SEC Final Rule - Good Faith Determinations of Fair Value

December 10th | 2020

The SEC recently adopted amendments to the Investment Company Act of 1940 that addresses valuation practices and the role of the board of directors with respect to the fair value of the investments of a registered investment company or business development company (a “fund”). The new rule, Rule 2a-5, sets out to establish a consistent framework for fair value and standard of baseline practices across funds. Thus, the rule applies to all registered investment companies and BDCs, regardless of their classification or sub-classification (e.g., open-end funds and closed-end funds), or their investment objectives or strategies (e.g., equity or fixed income; actively managed or tracking an index).

The rule permits a fund’s board to designate certain parties to perform the fair value determinations, who will then carry out these functions for some or all of the fund’s investments. The valuation designee can be the adviser of the fund or an officer of an internally managed fund. The valuation designation would be subject to board oversight and certain reporting, recordkeeping, and other requirements designed to facilitate the board’s ability effectively to oversee the designee’s fair value determinations.

The final rule also clarifies that the requirement to adopt written policies and procedures reasonably designed to achieve compliance with the requirements of rule 2a-5 are already a required by the compliance rule, so they are not a new, stand-alone requirement of the new rule.

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