You’ve probably been hearing a lot about SEC Rule 2a-5 since last December, when it was first announced, sparking a period of intense discussion. Essentially, SEC Rule 2a-5 establishes new requirements for determining fair value in good faith—requirements that could have far-reaching implications for many asset managers.
Primarily, the new rule calls for a “Valuation Designee” who will oversee and adjust fair value determination processes as well as regularly report any material changes to the board. The new rule also expands on which quotes can be considered Readily Available Market Quotations, using the fair value hierarchy found in the US GAAP (level 1/2/3 input system).
The rule goes into effect on March 8, 2021, a date that marks the beginning of an 18-month period for alignment and compliance that ends on September 22, 2022. In other words, all registered investment companies under the 1940 Act, as well as business development companies and unit investment trusts (UITs) whose initial date of deposit (or rollover) falls on or after the effective date of the rule, will need to comply with the rule by the September date.
Let’s talk about the Valuation Designee first, because it is the biggest change in the rule. This person must have fiduciary duties towards the fund. So, for example, they could be the fund adviser or a trustee/depositor (for UITs only). However, the Valuation Designee cannot be a portfolio manager and may not exert influence on the fair values of assets in the portfolio.