SEC Proposes New Valuation Framework For Funds And BDCs

Section 2(a)(41)(B) of the Investment Company Act of 1940 (1940 Act) requires that portfolio securities without readily available market quotations be valued at "fair value as determined in good faith by the board of directors." On April 20, the Securities and Exchange Commission (SEC) voted to propose Rule 2a-5, establishing a new framework for funds' fair value determinations.

Section 2(a)(41) is a definitional provision, not a substantive one, but the SEC has long taken the position that directors have a "duty" to "determine" fair value. The most substantive formal guidance comes from accounting releases approximately 50 years ago. The Proposed Rule would expressly permit boards to assign the making of fair value determinations to the fund's investment adviser, subject to normal board oversight and certain special conditions to be established by the rule. The proposals would apply to open- and closed-end funds and business development companies . Shops that also