The U.S. Securities and Exchange Commission on April 21, 2020 proposed a long-anticipated framework for fair valuation of fund investments. Proposed Rule 2a-5 under the Investment Company Act of 1940 would establish requirements for good faith determinations of fair value and would address roles and responsibilities for both fund boards and fund advisers relating to fair valuation.

The concept of “fair value” is embedded in the Investment Company Act definition of the “value” of a fund’s assets – the value of securities for which market quotations are not readily available is defined as fair value as determined in good faith by the fund’s board of directors. Recognizing the evolution of markets and fund investment practices since the SEC’s issuance of its most recent comprehensive treatment of fund valuation, as well as three significant regulatory developments since that time, the SEC seeks to modernize and formalize the framework for fair valuation determinations under the Investment Company Act.