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IPA Submits Comment Letter to the SEC Regarding a Proposed Rule Governing Valuation
Practices Under the Investment Company Act of 1940

The IPA today submitted a to the SEC regarding a proposed rule to the Investment Company Act of 1940 (Investment Company Act) that would codify fair valuation requirements for funds registered under the Investment Company Act and business development companies regulated by the Investment Company Act. The proposed rule would address 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. We want to thank Martin Dozier, Partner, Alston & Bird, for heading this project, along with Owen Pinkerton, Partner, Thompson Hine, and our members that provided their critical review.

The proposed rule aims to update guidance regarding fund valuation for the first time in over 50 years, replacing a patchwork of no-action letters, staff statements and commentary in SEC releases. Among other amendments, the SEC proposal contains three distinct updates:

  1. Provides clarity on the ability of a fund’s board to assign fair value determinations to a fund’s investment adviser, subject to oversight by the board and other reporting requirements;
  2. Offers a definition of “readily available” in evaluating market quotations and whether to use “market value” or “fair value;” and
  3. Mandates detailed requirements for determining fair values and, if a fund’s board formally assigns fair value determinations to the investment adviser, requiring board oversight and detailed reporting, record-keeping, and other requirements intended to enhance the board’s oversight of the investment adviser’s fair value determinations.

The IPA commends the SEC for their thorough analysis and updated guidance regarding the above in the proposal. Our letter addresses the below corresponding concerns and recommendations:

  1. The IPA applauds the SEC for providing explicit authority for boards to assign fair value determinations to a fund’s investment adviser. The proposal, however, does not provide guidance on the ability of the investment adviser to leverage pricing services in fair value determinations. The IPA suggests that the investment adviser have the ability to assign a portion of the fair value function to such a service, subject to necessary oversight.

    Further, while the IPA appreciates the SEC’s effort of establishing a valuation framework for boards to effectively oversee an investment adviser, our letter expresses concern that the proposed rule could potentially be too prescriptive in its requirements.

    Although the IPA agrees with the SEC that the proposed rule requirements are generally in-line with current valuation practices, complying with new prescriptive reporting requirements would require extensive time and resources without a corresponding benefit to the investing public. The IPA recommends updating the proposed guidance to require reporting to address those events which have resulted in material change, using topics outlined within the proposed rule as a framework.

  2. Under the proposed rule, a market quotation would be considered readily available when it is a quoted price in active markets for identical investments. It also clarifies that a quotation is not readily available if it isn’t reliable, and that indications of interest and accommodation quotes are not considered readily available.

    The SEC proposal further outlines that for fair value methodologies to be appropriate, they must be determined in accordance with GAAP. This, however, creates confusion when considering other requirements in determining readily available market quotations. The IPA recommends further clarification in defining readily available market quotations and whether or not the framework is indeed GAAP.

Anya Coverman
SVP, Government Affairs and General Counsel
Institute for Portfolio Alternatives