SEC Finalizes Rule on Fair Value Determinations

The SEC last week voted to adopt a new rule under the Investment Company Act of 1940 addressing the valuation practices of registered investment companies and business development companies. Rule 2a-5 establishes a framework and standards to determine fair value of funds in good faith for purposes of the 1940 law. The rule will become effective 60 days after publication in the Federal Register and includes an 18-month transition period.

In determining the fair value of fund investments in good faith, the new rule requires periodically assessing and managing material risk associated with fair value determinations; selecting, applying and testing fair value methodologies; and overseeing and evaluating any pricing services used in the fair valuation process. The rule also allows a fund’s board to make fair value determinations itself or to designate fair value determinations to a third party “valuation designee,” which may include the fund’s investment adviser.

In connection with Rule 2a-5, the SEC also adopted a separate rule establishing recordkeeping requirements in connection with fair valuation and rescinded other previously issued guidance relating to fair value and valuation.

The American Bankers Association supported the SEC’s proposed Rule 2a-5, as it would provide clarity and transparency and would assist bank advisers and other affected institutions on regulatory expectations regarding good-faith value determinations. Rule 2a-5 also represents an important recognition of current industry practices, including the critical role of advisers in the fair value determination process, as well as the necessity and importance of fair value practices in both institutional and retail investing.