VRC Responds to SEC’s Modernized Framework for Fund Valuation

Agency’s new Rule 2a-5 specifically allows designation of investment valuation to third-party providers

New York (December 7, 2020) – Valuation Research Corporation (VRC), a leading global provider of independent valuation support and advisory services, today provided initial comments on the Securities and Exchange Commission’s announcement of the finalization of a new rule clarifying how fund boards of directors can satisfy their valuation obligations. Among other provisions, the new Rule 2a-5 explicitly permits designation of fair value determination—for assets that don’t have market quotations—to a “valuation designee” who may engage outside third parties to assist the Board in fulfilling its duties. According to the SEC, the rule, “establishes a principles-based framework for boards to use in creating their own specific process for making fair value determinations, including through designating and appropriately overseeing a valuation designee to perform certain valuation tasks.”

The final rule moves the proposed recordkeeping requirements out of rule 2a-5 and into a separate rule 31a-4 under the Act which helps underscore the objective of the final rule which is to ensure that a fund’s assets are properly valued. The rule also adopts the definition of “readily available” market quotations as it was initially proposed, however, the SEC removed from the initial proposal the requirement of establishing criteria for determining when market quotations are no longer reliable and therefore not “readily available.”

“We applaud the SEC’s initiative in modernizing its rules for fund valuation, which had not been updated in almost 50 years,” said VRC Chairman John Czapla, who also heads up the firm’s portfolio valuation group. “We are still analyzing the fine print in the final language and don’t expect any major surprises or deviations from the approach the agency took in previous drafts of the rule, for which VRC provided several suggestions during the public comment period.”

An analysis of the previous draft can be found here. VRC expects to publish detailed guidance on the final rules in the near future.

Rules 2a-5 and 31a-4 will be effective 60 days after publication in the Federal Register, and funds will then have 18 months to come into compliance. Funds may voluntarily comply in advance of the compliance date, under certain conditions.

About VRC

Valuation Research Corporation is a full-service, independent, global valuation firm. Since 1975, our network of over 1,300 valuation professionals, including VRC’s 170+ U.S.-based colleagues, has provided objective, supportable conclusions of value to domestic and international clients. The company’s core services include financial opinions for valuation, solvencycapital adequacy, and fairness in connection with mergers, acquisitions, divestitures, leveraged buyouts, recapitalizations, financings, and financial and tax reporting matters. VRC has locations in Atlanta, Boston, Chicago, Cincinnati, Dallas, Milwaukee, New York, Princeton, San Francisco, and Tampa; as well as international affiliates in Argentina, Australia, Brazil, Canada, China, Colombia, Germany, India, Japan, Luxembourg, Mexico, Singapore, Spain, and the United Kingdom.

SEC Proposes Rule Modernizing Fund Valuation Guidance

SEC Proposes Rule Modernizing Fund Valuation Guidance

Read VRC’s overview of SEC Proposed Rule 2-a5, providing the general requirements addressed within the proposal.

+ Read the May 2020 Alert Here

VRC Supports the SEC's Proposed Rule 2a-5 to Modernize Asset Valuation Guidance

VRC Supports the SEC's Proposed Rule 2a-5 to Modernize Asset Valuation Guidance

The SEC proposal continues to emphasize that boards will still need to fulfill their duty to identify, monitor, and manage potential conflicts of interest when involving third-party valuation advisors.

+ Rules Catching Up With Reality