With the SEC 2a-5 rule deadline fast approaching, fund managers have the opportunity to implement systems to ensure an accurate and transparent valuation process, and bring fair value determination into sharp focus, according to Bob Proctor, Head of Product Management – Oversight and Control at Milestone Group.
The rule, which will be implemented on September 8, applies to all registered investment companies and business development companies and their obligations relating to price validation and the fair value determination process more broadly including reporting.
The crucial challenge is how different parties operate and collaborate throughout this entire process. The process is data intensive and may involve multiple roles and systems across multiple firms spanning the Funds Board, Fund Managers, Accounting Agents, Data Vendors, and Sub-Advisors, according to Milestone Group.
Proctor said that asset managers are going to have to find more efficient ways to perform their oversight, back testing and risk monitoring.
“There’s been a big emphasis on back testing, risk reduction, and vendor comparisons on a more timely basis,” he commented.
“We’re seeing a lot of the firms looking at their current processes. They’re seeing where any gaps might be and trying to close those gaps,” he said.
On December 3, 2020, the Securities and Exchange Commission (SEC) adopted new rule 2a-5 under the Investment Company Act of 1940. The rule establishes an updated regulatory framework for fund valuation practices. According to the SEC, the rule is designed to clarify how fund boards of directors can satisfy their valuation obligations in light of market developments, including an increase in the variety of asset classes held by funds and an increase in both the volume and type of data used in valuation determinations.
The rule establishes requirements for satisfying a fund board’s obligation to determine fair value in good faith for purposes of the Investment Company Act. The rule requires a board or its valuation designee to assess and manage material risks associated with fair value determinations; select, apply, and test fair value methodologies; and oversee and evaluate any pricing services used.
Proctor said that many companies have “the bones in place” for the most part.
He thinks however that a lot of the firms have different methodologies they apply to the different types of assets based upon whether they have readily available market prices or not.
Proctor added the firms have to determine what is a sufficient amount of information to give to the Board to provide adequate oversight.
“In general, I think, firms have a good foundation, they just need to expand upon it and find ways to be more efficient,” he said.
According to Proctor, with asset managers trying to comply by September, there will be many that are going to be adopting temporary processes and procedures that they’ll look to replace with technology and automation over time.
“I really see this as a great opportunity for these firms to re-imagine their processes and look for efficient ways to facilitate and implement new technology,” he said.
