fund sponsors.