Modernising fund valuation practices across the industry
On 3 December 2020, the US Securities and Exchange Commission (SEC) adopted rule 2a-5 to modernise valuation practices across the industry. The rule seeks to provide a common fund valuation framework to be adopted by registered investment companies and/or business development companies. It would address valuation practices and the role of the board of directors (the Board) and provide requirements for determining fair value in good faith with respect to a fund.
The Board of the investment company is required to perform certain functions to ensure the valuation process is well managed and valuation risk is mitigated, or actively oversee the valuation process that is managed by the investment advisor that’s been designated by the Board.
With pricing services becoming an integral part of the valuation landscape, and in many ways, the only alternative to portfolio valuations, the SEC rule references pricing services in the regulation to be overseen by investment companies through ongoing due diligence and monitoring. The compliance date set by the SEC is September 2022.
Challenges and solutions
What to consider when preparing for SEC Rule 2a-5
- Establishing a framework – A robust framework should include the appropriate valuation of investments, managing risk, governance, conflict of interest and Board reporting.
- Valuation risk – Some of the risks that can materially impact valuations include the types of investments being valued, use of unobservable inputs, risks that the pricing methodologies are inappropriate or not being applied consistently and reliance on service providers that have limited expertise in asset classes and the extent to which third-party providers rely on other vendors to perform pricing.
- Fair value methodologies – Selecting, testing and applying methodologies in a consistent manner as appropriate for determining the fair value. This requirement would include specifying the key inputs and assumptions specific to each asset class and the methodologies that will apply to new types of investments.
- Pricing service – Overseeing and evaluating any pricing services used. Processes for approving, monitoring, and evaluating each service would need to be established. The following should be considered: (i) the qualifications, experience, and history of the service; (ii) the valuation methods, inputs and assumptions used for each security; (iii) the service’s process for managing price challenges.
Features & Benefits
What you get with our evaluated pricing service
Refinitiv® Evaluated Pricing Service (REPS) has offices in AMERS, EMEA and APAC with established relationships in these regions. REPS provides extensive pricing coverage with 2.7 million securities priced daily.
Experienced staff with financial markets expertise with an intimate understanding behind securities valuations including methodologies and inputs.
The network includes Refinitiv’s Real-Time - Optimized infrastructure with thousands of price quotes daily, third-party quote providers and trade venues such as Tradeweb®, Trace and MSRB.
Transparency into the methodologies, models and inputs underpinning the valuations process. Upon request, customers can request metrics reporting and deep dive analysis and discussion on selected securities.
Our Evaluated Pricing Service Client Relations team assist clients with their due diligence requirements including meeting requests and supporting documentation. Clients can access evaluators to discuss detail behind the pricing of securities.
Established oversight and controls structure which includes an annual SOC 1 audit by a top 4 audit firm. Dedicated compliance members to coordinate implementations of regulations.
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