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Valuation Frequently Asked Questions
March 1, 2021
Updated March 18, 2021
The staff of the Division of Investment Management has prepared the following responses to questions related to the adoption of rules 2a-5 and 31a-4 under the Investment Company Act of 1940 (“Act”) in December 2020. The staff expects to update this document from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved these FAQs or the answers to these FAQs. The FAQs, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person. The December 2020 adopting release for rules 2a-5 and 31a-4 (“Adopting Release”) is available at: https://www.sec.gov/rules/final/2020/ic-34128.pdf.
If you have questions about the application of these rules, please contact the IM Investment Company Regulation Office at 202-551-6792.
Q: As part of the adoption of new rule 2a-5 related to the fair value of fund investments, the Commission stated that it would be withdrawing certain past guidance, including ASR 118,[1] eighteen months following the effective date of the new rule. ASR 118 also contains guidance directed to independent public accountants on appropriate methods for auditing the valuation of fund securities, which the Commission stated it was withdrawing in favor of independent public accountants determining the appropriate audit approach by following the relevant auditing standards as prescribed by the Public Company Accounting Oversight Board (“PCAOB”). Can an independent public accountant stop looking to the auditing guidance contained in ASR 118 and instead solely rely on these PCAOB standards prior to the withdrawal of ASR 118 on the compliance date?
A: In the staff’s view, the guidance contained in ASR 118 directed to independent public accountants is distinct from the guidance contained in ASR 118 that is superseded or made redundant by the adoption of rule 2a-5. Accordingly, the staff would not object if an independent public accountant chooses to stop looking to the auditing guidance contained in ASR 118 and instead determines the appropriate audit approach by following only the relevant PCAOB auditing standards any time after March 8, 2021, the effective date of the release withdrawing this prior auditing guidance.[2]
Q: Rule 2a-5 defines “readily available market quotations” for purposes of section 2(a)(41) of the Act. In the adopting release, the Commission stated that this definition will apply in all contexts under the Investment Company Act and the rules thereunder, including rule 17a-7, which governs cross-trading between certain affiliated persons. The Commission had not previously defined this term in a rule. At what point must a fund conform its cross-trading practices under rule 17a-7 with the new definition of this term?
A: The Commission provided an eighteen-month transition period beginning on the effective date of rule 2a-5 (March 8, 2021) until its compliance date (Sept. 8, 2022) for rule 2a-5. Funds may choose to begin complying with rule 2a-5 at any time after the new rule’s effective date. However, funds would not be required to comply with rule 2a-5, including its definition of “readily available market quotations,” until rule 2a-5’s compliance date. This new definition applies in all contexts under the Investment Company Act, including to determine whether a security may be cross-traded under rule 17a-7, and not just to valuation matters subject to rule 2a-5. Nevertheless, if a fund chooses to comply with rule 2a-5 before its compliance date, the staff would not object if the fund does not apply rule 2a-5’s definition of readily available market quotations to its cross-trading practices under rule 17a-7 until the Sept. 8, 2022 compliance date.