748 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

1Section 2(a)(41) of the Investment Company Act. 

See also 17 CFR 270.2a–4 (‘‘rule 2a–4’’). We 

generally use the term ‘‘fair value’’ in this release 

as that term is used in the definition of ‘‘value’’ in 

the Investment Company Act, that is, the value of 

securities for which no readily available market 

quotations exist. See section 2(a)(41) of the 

Investment Company Act. In contrast to the 

Investment Company Act, FASB Accounting 

Standard Codification Topic 820: Fair Value 

Measurement (‘‘ASC Topic 820’’) uses the term ‘‘fair 

value’’ to refer generally to the value of an asset or 

liability, regardless of whether that value is based 

on readily available market quotations or on other 

inputs. Accordingly, when we use the term fair 

value in this release, we are using it to mean fair 

value as defined under the Investment Company 

Act, unless we specifically note that we mean fair 

value under ASC Topic 820, such as in the sections 

below that discuss rescission of the accounting 

guidance. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 210 and 270 

[Release No. IC–34128; File No. S7–07–20] 

RIN 3235–AM71 

Good Faith Determinations of Fair 

Value 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

adopting a new rule under the 

Investment Company Act of 1940 

(‘‘Investment Company Act’’ or the 

‘‘Act’’) that will address valuation 

practices and the role of the board of 

directors with respect to the fair value 

of the investments of a registered 

investment company or business 

development company (‘‘fund’’). The 

rule will provide requirements for 

determining fair value in good faith for 

purposes of the Act. This determination 

will involve assessing and managing 

material risks associated with fair value 

determinations; selecting, applying, and 

testing fair value methodologies; and 

overseeing and evaluating any pricing 

services used. The rule will permit a 

fund’s board of directors to designate 

certain parties to perform the fair value 

determinations, who will then carry out 

these functions for some or all of the 

fund’s investments. This designation 

will be subject to board oversight and 

certain reporting and other requirements 

designed to facilitate the board’s ability 

effectively to oversee this party’s fair 

value determinations. The rule will 

include a specific provision related to 

the determination of the fair value of 

investments held by unit investment 

trusts, which do not have boards of 

directors. The rule will also define 

when market quotations are readily 

available under the Act. The 

Commission is also adopting a separate 

rule providing the recordkeeping 

requirements that will be associated 

with fair value determinations and is 

rescinding previously issued guidance 

on the role of the board of directors in 

determining fair value and the 

accounting and auditing of fund 

investments. 

DATES: Effective date: This rule is 

effective March 8, 2021. Compliance 

dates: The applicable compliance dates 

are discussed in section II.G of this rule. 

FOR FURTHER INFORMATION CONTACT: 

Zeena Abdul-Rahman, Senior Counsel; 

Joel Cavanaugh, Senior Counsel; 

Bradley Gude, Senior Counsel; Thoreau 

A. Bartmann, Senior Special Counsel; or 

Brian McLaughlin Johnson, Assistant 

Director, at (202) 551–6792, Investment 

Company Regulation Office, Division of 

Investment Management; Kieran G. 

Brown, Senior Counsel, or David J. 

Marcinkus, Branch Chief, at (202) 551– 

6825 or IMOCC@sec.gov, Chief 

Counsel’s Office, Division of Investment 

Management; Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–8549. Regarding 

accounting and auditing matters: Jenson 

Wayne or Alexis Cunningham, Assistant 

Chief Accountants at (202) 551–6918 or 

IM-CAO@sec.gov, Chief Accountant’s 

Office, Division of Investment 

Management, Securities and Exchange 

Commission; or Jeffrey Nick or Natalie 

Martin, Professional Accounting 

Fellows, at (202) 551–5300 or OCA@

sec.gov, Office of the Chief Accountant, 

Securities and Exchange Commission. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting 17 CFR 270.2a– 

5 (new rule 2a–5) and 17 CFR 270.31a– 

4 (new rule 31a–4) under the Investment 

Company Act. 

Table of Contents 

I. Introduction 

II. Discussion 

A. Fair Value as Determined in Good Faith 

Under Section 2(a)(41) of the Act 

1. Periodically Assess and Manage 

Valuation Risks 

2. Establish and Apply Fair Value 

Methodologies 

3. Test Fair Value Methodologies for 

Appropriateness and Accuracy 

4. Pricing Services 

5. Fair Value Policies and Procedures 

B. Performance of Fair Value 

Determinations 

1. Board Oversight 

2. Board Reporting 

3. Specification of Functions 

C. Recordkeeping 

D. Readily Available Market Quotations 

E. Rescission of Prior Commission Releases 

F. Existing Commission Guidance, Staff 

No-Action Letters, and Other Staff 

Guidance 

G. Transition Period 

H. Other Matters 

III. Economic Analysis 

A. Introduction 

B. Economic Baseline 

1. Current Regulatory Framework 

2. Current Practices 

3. Affected Parties 

C. General Economic Considerations 

1. Investment Adviser Role in Fair Value 

Determinations 

2. Board Considerations When Designating 

Fair Value Determinations 

3. General Discussion of Benefits and Costs 

of Good Faith Determinations of Fair 

Value 

D. Benefits and Costs 

1. Fair Value as Determined in Good Faith 

Under Section 2(a)(41) of the Act 

2. Performance of Fair Value 

Determinations 

3. Recordkeeping 

4. Readily Available Market Quotations 

5. Rescission of Prior Commission Releases 

and Guidance 

6. Cost Estimates 

7. Other Cost Considerations and 

Comments on Costs 

E. Effects on Efficiency, Competition, and 

Capital Formation 

F. Reasonable Alternatives 

1. Designation to Officers of Internally 

Managed Fund Not Permitted 

2. Safe Harbor 

3. Three-Tiered Approach 

4. More Principles-Based Approach 

5. Designation of the Performance of Fair 

Value Determinations to Service 

Providers Other Than Advisers, Officers, 

Trustees, or Depositors 

6. Not Permit Boards To Designate a 

Valuation Designee 

IV. Paperwork Reduction Act 

A. Introduction 

B. Rule 2a–5 

C. Rule 31a–4 

D. Rule 38a–1 

V. Final Regulatory Flexibility Analysis 

A. Need for the Rules 

B. Significant Issues Raised by Public 

Comments 

C. Small Entities Subject to the Rule 

D. Projected Reporting, Recordkeeping, and 

Other Compliance Requirements 

1. Recordkeeping 

2. Board Reporting 

E. Agency Action To Minimize Effect on 

Small Entities 

VI. Update to Codification of Financial 

Reporting Policies Statutory Authority 

I. Introduction 

The Investment Company Act 

requires funds to value their portfolio 

investments using the market value of 

their portfolio securities when market 

quotations are ‘‘readily available,’’ and, 

when a market quotation for a portfolio 

security is not readily available or if the 

investment is not a security, by using 

the investment’s fair value, as 

determined in good faith by the fund’s 

board.1 Proper valuation, among other 

things, promotes the purchase and sale 


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2See Good Faith Determinations of Fair Value, 

Investment Company Act Release No. 33845 (Apr. 

21, 2020) [85 FR 28734 (May 13, 2020)] (‘‘Proposing 

Release’’), at n.2. 

3See Id. at nn.1–11 and accompanying text. 

4See Securities and Exchange Commission 

Codification of Financial Reporting Policies, 

Statement Regarding ‘‘Restricted Securities,’’ 

Investment Company Act Release No. 5847 (Oct. 21, 

1969) [35 FR 19989 (Dec. 31, 1970)], Financial 

Reporting Codification (CCH) section 404.04 (Apr. 

15, 1982) (‘‘ASR 113’’); Investment Companies, 

Investment Company Act Release No. 6295 (Dec. 

23, 1970) [35 FR 19986 (Dec. 31, 1970)], Financial 

Reporting Codification (CCH) section 404.03 (Apr. 

15, 1982) (‘‘ASR 118’’). ASR 113 and ASR 118 

continue to be included in the list of interpretive 

releases relating to the Investment Company Act 

found in 17 CFR part 271 as Investment Company 

Act Release Nos. 5847 and 6295, respectively. We 

refer to the releases herein as ASR 113 and ASR 

118. 

5See Proposing Release, supra footnote 2, at 

nn.17–31 and accompanying text. 

6See Use of Derivatives by Registered Investment 

Companies and Business Development Companies; 

Required Due Diligence by Broker-Dealers and 

Registered Investment Advisers Regarding Retail 

Customers’ Transactions in Certain Leveraged/ 

Inverse Investment Vehicles, Investment Company 

Act Release No. 33704 (Nov. 25, 2019) [85 FR 4446 

(Jan. 24, 2020)] (noting the dramatic growth in the 

volume and complexity of the derivatives markets 

over the past two decades, and the increased use 

of derivatives by certain funds); Use of Derivatives 

by Investment Companies under the Investment 

Company Act of 1940, Investment Company Act 

Release No. 29776 (Aug. 31, 2011) [76 FR 55237 

(Sept. 7, 2011)], at 69 (noting that ‘‘[v]aluation of 

some derivatives may present special challenges for 

funds’’); see also Use of Derivatives by Registered 

Investment Companies and Business Development 

Companies, Investment Company Act Release No. 

34084 (Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)] 

(‘‘Derivatives Adopting Release’’) at n.1 and 

accompanying text. The fund industry has grown 

tremendously in the intervening years. For 

example, in December 1969, open-end funds had 

net assets of over $53 billion. See H.R. Rep. No. 

1382, 91st Cong., 2d Sess. 2 (1970). As of September 

11, 2020, there were 12,680 open-end funds 

registered with the Commission with total net assets 

of over $27 trillion. See infra footnotes 496 through 

497 and accompanying text. Moreover, as of 

September 2020, there were 97 business 

development companies (‘‘BDCs’’) with $62 billion 

in total net assets. See infra footnote 497 and 

accompanying text. BDCs, which did not exist in 

1970, must invest at least 70% of their assets in 

certain investments, which may be difficult to 

value. See section 55(a) of the Act. 

7See 2020 Investment Company Institute Fact 

Book at data table 3 available at https://

www.icifactbook.org/data/20_fb_data. See also 

Proposing Release, supra footnote 2 (discussing the 

fund industry changes since the issuance of ASR 

113 and 118). 

8See Proposing Release, supra footnote 2. The 

comment letters on the Proposing Release (File No. 

S7–07–20) are available at https://www.sec.gov/ 

comments/s7-07-20/s70720.htm. 

9See, e.g., Comment Letter of Fidelity 

Investments (July 21, 2020) (‘‘Fidelity Comment 

Letter’’); Comment Letter of the American Bar 

Association (July 20, 2020) (‘‘ABA Comment 

Letter’’); Comment Letter of Franklin Resources, 

Inc. (July 21, 2020) (‘‘Franklin Comment Letter’’); 

Comment Letter of Charles E. Andrews, James G. 

Ellis, Pablo R. Gonza ́lez Guajardo, Vanessa C.L. 

Chang, John G. Freund, and Christopher E. Stone 

(July 21, 2020) (‘‘American Fund Trustees Comment 

Letter’’); Comment Letter of the New York City Bar 

Association (July 21, 2020) (‘‘NYC Bar Comment 

Letter’’). However, some commenters objected to 

the proposal. See Comment Letter of Douglas 

Scheidt (May 29, 2020) (‘‘Scheidt Comment Letter 

1’’) and (June 29, 2020) (‘‘Scheidt Comment Letter 

2’’); Comment Letter of Michael Cohan, David 

Jessup, Jr., and Shenghang Jiang (July 21, 2020) 

(‘‘University of Miami Comment Letter’’). 

10See, e.g., Comment Letter of J.P. Morgan Asset 

Management (July 15, 2020) (‘‘JPMAM Comment 

Letter’’); Comment Letter of the Vanguard Group 

(July 21, 2020) (‘‘Vanguard Comment Letter’’); 

Comment Letter of the Investment Company 

Institute (July 16, 2020) (‘‘ICI Comment Letter’’); 

Comment Letter of the Asset Management Group of 

the Securities Industry and Financial Markets 

Association (July 21, 2020) (‘‘SIFMA AMG 

Comment Letter’’); Comment Letter of Capital 

Research and Management Company (July 21, 2020) 

(‘‘Capital Group Comment Letter’’). 

11Money Market Fund Reform; Amendments to 

Form PF, Investment Company Act Release No. 

31166 (July 23, 2014) [79 FR 47736 (Aug. 14, 2014)] 

(‘‘2014 Money Market Fund Release’’). 

12The final rule defines a ‘‘fund’’ as a registered 

investment company or a business development 

company. Rule 2a–5(e)(1). 

13One commenter stated that rule 2a–5 does not 

require the Commission to exercise its exemptive 

authority under section 6(c). Comment Letter of 

Jack Murphy (July 20, 2020) (‘‘Murphy Comment 

Letter’’). We agree and are relying on our authority 

under other provisions of the Investment Company 

Act, including our authority under section 38(a) of 

the Act, to adopt rule 2a–5. In any event, we believe 

the final rule’s provisions are necessary or 

appropriate in the public interest and consistent 

with the protection of investors and the purposes 

fairly intended by the Act. Accordingly, we believe 

section 6(c) also provides additional authority for 

the final rule. 

14For purpose of the final rule, ‘‘board’’ means 

either the fund’s entire board of directors or a 

designated committee of such board composed of a 

majority of directors who are not interested persons 

of the fund. Rule 2a–5(e)(3). 

15See infra footnotes 138–140 and accompanying 

text (discussing the change from the proposed 

‘‘assign’’ to the term ‘‘designate’’ in the final rule). 

of fund shares at fair prices, and helps 

to avoid dilution of shareholder 

interests.2 Improper valuation can cause 

investors to pay fees that are too high or 

to base their investment decisions on 

inaccurate information.3 We are 

adopting new 17 CFR 270.2a–5 (‘‘rule 

2a–5’’ or ‘‘final rule’’) in response to the 

developments in markets and fund 

investment practices since the 

Commission last comprehensively 

addressed valuation 50 years ago. These 

include developments in the accounting 

and auditing literature,4 the growing 

complexity of valuation, and 

intervening regulatory developments 

such as the development of ASC Topic 

820 and the interplay of 17 CFR 

270.38a–1 (‘‘rule 38a–1’’ or ‘‘the 

compliance rule’’) in facilitating board 

oversight of funds and the valuation 

process.5 In addition, funds now invest 

in a greater variety of securities and 

other instruments, some of which did 

not exist in 1970 and may present 

different and more significant valuation 

challenges.6 For example, funds that 

invest primarily in fixed income 

instruments (which may require fair 

value determinations for some or all of 

the portfolio assets) have expanded from 

around $800 billion in assets to over 

$4.5 trillion in just the last 20 years.7

We proposed rule 2a–5 in April 2020 

and received more than 60 comment 

letters on the proposal.8 Most 

commenters supported the 

Commission’s goal of modernizing the 

regulatory framework for fund 

valuations.9 Commenters generally 

agreed that the proposed framework for 

making a fair value determination was 

reasonable and consistent with current 

practice, but several requested 

additional flexibility regarding certain 

proposed requirements.10

We are adopting rule 2a–5 and 

companion 17 CFR 270.31a–4 (‘‘rule 

31a–4’’ and, together with rule 2a–5, the 

‘‘rules’’) with certain modifications from 

the proposal to address the comments 

we received, including targeted 

revisions to address issues noted with 

respect to certain of the more 

prescriptive elements of the proposed 

rule. We are also rescinding the 

Commission’s previously issued 

guidance on the role of the board of 

directors in determining fair value and 

the accounting and auditing of fund 

investments as proposed and, in a 

change from the proposal, are 

superseding certain of the guidance on 

thinly traded securities and the use of 

pricing services the Commission issued 

in 2014.11

II. Discussion 

The final rule provides requirements 

for determining fair value in good faith 

with respect to a fund for purposes of 

section 2(a)(41) of the Act and rule 2a– 

4 thereunder.12 We believe that, in light 

of the developments discussed above 

and in the Proposing Release, to 

determine the fair value of fund 

investments in good faith requires a 

certain minimum, consistent framework 

for fair value and standard of baseline 

practices across funds, which the final 

rule establishes.13

Under the final rule, fair value as 

determined in good faith will require 

assessing and managing material risks 

associated with fair value 

determinations; selecting, applying, and 

testing fair value methodologies; and 

overseeing and evaluating any pricing 

services used. These required functions 

generally reflect our understanding of 

current practices used by funds to fair 

value their investments, and we discuss 

each in detail below. 

The final rule also permits a fund’s 

board 14 to designate a ‘‘valuation 

designee’’ to perform fair value 

determinations.15 The valuation 


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16Rule 2a–5(e)(4). 

17Rule 2a–5(b). 

18One commenter stated his belief that the 

Commission would need to use exemptive authority 

to ‘‘shift[ ] the statutory fair valuation 

responsibilities’’ away from fund directors. Scheidt 

Comment Letter 2. But see Murphy Comment Letter. 

As discussed above, we emphasize that the final 

rule does not in fact shift the statutory fair valuation 

responsibilities away from directors. Rather, the 

final rule establishes the requirements the board 

must meet to fulfill its continuing statutory 

obligations. 

19An open-end fund is a management investment 

company that offers for sale or has outstanding 

redeemable securities of which it is the issuer. See 

section 5(a)(1) of the Investment Company Act. A 

closed-end fund is a management investment 

company other than an open-end fund. See section 

5(a)(2) of the Investment Company Act. Section 

2(a)(48) of the Investment Company Act defines a 

‘‘business development company’’ as any closedend investment company that operates for the 

purpose of making investments in securities 

described in section 55(a)(1) through 55(a)(3) of the 

Investment Company Act and that makes available 

significant managerial assistance with respect to the 

issuers of such securities. 

20See rule 2a–5(e)(1) (defining ‘‘fund’’ to mean a 

registered investment company or business 

development company). 

21Rule 2a–5(d). Section 4(2) of the Investment 

Company Act defines a UIT as an investment 

company that (1) is organized under a trust 

indenture or similar instrument; (2) does not have 

a board of directors; and (3) issues only redeemable 

securities, each of which represents an undivided 

interest in a unit of specified securities. But see 

Form N–7 for Registration of Unit Investment Trusts 

under the Securities Act of 1933 and the Investment 

Company Act of 1940, Investment Company Act 

Release No. 15612, Appendix B, Guide 2 (Mar. 9, 

1987) [52 FR 8268, 8295–96 (Mar. 17, 1987)] (Staff 

Guidelines stating that the board’s fair value role 

under section 2(a)(41) is to be performed by the 

UIT’s trustee or the trustee’s appointed person). See 

infra section II.E (rescission of staff guidance). 

22See, e.g., JPMAM Comment Letter; Vanguard 

Comment Letter; Comment Letter of State Street 

Global Advisors (July 21, 2020) (‘‘SSGA Comment 

Letter’’); Comment Letter of Baillie Gifford Funds 

(July 21, 2020) (‘‘Baillie Gifford Comment Letter’’). 

23See, e.g., Comment Letter of Arthur E. Johnson, 

Chairman of Independent Trustees, Fidelity Fixed 

Income and Asset Allocation Funds and David M. 

Thomas, Co-Lead Independent Trustee, Fidelity 

Equity and High Income Funds (June 26, 2020) 

(‘‘Fidelity Trustees Comment Letter’’); ICI Comment 

Letter; Comment Letter of Ronald E. Toupin, Board 

Chair, Guggenheim Funds (July 20, 2020) 

(‘‘Guggenheim Trustees Comment Letter’’); 

Catherine L. Newell, General Counsel and 

Executive Vice President, Dimensional Fund 

Advisers (July 27, 2020) (‘‘Dimensional Comment 

Letter’’); Comment Letter of Dechert LLP (July 21, 

2020) (‘‘Dechert Comment Letter’’); Comment Letter 

of David B. Smith, General Counsel, Mutual Fund 

Directors Forum (July 21, 2020) (‘‘MFDF Comment 

Letter’’). 

24See ICI Comment Letter; Fidelity Trustees 

Comment Letter; Guggenheim Trustees Comment 

Letter; Dimensional Comment Letter; Dechert 

Comment Letter. See also ASR 118 and Letter to 

Craig S. Tyle, General Counsel, Investment 

Company Institute (Dec. 8, 1999) and infra footnote 

386 and accompanying text. 

25Throughout this release, when we refer to 

‘‘appropriate’’ oversight, we mean oversight 

consistent with the guidance set out infra in section 

II.B.1. 

26As stated in the Proposing Release, we believe 

that, in light of the developments discussed above, 

to determine the fair value of fund investments in 

good faith requires a certain minimum, consistent 

framework for fair value and standard of baseline 

practices across funds, which would be established 

by the final rule. See Proposing Release, supra 

footnote 2, at 14–15. 

27We do not believe that establishing a baseline 

for making fair value determinations detracts from, 

or is at odds with, the board’s fiduciary duty. 

Nothing in this rulemaking should be construed as 

abrogating or limiting any of the fiduciary duties 

that boards owe to funds. See, e.g., section 36(a) of 

the Act; Burks v. Lasker, 441 U.S. 471, 484–85 

(1970). 

28See also Fidelity Comment Letter (approving of 

the proposed approach of describing the process 

that must be followed rather than the describing 

with specificity the substantive elements of a 

proper fair value determination); ICI Comment 

Letter (appreciating that the Commission has not 

prescribed detailed methodological or investmentspecific valuation guidance and instead emphasized 

process, reporting, and oversight). 

29See, e.g., infra section II.B.2. 

designee can be the adviser of the fund 

or, in a change from the proposal, an 

officer of an internally managed fund.16

When a board designates the 

performance of determinations of fair 

value to a valuation designee for some 

or all of the fund’s investments under 

the final rule, the final rule requires the 

board to oversee the valuation 

designee’s performance of fair value 

determinations. To facilitate such 

oversight, the final rule also includes 

certain reporting and other 

requirements.17 The final rule 

acknowledges that, consistent with 

longstanding practice, these valuation 

designees often play an important and 

valuable role in carrying out the day-today work of determining fair values. 

Under the final rule, the board remains 

responsible for the fair value 

determinations required by the statute. 

Where the board designates a valuation 

designee to perform fair value 

determinations under the final rule, the 

board will fulfill its continuing statutory 

obligations through active oversight of 

the valuation designee’s performance of 

fair value determinations and 

compliance with the other requirements 

of the final rule.18

Also, as proposed, the final rule 

applies to all registered investment 

companies and BDCs, regardless of their 

classification or sub-classification (e.g., 

open-end funds and closed-end 

funds),19 or their investment objectives 

or strategies (e.g., equity or fixed 

income; actively managed or tracking an 

index).20 In the case of a unit 

investment trust (‘‘UIT’’), because a UIT 

does not have a board of directors or 

adviser, a UIT’s trustee, or, in a change 

from the proposal, the UIT’s depositor 

must conduct fair value determinations 

under the final rule.21

While many commenters thought that 

the proposal’s general approach of 

balancing between prescriptive 

requirements and principles-based 

guidelines was reasonable, others 

requested modifications.22 A number of 

commenters recommended that the 

Commission recast the proposed rule as 

a non-exclusive safe harbor or provide 

additional flexibility.23 Some stated that 

they believed that fair value in good 

faith is a flexible concept, and thus they 

believed that fair value determinations 

are not amenable to a single approach, 

which they believed was consistent 

with the flexible approach taken in ASR 

118.24

In light of the developments since the 

Commission last comprehensively 

addressed fair value determinations for 

funds, we believe that it is important to 

establish a minimum and consistent 

framework for fair value practices across 

funds. This framework also allows the 

Commission to articulate appropriate 

oversight measures, as outlined in 

section II.B below,25 that are designed to 

help address valuation risks, including 

those arising from conflicts of interest.26

The final rule establishes minimum and 

baseline standards that we believe are 

inherent in any good faith fair value 

determination, as informed by current 

industry practice. If we were to establish 

a safe harbor, in contrast, it may give the 

misleading impression that an approach 

to making fair value determinations that 

does not meet this minimum baseline 

would satisfy the board’s statutory 

obligations.27 The final rule does not 

establish a single approach to making 

such determinations. Instead, it 

establishes a principles-based 

framework for boards to use in creating 

their own specific process for making 

fair value determinations, including 

through designating and appropriately 

overseeing a valuation designee to 

perform certain valuation tasks.28 It 

reflects an appropriate balance between 

providing a board or valuation designee 

with the flexibility to exercise judgment 

in the valuation process consistent with 

its good faith, paired with an 

appropriate set of baseline standards. 

Accordingly, we do not think that it is 

appropriate to recast rule 2a–5 as a safe 

harbor. However, we do agree with 

commenters that additional flexibility is 

appropriate in certain areas and have 

made a number of changes from the 

proposal in this regard, as discussed 

below.29

In support of a safe-harbor approach, 

some commenters raised concerns that 

violations of the proposed rule that may 

not directly impact the value given to an 

asset, for example a failure to keep 

records for the prescribed period, could 


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30See, e.g., Comment Letter of Stradley Ronon 

Stevens Young, LLP (July 21, 2020) (‘‘Stradley 

Comment Letter’’); Comment Letter of Guggenheim 

Investments (July 21, 2020) (‘‘Guggenheim 

Comment Letter’’); Dechert Comment Letter. 

31See infra section II.C. 

32As proposed, these requirements will apply to 

a fund’s board that is determining fair value or, if 

the board designates a valuation designee to 

perform any fair value determinations as discussed 

below, to that party. 

33Rule 2a–5(a)(1). Valuation risk includes the 

risks associated with the process of determining 

whether an investment must be fair valued in the 

first place. 

34See Comment Letter of Valuation Research 

Corporation (July 21, 2020) (‘‘VRC Comment 

Letter’’); Murphy Comment Letter. 

35See, e.g., Comment Letter of Sullivan & 

Worcester LLP (June 8, 2020) (‘‘Sullivan Comment 

Letter’’) (suggesting requirement of annual reassessment of valuation risks); Comment Letter of 

the International Valuation Standard Council (July 

14, 2020) (‘‘IVSC Comment Letter’’) (same); but see 

ABA Comment Letter (stating that valuation 

policies and procedures, including procedures for 

re-assessment of valuation risks, would be subject 

to annual review under rule 38a–1, and 

recommending no minimum frequency in final 

rule). 

36See Franklin Comment Letter. For the same 

reasons, this commenter also suggested that we 

remove the proposed requirement that the adviser 

periodically report to the board on material changes 

to the assessment and management of valuation 

risks, including conflicts of interest. As discussed 

in section II.B.2.a below, the final rule includes 

periodic reporting on material changes in the 

assessment and management of valuation risks. 

37The final rule will require, among other things, 

that the board or valuation designee, as applicable, 

take into account the fund’s valuation risks in 

establishing and applying fair value methodologies 

and, where the board has designated the valuation 

designee to perform fair value determinations, 

periodic reporting on material changes in the 

management and assessment of valuation risks, as 

discussed in section II.B.2.a) below. See rule 2a– 

5(a)(2). 

38See Proposing Release, supra footnote 2, at 

section II.A.1. 

39See id. 

40See, e.g., Murphy Comment Letter. 

41See Franklin Comment Letter (questioning 

whether funds should be expected to anticipate 

‘‘potential market shocks or dislocations’’ in fair 

valuing their investments). See also ABA Comment 

Letter (stating that a board or adviser’s assessment 

of valuation risks cannot account for potential 

future events, such as potential market shocks or 

dislocations that could change the assessment or 

management of valuation risk). 

42See University of Miami Comment Letter. 

43See, e.g., Comment Letter of IHS Markit (July 

21, 2020) (‘‘IHS Markit Comment Letter’’) (stating 

that additional risks include the market structure 

for the asset); Murphy Comment Letter (stating that 

additional risks include the possibility that an 

adviser or third-party service provider will be 

unable to operate). 

44See Stradley Comment Letter. 

45See ABA Comment Letter. 

raise doubts about whether a valuation 

was made consistent with the 

requirements of the Act. These 

commenters stated that this would be 

true even where the end result of the 

actual valuation was appropriate.30 In 

response to these concerns, as discussed 

below, we are tailoring certain of the 

proposed reporting requirements and 

moving the proposed recordkeeping 

requirements out of rule 2a–5 and into 

a separate rule under the Act.31 While 

a board or adviser’s failure to comply 

with the final rule’s requirements may 

call into question the effectiveness of 

the fund’s fair value process and its 

compliance program, the Commission 

underscores that the objective of the 

final rule is to ensure that a fund’s 

assets are properly valued. A violation 

of the final rule does not necessarily 

mean that the actual values ascribed to 

particular fund investments were in fact 

inappropriate, or, for example, that the 

fund has violated rule 22c–1. 

A. Fair Value as Determined in Good 

Faith Under Section 2(a)(41) of the Act 

Rule 2a–5 sets forth certain required 

functions that must be performed to 

determine the fair value of the fund’s 

investments in good faith.32 As 

discussed below, we are adopting these 

required functions substantially as 

proposed, with several changes from the 

proposal based on the comments the 

Commission received. 

1. Periodically Assess and Manage 

Valuation Risks 

We are adopting, as proposed, the 

requirement to assess periodically any 

material risks associated with the 

determination of the fair value of the 

fund’s investments, including material 

conflicts of interest, and to manage 

those identified valuation risks.33 Also 

as proposed, the final rule does not 

identify other specific valuation risks 

that may need to be addressed under 

this requirement or establish a specific 

re-assessment frequency. 

Several commenters expressed 

general support for the valuation risk 

requirement,34 with others suggesting 

certain modifications, particularly 

regarding whether the final rule should 

prescribe a frequency for the proposed 

periodic re-assessment of the fund’s 

material valuation risks.35 One 

commenter opposed the proposed 

requirement entirely, and suggested that 

the Commission remove references to 

valuation risk from the proposed rule, 

on the basis that identified valuation 

risks should have no impact on the 

actual fair valuing of particular fund 

investments, and that this requirement 

thus would unnecessarily complicate 

the final rule while providing no 

investor protection benefit.36

After considering these comments, we 

continue to believe that requiring the 

assessment and management of material 

valuation risks in the final rule will help 

promote an effective overall process for 

fair valuing fund investments in good 

faith.37 With respect to the frequency of 

the required periodic re-assessment of 

valuation risks, we continue to believe 

that different frequencies for the reassessment of valuation risks may be 

appropriate for different funds or risks, 

and have determined not to modify the 

proposed rule to include a required 

minimum frequency. We also continue 

to believe, as stated in the Proposing 

Release, that the periodic re-assessment 

of valuation risk generally should take 

into account changes in fund 

investments, significant changes in a 

fund’s investment strategy or policies, 

market events, and other relevant 

factors.38

The Proposing Release also included 

a non-exhaustive list of examples of 

sources or types of valuation risk.39 As 

discussed below, we are reiterating this 

non-exhaustive list here, with several 

modifications to broaden the examples 

to include additional sources and types 

of risk raised by commenters. 

We received a number of comments 

on the list of sources and types of 

valuation risk. One commenter 

expressed general support for the 

inclusion of this list, including its level 

of generality in describing sources and 

types of risk.40 One commenter, on the 

other hand, stated that this list would 

cause confusion because funds cannot 

anticipate how the identified sources 

and types of valuation risk will affect 

the valuation of particular 

investments.41 One commenter stated 

that the text of the final rule should 

identify specific valuation risks (similar 

to the non-exhaustive list discussed in 

the Proposing Release) that a board or 

adviser, as applicable, must assess and 

manage.42 Other commenters 

recommended that the Commission 

identify additional sources and types of 

valuation risks.43

One commenter recommended we 

clarify that the assessment and 

management of valuation risks other 

than those identified in the Proposing 

Release can satisfy this requirement.44

Similarly, one commenter suggested we 

clarify that some sources or types of 

valuation risk may be considered more 

or less important than others based on 

a particular fund’s investments, the 

markets in which its investments trade, 

reliance on third-party service 

providers, and other relevant 

circumstances.45

After considering these comments, we 

continue to believe that a fund’s specific 


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46We recognize that in assessing and managing 

this potential source of valuation risk, a board or 

valuation designee, as applicable, may not be able 

to identify all of the types of investments the fund 

will hold or the specific valuation risks related to 

such investments. This risk assessment and 

management generally should take into account 

those investments that the fund reasonably expects 

to purchase in the reasonably near term. 

47 Investment characteristics would include 

among other things, the size of the investment 

relative to measures of market demand, such as 

daily trading volume. 

48 Indicators of potential market or sector shocks 

or dislocations could include a significant change 

in short-term volatility or market liquidity, 

significant changes in trading volume, or a sudden 

increase in trading suspensions. Additional types of 

disruptions that may affect a valuation designee’s 

or a third-party’s ability to operate include, for 

example, a system failure or cyberattack. 

49See infra footnotes 354–355 and accompanying 

text. 

50As the Commission stated in the Proposing 

Release, ASC Topic 820 refers to valuation 

approaches and valuation techniques. In practice, 

many valuation techniques are referred to as 

methods (e.g., discounted cash flow method). As a 

result, this Adopting Release uses the terms 

‘‘technique’’ and ‘‘method’’ interchangeably to refer 

to a specific way of determining fair value and 

likewise uses the terms ‘‘methods’’ and 

‘‘methodologies’’ interchangeably. 

51Proposing Release, supra footnote 2, at n.45 

and accompanying text. As stated in the Proposing 

Release, regarding the key inputs and assumptions 

specific to each asset class or portfolio holding, it 

would not be sufficient, for example, to simply state 

that private equity investments are valued using a 

discounted cash flow model, or that options are 

valued using a Black-Scholes model, without 

providing any additional detail on the specific 

qualitative and quantitative factors to be 

considered, the sources of the methodology’s inputs 

and assumptions, and a description of how the 

calculation is to be performed (which may, but need 

not necessarily, take the form of a formula). 

52See rule 2a–5(a)(2)(i). 

53See, e.g., ICI Comment Letter; Sullivan 

Comment Letter; Murphy Comment Letter; 

Comment Letter of MFS Investment Management 

(July 21, 2020) (‘‘MFS Comment Letter’’); Comment 

Letter of John Hancock Investment Management 

LLC (July 21, 2020) (‘‘John Hancock Comment 

Letter’’). 

54See, e.g., Sullivan Comment Letter; IVSC 

Comment Letter; JPMAM Comment Letter; 

valuation risks depend on the facts and 

circumstances of the particular fund’s 

investments. As such, we believe that 

the non-exhaustive list of examples of 

sources and types of valuation risk, set 

forth below, is appropriate. As we stated 

in the Proposing Release, the risks 

identified are not intended to be a 

comprehensive list of all possible 

sources of valuation risk, but a set of 

examples that may help inform fund 

boards and valuation designees. We 

agree that the additional risks identified 

by commenters may also be relevant for 

certain funds, and have broadened the 

list provided below in several respects 

to include those risks. The final rule, 

like the proposal, is designed to provide 

a board or valuation designee, as 

applicable, with the flexibility to 

determine which of the identified 

sources and types of valuation risk are 

relevant to the fund’s investments, as 

well as to identify other risks not listed 

here. The final rule also provides 

flexibility to determine whether certain 

sources and types of valuation risk 

should be weighed more heavily than 

others. 

As such, the following is a nonexhaustive list of sources or types of 

valuation risk: 

• The types of investments held or 

intended to be held by the fund 46 and 

the characteristics of those 

investments; 47

• Potential market or sector shocks or 

dislocations and other types of 

disruptions that may affect a valuation 

designee’s or a third-party’s ability to 

operate; 48

• The extent to which each fair value 

methodology uses unobservable inputs, 

particularly if such inputs are provided 

by the valuation designee; 49

• The proportion of the fund’s 

investments that are fair valued as 

determined in good faith, and their 

contribution to the fund’s returns; 

• Reliance on service providers that 

have more limited expertise in relevant 

asset classes; the use of fair value 

methodologies that rely on inputs from 

third-party service providers; and the 

extent to which third-party service 

providers rely on their own service 

providers (so-called ‘‘fourth-party’’ 

risks); and 

• The risk that the methods for 

determining and calculating fair value 

are inappropriate or that such methods 

are not being applied consistently or 

correctly. 

2. Establish and Apply Fair Value 

Methodologies 

As proposed, the final rule will 

provide that fair value as determined in 

good faith requires the board or 

valuation designee, as applicable, to 

establish and apply fair value 

methodologies. To satisfy this 

requirement, a board or valuation 

designee, as applicable, must: 

(1) Select and apply appropriate fair 

value methodologies; 

(2) Periodically review the 

appropriateness and accuracy of the 

methodologies selected and make any 

necessary changes or adjustments 

thereto; and 

(3) Monitor for circumstances that 

may necessitate the use of fair value. 

As discussed below, we are adopting 

these functions substantially as 

proposed, with certain modifications to 

respond to commenters’ concerns and 

suggestions. 

(a) Select and Apply Appropriate Fair 

Value Methodologies 

The final rule will require the board 

or valuation designee, as applicable, to 

select and apply in a consistent manner 

an appropriate methodology or 

methodologies 50 for determining 

(which includes calculating) the fair 

value of fund investments.51 As 

proposed, to satisfy this requirement, 

the board or valuation designee, as 

applicable, will have to specify the key 

inputs and assumptions specific to each 

asset class or portfolio holding.52 We 

are, however, modifying the 

requirement to select and apply 

appropriate methodologies in the final 

rule in two ways to address commenter 

concerns and suggestions. First, the 

final rule will provide that the selected 

methodologies for fund investments 

may be changed if different 

methodologies are equally or more 

representative of the fair value of the 

investments. Second, the final rule will 

not require the specification of 

methodologies that will apply to new 

types of investments in which the fund 

intends to invest. 

We received numerous comments on 

the proposed requirement that the board 

or adviser, as applicable, select and 

apply in a consistent manner an 

appropriate methodology or 

methodologies for determining (which 

includes calculating) the fair value of 

fund investments. These commenters 

generally requested clarification relating 

to the proposed requirement that a 

board or adviser, as applicable, select 

and apply fair value methodologies ‘‘in 

a consistent manner.’’ Several 

commenters stated that this proposed 

requirement suggested that a board or 

adviser, as applicable, generally may 

select only one methodology per asset 

class, and requested we clarify that this 

requirement does not preclude a board 

or adviser, as applicable, from selecting 

different methodologies for different 

securities within the same asset class or 

sub-class.53 The final rule clarifies that 

this requirement is not meant to limit a 

board or valuation designee, as 

applicable, from using an appropriate 

methodology to fair value an 

investment, even if other investments 

within the same ‘‘asset class’’ are fair 

valued using a different appropriate 

methodology. 

Similarly, commenters requested we 

clarify that the requirement to select and 

apply fair value methodologies in a 

consistent manner does not restrict a 

board’s or adviser’s ability to change the 

selected methodology for an investment 

or asset class under appropriate 

circumstances.54 We recognize that 


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Comment Letter of Seward & Kissel LLP (July 20, 

2020) (‘‘Seward & Kissel Comment Letter’’). For this 

reason, two commenters also suggested that we 

remove this term from the final rule. See Franklin 

Comment Letter; Comment Letter of Federated 

Hermes, Inc. (July 21, 2020) (‘‘Federated Hermes 

Comment Letter’’). 

55See ASC Topic 820–10–35–25 (requiring 

consistent application of valuation techniques, but 

providing that a change in a valuation technique or 

its application is appropriate if the change results 

in a measurement that is equally or more 

representative of fair value in the circumstances). 

56See rule 2a–5(a)(2)(i). 

57A change includes using a new methodology or 

making a material adjustment to an existing 

methodology. See JPMAM Comment Letter. 

58See rule 31a–4(a). Furthermore, where the 

board has designated the valuation designee to 

perform fair value determinations, the final rule 

will require that the valuation designee periodically 

report to the board on material changes to, or 

material deviations from, the fair value 

methodologies established under this requirement. 

See rule 2a–5(b)(1)(i)(A)(2)(ii). 

59Currently, ASC Topic 820 refers to valuation 

approaches, including the market approach, income 

approach, and cost approach, as well as valuation 

techniques and methods as ways in which to 

measure fair value. See supra footnote 50. 

60See, e.g., NYC Bar Comment Letter; Scheidt 

Comment Letter 2. 

61See Scheidt Comment Letter 2. 

62See ABA Comment Letter. 

63This is consistent with what the Commission 

previously said in ASR 118 (‘‘Methods which are 

in accord with this principle may, for example, be 

based on a multiple of earnings, or a discount from 

market of a similar freely traded security, or yield 

to maturity with respect to debt issues, or a 

combination of these and other methods.’’). 

Consistent with the principles in ASC Topic 820, 

the methodologies selected should maximize the 

use of relevant observable inputs and minimize the 

use of unobservable inputs. 

64See, e.g., Vanguard Comment Letter. 

65See 2014 Money Market Funds Release, supra 

footnote 11, at last paragraph of section III.D.2.a. 

66See 2014 Money Market Funds Release, supra 

footnote 11, at section III.D.2.a. 

67See ASC 820–10–35–3 and ASC 820–10–20 (‘‘A 

fair value measurement assumes that the asset or 

liability is exchanged in an orderly transaction 

between market participants to sell the asset or 

transfer the liability at the measurement date under 

current market conditions.’’; Fair Value means ‘‘the 

price that would be received to sell an asset or paid 

to transfer a liability in an orderly transaction 

between market participants at the measurement 

Continued 

there may be circumstances where it is 

appropriate to change a methodology if 

it would result in a measurement that is 

equally or more representative of fair 

value.55 Accordingly, we have modified 

the final rule to clarify that the 

requirement to apply fair value 

methodologies in a consistent manner 

does not preclude the board or valuation 

designee, as applicable, from changing 

the methodology for an investment in 

such circumstances.56 Applying a 

methodology consistently is not meant 

to lock in place a rigid pre-established 

methodology, but instead to address the 

risks associated with switching 

methodologies in order to achieve a 

specific outcome. Accordingly, the 

consistent application of appropriate 

methodologies allows for a board or 

valuation designee, as applicable, to 

select and apply a different 

methodology or methodologies for 

investments in the same asset class, or 

to change the methodology selected for 

one or more particular investments, 

based on changes to the facts and 

circumstances related to the particular 

investment if different methodologies 

are equally or more representative of the 

fair value of the investments.57 Any 

change in methodology must be 

documented under the applicable 

recordkeeping requirements.58

Commenters questioned our statement 

in the Proposing Release that to be 

appropriate under rule 2a–5, a 

methodology used for purposes of 

determining fair value must be 

consistent with ASC Topic 820,59 and 

thus must be derived from one of the 

principles-based approaches described 

therein.60 Some of these commenters 

suggested that ASC Topic 820 is not 

appropriately tailored to address all of 

the specific circumstances that may 

arise for a fund that values its assets 

daily, and stated that we should either 

provide more specific guidance for 

certain funds or investments,61 or not 

limit appropriate methodologies to 

those addressed in ASC Topic 820.62

We believe that an appropriate 

methodology must be consistent with 

those used to prepare the fund’s 

financial statements and thus be 

consistent with the principles of the 

valuation approaches laid out in ASC 

Topic 820. Therefore, if a valuation 

methodology was used that is not 

consistent with the principles of the 

valuation approaches laid out in ASC 

Topic 820, we would presume that use 

of such a methodology would be 

misleading or inaccurate. While the 

valuation approaches laid out in ASC 

Topic 820 may not directly address 

every situation that a fund may face 

because the accounting standards are 

principles-based, we believe that taking 

a valuation approach that is inconsistent 

with the principles outlined in ASC 

Topic 820 may result in a fund having 

a misleading or inaccurate fair value 

process because such an approach may 

not be consistent with U.S. GAAP and 

the fund’s financial reporting process. 

Supplemental methodologies for 

situations not explicitly outlined in ASC 

Topic 820 may be appropriately applied 

by boards or valuation designees 

provided that the methodologies are not 

inconsistent with the principles 

outlined in ASC Topic 820. We 

recognize that there is no single 

methodology for determining the fair 

value of an investment because fair 

value depends on the facts and 

circumstance of each investment, 

including the relevant market and 

market participants.63 We continue to 

believe that for any particular 

investment, there may be a range of 

appropriate values that could 

reasonably be considered to be fair 

value, and whether a specific value 

should be considered fair value will 

depend on the facts and circumstances 

of the particular investment. A 

consistent application of the selected 

methodology or methodologies, with 

changes to the methodology or 

methodologies where appropriate, 

together with the other provisions of the 

rules, would promote unbiased 

determinations of fair value within the 

range. 

Commenters suggested we clarify that 

certain guidance provided in the 2014 

Money Market Funds Adopting Release 

relating to the valuation of thinly traded 

securities is being superseded by final 

rule 2a–5 and the related guidance 

provided herein.64 We believe that the 

guidance contained in this section 

addresses the same concerns discussed 

in the guidance contained in the last 

paragraph of the section on valuing 

thinly traded securities in the 2014 

Money Market Funds Adopting 

Release.65 Accordingly, that paragraph 

is superseded. As a general principle, 

determining fair value requires taking 

into account market conditions existing 

at the time of the determination. 

Accordingly, appropriate methodologies 

for funds holding debt securities 

generally should not fair value these 

securities at par or amortized cost based 

on the expectation that the funds will 

hold those securities until maturity, if 

the funds could not reasonably expect to 

receive approximately that value upon 

the measurement date under current 

market conditions. We continue to 

believe that fair value cannot be based 

on what a buyer might pay at some later 

time, such as when the market 

ultimately recognizes the security’s true 

value as currently perceived by the 

portfolio manager.66 Funds also may not 

fair value portfolio securities at prices 

not achievable on a current basis on the 

belief that the fund would not currently 

need to sell those securities. We believe 

the principles established in ASC Topic 

820, which provide that an investment 

is valued based on an exit price at the 

measurement date from the perspective 

of a market participant under current 

market conditions, are consistent with 

the statements in this paragraph.67


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date’’). See also ASC Topic 820, at par. 820–10–35– 

54H (‘‘A reporting entity’s intention to hold the 

asset or to settle or otherwise fulfill the liability is 

not relevant when measuring fair value because fair 

value is a market-based measurement, not an entityspecific measurement.’’). 

68Proposed rule 2a–5(a)(2)(i)(B). 

69See IHS Markit Comment Letter (stating that 

funds currently have processes in place to ensure 

that a methodology and supporting pricing service 

provider are in place to cover new investments). 

70See, e.g., Sullivan Comment Letter; Seward & 

Kissel Comment Letter; ABA Comment Letter; VRC 

Comment Letter. 

71See rule 2a–5(a)(1). 

72See Proposing Release, supra footnote 2, at n.50 

and accompanying text. 

73Cf. ASC Topic 820–10–35–25, which provides 

a non-exhaustive list of events that may warrant a 

change or an adjustment to a valuation technique, 

including where (1) new markets develop, (2) new 

information becomes available, (3) information 

previously used is no longer available, (4) the 

valuation technique improves, and (5) market 

conditions change. Boards or valuation designees 

generally should seek to account for such 

occurrences and consider specifying alternative 

sources. 

74See Murphy Comment Letter. 

75See supra section II.A.2.a). 

76Rule 2a–5(a)(2)(iii). 

77Cf. ASC Topic 820–10–35–41C(b). 

78See John Hancock Comment Letter. 

79Proposed rule 2a–5(a)(2)(iv). 

80See Sullivan Comment Letter. 

81See John Hancock Comment Letter. 

82See Compliance Programs of Investment 

Companies and Investment Advisers, Investment 

Company Act Release No. 26299 (Dec. 17, 2003) [68 

FR 74713 (Dec. 24, 2003)] (‘‘Compliance Rules 

Adopting Release’’). 

The proposed rule also would have 

required the board or adviser, as 

applicable, to consider the applicability 

of the selected fair value methodologies 

to types of fund investments that a fund 

does not currently hold but in which it 

intends to invest in the future.68 This 

requirement was designed to facilitate 

the effective determination of the fair 

value of these new investments by the 

board or adviser, as applicable. While 

one commenter suggested that this 

requirement was appropriate as 

proposed,69 other commenters generally 

opposed this requirement as being 

potentially overly burdensome by 

requiring boards and advisers to 

establish a predetermined list of 

methodologies to account for all types of 

new investments in which the fund may 

invest.70

We are persuaded that specifically 

requiring a predetermination of the 

methodologies that must be applied to 

hypothetical future investments could 

cause undue burdens to the extent it 

caused a fund to establish 

methodologies for assets in which a 

fund ultimately does not invest. 

Moreover, a fund will be required to 

value all of its investments, regardless of 

whether the fund had pre-determined a 

methodology. We believe that the 

general requirement under the final rule 

to select and apply in a consistent 

manner an appropriate methodology or 

methodologies for determining (and 

calculating) the fair value of fund 

investments,71 will require a board or a 

valuation designee, where applicable, to 

determine which methodology is 

appropriate for a new investment type 

that a fund has actually purchased by 

the time the investments are valued. 

Accordingly, we have determined to 

remove from the final rule the proposed 

specific requirement that a board or 

adviser, as applicable, specify in 

advance the fair value methodologies 

that will apply to new types of 

investments in which the fund intends 

to invest. 

(b) Periodically Review the 

Appropriateness and Accuracy of the 

Methodologies Selected 

To establish and apply fair value 

methodologies appropriately, the final 

rule will require a board or valuation 

designee to review periodically the 

selected fair value methodologies for 

appropriateness and accuracy, and to 

make changes or adjustments to the 

methodologies where necessary.72 We 

are adopting this requirement 

substantially as proposed, with one 

modification, discussed below, to 

respond to a comment we received. In 

addition, as stated in the Proposing 

Release, the results of back-testing or 

calibration (as discussed below) or a 

change in circumstances specific to an 

investment, for example, could 

necessitate adjustments to a fund’s fair 

value methodologies.73

We received one comment on this 

requirement. The commenter generally 

supported it, but suggested we clarify 

that ‘‘adjustments’’ to the selected fair 

value methodologies under this 

requirement may include a change to 

new appropriate methodologies.74 We 

agree, and have added the word 

‘‘change’’ to the final rule to clarify that 

a necessary adjustment to the selected 

methodology under the final rule is not 

limited to modifying an existing 

methodology for a particular investment 

(for example, adjusting inputs), but also 

may include changing to a new 

methodology where appropriate.75

(c) Monitor for Circumstances That May 

Necessitate the Use of Fair Value 

As proposed, the final rule will also 

require the board or valuation designee, 

as applicable, to monitor for 

circumstances that may necessitate the 

use of fair value as determined in good 

faith.76 For example, if a fund invests in 

securities that trade in foreign markets, 

the board or valuation designee, as 

applicable, generally should identify 

and monitor for the kinds of significant 

events that, if they occurred after the 

market closes in the relevant 

jurisdiction but before the fund prices 

its shares, would materially affect the 

value of the security and therefore may 

suggest that market quotations are not 

reliable.77

One commenter generally requested 

we clarify that this requirement is not 

meant to require the board or valuation 

designee, where applicable, to identify 

in advance all of the circumstances that 

may require the use of fair value.78

While we agree that the circumstances 

that may necessitate fair value depend 

on the facts and circumstances of the 

particular fund’s investments and that 

certain of these circumstances cannot be 

established in advance, we also believe 

that monitoring for circumstances that 

may require the use of fair value is an 

important element of an effective overall 

process for determining fair value in 

good faith. 

The proposed rule also would have 

required the establishment of criteria for 

determining when market quotations are 

no longer reliable and therefore not 

readily available.79 One commenter 

viewed this proposed requirement as 

potentially being overly restrictive of 

boards’ and advisers’ discretion to 

question the reliability of market 

quotations, and suggested we remove it 

from the final rule.80 Another 

commenter suggested that requiring a 

board or adviser to identify in advance 

all of the criteria indicating when a 

market quotation may not be reliable 

would be overly burdensome.81

Although this requirement derived 

from the Commission’s positions under 

the compliance rule,82 we have 

determined to remove it from the final 

rule. We agree with commenters that 

requiring, in advance, a list of specific 

criteria for determining when market 

quotations may no longer be reliable 

could limit the board’s or valuation 

designee’s flexibility to consider the full 

range of conditions that may affect the 

reliability of market quotations. In 

addition, we believe that to satisfy the 

requirement to monitor for 

circumstances that may necessitate the 

use of fair value, discussed above, 

boards and valuation designees would 

have to take into account the 

circumstances that may cause market 

quotations to be no longer reliable. The 

final rule, however, will not require 


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83Rule 2a–5(a)(3). 

84See, e.g., Baillie Gifford Comment Letter; 

Capital Group Comment Letter; Comment Letter of 

Invesco Advisers, Inc. (July 21, 2020) (‘‘Invesco 

Comment Letter’’). 

85See Franklin Comment Letter. 

86See ICI Comment Letter; IHS Markit Comment 

Letter; Comment Letter of New York State Society 

of Certified Public Accountants (Jul. 22, 2020) 

(‘‘NYSSCPA Comment Letter’’). We received several 

comments generally requesting that we clarify that 

the board or adviser, where applicable, may engage 

third parties to assist with fair value 

determinations. Those comments are addressed 

below in section II.B relating to guidance on 

assistance of others. 

87See NYSSCPA Comment Letter. 

88See Comment Letter of CFA Institute (July 21, 

2020) (‘‘CFA Institute Comment Letter’’). 

89Calibration can assist in assessing whether the 

fund’s valuation technique reflects current market 

conditions, and whether any adjustments to the 

valuation technique are appropriate. ‘‘Calibration’’ 

for these purposes is the process for monitoring and 

evaluating whether there are material differences 

between the actual price the fund paid to acquire 

portfolio holdings that received a fair value under 

the Act and the prices calculated for those holdings 

by the fund’s fair value methodology at the time of 

acquisition. See Proposing Release, supra footnote 

2, at n.57. 

90See NYSSCPA Comment Letter. 

91As stated in the Proposing Release, back-testing 

involves a comparison of the fair value ascribed to 

the fund’s investment against observed transactions 

or other market information, such as quotes from 

dealers or data from pricing services. One common 

form of back-testing is ‘‘disposition analysis,’’ 

which compares a fair value as determined using 

a fair value technique with the price obtained for 

the security upon its disposition by the fund. See 

Proposing Release, supra footnote 2, at n.58. 

92See, e.g., Comment Letter of T. Rowe Price 

Associates, Inc. (‘‘July 21, 2020) (‘‘TRC Comment 

Letter’’); SIFMA Comment Letter; CFA Institute 

Comment Letter. 

93We recognize, for example, that back-testing as 

a testing method may be less useful for portfolio 

holdings that trade infrequently. See Proposing 

Release, supra footnote 2, at n.59 and 

accompanying text. 

94Rule 2a–5(a)(4). 

95See, e.g. Comment Letter of Deloitte & Touche 

LLP (July 15, 2020) (‘‘Deloitte Comment Letter’’); 

Fidelity Trustees Comment Letter; John Hancock 

Comment Letter; ICI Comment Letter; Comment 

Letter of Council of Institutional Investors (July 20, 

2020) (‘‘Council of Institutional Investors Comment 

Letter’’); Comment Letter of AIMA (July 21, 2020) 

(‘‘AIMA Comment Letter); Vanguard Comment 

Letter; Invesco Comment Letter; MFS Comment 

Letter; VRC Comment Letter; Guggenheim Comment 

Letter; TRP Comment Letter; IVSC Comment Letter; 

Comment Letter of Harvest Investments, Ltd. (July 

21, 2020) (‘‘Harvest Comment Letter’’); Murphy 

Comment Letter. 

96Stradley Comment Letter. 

those broader circumstances to be 

captured in specific criteria. 

3. Test Fair Value Methodologies for 

Appropriateness and Accuracy 

As proposed, the final rule will 

require the testing of the 

appropriateness and accuracy of the 

methodologies used to calculate fair 

value.83 This requirement is designed to 

help ensure that the selected fair value 

methodologies are appropriate and that 

adjustments to the methodologies are 

made where necessary. The final rule, 

similar to the proposal, will require the 

board or valuation designee, as 

applicable, to identify the testing 

methods to be used and the minimum 

frequency with which such testing 

methods are used, but will not require 

particular testing methods or a specific 

minimum frequency for the testing. 

While several commenters supported 

the proposed requirement,84 other 

commenters recommended that we 

modify or clarify the requirement in the 

final rule. One commenter 

recommended that we remove from the 

final rule the proposed requirement that 

the adviser or board identify the testing 

methods to be used and the minimum 

frequency with which such testing 

methods are used, viewing it as overly 

prescriptive and too limiting of the 

discretion of the board or adviser, as 

applicable, to determine how testing 

should be conducted.85 Several 

commenters recommended we clarify 

that parties other than the board or 

adviser, as applicable, such as pricing 

services, may perform the testing.86 One 

commenter asked that we provide a de 

minimis exception to the proposed 

testing requirement for funds that have 

a limited amount of fair valued 

investments.87 Finally, one commenter 

recommended that the final rule require 

that methodology testing be performed 

at least quarterly or whenever the fund 

provides financial statements to 

investors.88

After considering these comments, we 

continue to believe that the specific 

tests to be performed and the frequency 

with which such tests should be 

performed are matters that depend on 

the circumstances of each fund and thus 

should be determined by the board or 

the valuation designee, as applicable. 

We also continue to believe that 

requiring the identification of (1) the 

testing methods to be used, and (2) the 

minimum frequency of the testing, is 

appropriate and still provides boards 

and valuation designees with flexibility 

to perform methodology testing based 

on the particular circumstances of a 

particular fund.89 We believe that funds 

that have even a limited amount of fair 

valued investments should test their 

methodologies, and therefore are not 

providing a de minimis exception.90

Testing can often reveal important 

information about the continuing 

appropriateness of a methodology. We 

expect the frequency and nature of 

testing would vary depending on the 

type and amount of investments held by 

the fund. If a specific methodology 

consistently over-values or under-values 

one or more fund investments as 

compared to observed transactions, the 

board or valuation designee, as 

applicable, should investigate the 

reasons for this difference. 

Calibration and back-testing are 

examples of particularly useful testing 

methods to identify trends in certain 

circumstances, and potentially to assist 

in identifying issues with 

methodologies applied by fund service 

providers, including poor performance 

or potential conflicts of interest.91

Several commenters recommended we 

clarify that this statement is not meant 

to suggest that calibration and backtesting are required testing methods, or 

that the use of appropriate testing 

methods other than calibration and 

back-testing would not satisfy the 

testing requirement.92 While we believe 

that calibration and back-testing are 

methods that should be used for testing 

the appropriateness and accuracy of 

funds’ fair value methodologies in many 

circumstances, the final rule does not 

require calibration and back-testing, nor 

does it preclude boards or valuation 

designees, where applicable, from using 

other appropriate testing methods.93 We 

expect that as testing methodologies are 

developed and change over time, new 

and different tools for testing may also 

become more prominent or useful. The 

final rule provides flexibility to allow 

funds to use new, appropriate testing 

methods. 

4. Pricing Services 

As proposed, the final rule will 

provide that determining fair value in 

good faith requires the oversight and 

evaluation of pricing services, where 

used.94 For funds that use pricing 

services, the final rule will require that 

the board or valuation designee, as 

applicable, establish a process for 

approving, monitoring, and evaluating 

each pricing service provider. The final 

rule also will require that the board or 

valuation designee, as applicable, 

establish a process for initiating price 

challenges as appropriate. Commenters 

generally supported the proposal to 

require the board or adviser, as 

applicable, to oversee and evaluate 

pricing services.95 One commenter, 

however, stated that this oversight 

provision is unnecessary in the case of 

pricing services that are not affiliated 

with the fund’s adviser.96 This 

commenter stated that pricing services 

should not be distinguished from other 

third-party fund service providers, 

which advisers oversee to meet their 

own fiduciary obligations. Another 

commenter questioned the significance 


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97 John Hancock Comment Letter. 

98See, e.g. Fidelity Trustees Comment Letter; 

Deloitte Comment Letter. See also Capital Group 

Comment Letter (noting that more than 50% of the 

fund portfolios with non-U.S. equity strategies may 

be subject to non-U.S. price adjustments due to 

significant U.S. market moves, which would require 

pricing services to provide a substantial amount of 

pricing information). 

99See Proposing Release, supra footnote 2, at text 

following n.63 (stating that price challenges are 

typically initiated when pricing information from a 

pricing service differs materially from the board’s 

or adviser’s view of the fair value of an investment). 

100See e.g., ICI Comment Letter; JPMAM 

Comment Letter; John Hancock Comment Letter; 

Dechert Comment Letter; SIFMA AMG Comment 

Letter; TRP Comment Letter; Guggenheim Comment 

Letter; Comment Letter of Jon Hunt and Joseph T. 

Grause, Trustee and Lead Non-Interested Trustee, 

Advisors’ Inner Circle Funds Trusts (July 23, 2020) 

(‘‘Advisor’s Inner Circle Trustees Comment Letter’’); 

Murphy Comment Letter. 

101See e.g., Capital Group Comment Letter; John 

Hancock Comment Letter. 

102See e.g., ICI Comment Letter; Guggenheim 

Comment Letter; TRP Comment Letter. 

103See e.g. SIFMA AMG Comment Letter. 

104 If the board designates a valuation designee to 

perform fair value determinations, the process for 

initiating price challenges established by the 

valuation designee is required to be subject to 

appropriate board oversight under rule 2a–5. See 

infra text accompanying footnotes 214–218 (noting 

that a valuation designee may have an incentive to 

value fund assets improperly in order to increase 

fees and that, therefore, as part of the board’s 

oversight responsibilities, the board should seek to 

identify such potential conflicts of interest, monitor 

such conflicts, and take reasonable steps to manage 

such conflicts). 

105See e.g., Comment Letter of Refinitiv 

Evaluated Pricing Service (July 21, 2020) (‘‘Refinitiv 

Comment Letter’’); Comment Letter of ICE Data 

Pricing & Reference Data, LLC (July 21, 2020) (‘‘ICE 

Data Comment Letter’’); Capital Group Comment 

Letter; AIMA Comment Letter; Comment Letter of 

KPMG (July 20, 2020) (‘‘KPMG Comment Letter’’); 

Comment Letter of Duffs and Phelps (July 21, 2020) 

(‘‘Duff & Phelps Comment Letter’’); Comment Letter 

of the American Society of Appraisers (July 21, 

2020) (‘‘ASA Comment Letter’’). 

106See KPMG Comment Letter; see also Duff & 

Phelps Comment Letter. 

107See Proposing Release, supra footnote 2, at 

text accompanying n.60. 

108See PCAOB AS 2501. 

109See Council of Institutional Investors 

Comment Letter; VRC Comment Letter; IHS Markit 

Comment Letter. 

110 ICE Data Comment Letter; see also Refinitiv 

Comment Letter; Murphy Comment Letter. We 

disagree with these commenters. See Compliance 

Rules Adopting Release, supra footnote 82, at n.28 

(stating that the term ‘‘service provider’’ as used in 

the Compliance Rules Adopting Release does not 

include pricing services). 

of a pricing service’s conflicts of 

interest, stating that pricing services 

maintain relationships with a wide 

variety of investment advisers, and 

generally are expected to provide the 

same valuation information with respect 

to a particular security to all funds.97 As 

a result, this commenter asserted that it 

would be less likely for a pricing service 

to be unduly pressured to provide 

favorable information in a particular 

scenario or to a particular investment 

adviser. We believe, however, that the 

conflict is not necessarily one of 

responding to pressure from a particular 

investment adviser, but, rather, a pricing 

service might generally provide higher 

or more aggressive valuations to retain 

business. 

We believe, and many commenters 

agreed, that pricing services play an 

important role in the fair value process 

by providing information on evaluated 

prices, matrix prices, price opinions, or 

similar pricing estimates or information 

that can assist in determining the fair 

value of fund investments.98

Additionally, we believe that pricing 

services may have conflicts of interest 

such as maintaining continuing 

business relationships with the 

valuation designee. Therefore, given the 

widespread reliance on pricing services, 

the critical role they play in the 

valuation of fund investments, and their 

potential conflicts of interests, 

regardless of whether they are affiliated 

with the fund’s adviser, the final rule 

will require that pricing services be 

subject to oversight so that the board or 

valuation designee, as applicable, has a 

reasonable basis to use the pricing 

information it receives as an input in 

determining fair value in good faith. To 

oversee pricing services effectively, the 

board or valuation designee, as 

applicable, should establish a process 

for the approval, monitoring, and 

evaluation of each pricing service 

provider used. 

In a change from the proposal, we are 

modifying the final rule to require funds 

to establish a process for initiating price 

challenges as appropriate, instead of the 

proposed approach that would have 

required funds to establish criteria for 

the circumstances under which price 

challenges would be initiated.99 Many 

commenters stated that requiring funds 

to establish specific criteria, such as 

objective thresholds, for price 

challenges was too rigid. Commenters 

were concerned that this would result in 

rote or mechanical price challenges that 

may be unnecessary, while not covering 

price challenges that may be appropriate 

based on facts and circumstances not 

readily susceptible to being distilled 

into criteria specified in advance.100

Commenters stated that the 

circumstances under which a fund 

might initiate a price challenge are not 

always objective or based on set criteria 

given the myriad of different, and often 

fluid, data sources and inputs that could 

lead to challenges.101

After considering comments, we agree 

that there can be a range of 

circumstances under which a price 

challenge may be warranted, some of 

which cannot be distilled into specific 

criteria in advance.102 For example, 

such an approach may lead the 

valuation designee to challenge pricing 

information that is reasonable given 

market conditions, solely because such 

pricing information meets the preestablished criteria. We believe, 

however, that appropriate oversight of 

pricing services includes a rigorous 

analysis of the pricing information 

provided by pricing services and any 

price challenges, where appropriate. 

Therefore, we are amending this 

requirement to require that funds 

establish a process for initiating price 

challenges, instead of pre-established 

criteria.103 Such a process generally 

should outline the circumstances under 

which a price challenge should be 

initiated.104

Several commenters urged the 

Commission to provide additional 

guidance concerning who would qualify 

as a pricing service under the final 

rule.105 Two commenters stated that the 

term ‘‘pricing service’’ as used in the 

Proposing Release is not entirely 

consistent with the definition in the 

Public Company Accounting Oversight 

Board (PCAOB) standards for auditing 

fair value measurements.106 We are not 

adopting a specific list of criteria for 

who may qualify as a pricing service 

because we believe that it may become 

outdated over time and that the scope of 

the term ‘‘pricing service’’ is generally 

understood by boards and valuation 

designees. However, as we stated in the 

Proposing Release, we refer to pricing 

services as third parties that regularly 

provide funds with information on 

evaluated prices, matrix prices, price 

opinions, or similar pricing estimates or 

information to assist in determining the 

fair value of fund investments.107 We 

believe that the types of entities that 

would be pricing services under the 

final rule would include pricing 

services as defined in the PCAOB 

standards.108

Some commenters suggested we also 

include a specific requirement for a 

fund’s board or adviser, as applicable, to 

periodically review the selection of 

pricing services and to evaluate other 

pricing services.109 Two commenters, in 

contrast, stated that such a requirement 

would be unnecessary because the 

compliance rule already requires 

periodic reviews of service providers, 

including fund pricing services.110 We 

believe that a specific requirement to 

review the selection of pricing services 

is unnecessary in light of the reporting 

requirements of rule 2a–5, discussed 


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111See infra section II.B.2. 

112See MFDF Comment Letter; Fidelity Trustees 

Comment Letter; Comment Letter of Independent 

Directors Council (July 16, 2020) (‘‘IDC Comment 

Letter’’); NYC Bar Comment Letter; ABA Comment 

Letter; American Funds Trustees Comment Letter. 

113ABA Comment Letter; IDC Comment Letter; 

Fidelity Trustees Comment Letter. See also 

Advisor’s Inner Circle Trustees Comment Letter 

(stating its belief that the list of factors set out in 

the Proposing Release exceeds what is reasonably 

necessary to oversee pricing services, and offering, 

as an example, that review of a pricing service’s 

valuation methods or techniques, inputs and 

assumptions is inconsistent with the role of an 

overseer of pricing services). The specific factors 

with which the commenter had concerns were also 

included in the guidance in the 2014 Money Market 

Fund Release. We disagree with the commenter 

because we believe that a review of a pricing 

service’s valuation methods or techniques, inputs, 

and assumptions is a necessary factor of effective 

oversight by the valuation designee or the board, as 

applicable. 

114See Proposing Release, supra footnote 2, at 

text following n.154 (requesting comment on 

whether the Commission should rescind any other 

valuation guidance in light of the proposal). 

115See Proposing Release, supra footnote 2, at 

text accompanying nn.62–63. 

116This rescission is limited to section III.D.2.b of 

the 2014 Money Market Fund Release entitled ‘‘Use 

of Pricing Services.’’ The guidance in that release 

on the use of amortized cost valuation remains 

valid. See also supra footnotes 64–67 and 

accompanying text (discussing the rescission of 

certain guidance we provided in the 2014 Money 

Market Fund Release regarding thinly traded 

securities). 

117 In considering a pricing service’s valuation 

methods or techniques, inputs, and assumptions, 

the fair value policies and procedures generally 

should address whether the pricing service is 

relying on inputs or assumptions provided by the 

valuation designee or its affiliates. See Proposing 

Release, supra footnote 2, at n.62. See also infra 

section II.B.3. 

118 Guidance in the 2014 Money Market Fund 

Release contained a similar position. See, e.g., 2014 

Money Market Fund Release, supra footnote 11, at 

text accompanying n.899. 

119 Id. 

120See supra footnote 97 and accompanying text 

(discussing the conflicts of interests of pricing 

services). 

121Factors (iv) through (vi) were included in the 

Proposing Release. See Proposing Release, supra 

footnote 2, at text accompanying nn.62–63. 

122The 2014 Money Market Fund Release 

contained a similar position. See, e.g., 2014 Money 

Market Fund Release, supra footnote 11, at text 

accompanying n.899. 

123Proposed rule 2a–5(a)(5). 

124See, e.g., Comment Letter of IDC Comment 

Letter (July 21, 2020) (‘‘IAA Comment Letter’’); 

Murphy Comment Letter; ICI Comment Letter; 

Invesco Comment Letter; AIMA Comment Letter; 

IVSC Comment Letter; Comment Letter of the Small 

Business Investor Alliance (July 21, 2020) (‘‘SBIA 

Comment Letter’’); ICE Data Comment Letter; 

Fidelity Comment Letter; Comment Letter of 

Richard Cavanagh and Karen Robards, Independent 

Co-Chairs of the Boards of Directors/Trustees of the 

Funds in the BlackRock Fixed-Income Complex 

(July 17, 2020) (‘‘BlackRock Trustees Comment 

Letter’’); ABA Comment Letter; Vanguard Comment 

Letter. 

125See, e.g., Seward & Kissel Comment Letter; 

ABA Comment Letter; Fidelity Comment Letter; 

NYC Bar Comment Letter. See also Stradley 

Comment Letter and Advisor’s Inner Circle Trustees 

Comment Letter (noting that the proposed policies 

and procedures required under rule 2a–5 were 

duplicative and would be unnecessarily 

burdensome to boards). 

126 17 CFR 270.38a–1(a)(2). See also Compliance 

Rules Adopting Release, supra footnote 82. 

127See, e.g., Seward & Kissel Comment Letter; 

ABA Comment Letter; Fidelity Comment Letter; 

Advisor’s Inner Circle Trustees Comment Letter; 

NYC Bar Comment Letter. See Compliance Rules 

Adopting Release, supra footnote 82, at nn.39–47. 

below.111 We think that the board or the 

valuation designee should, as part of 

their annual review of the adequacy and 

effectiveness of the fair value process, 

consider the adequacy and effectiveness 

of the pricing services used given the 

important role that information 

provided by pricing services can play in 

the fair value process. 

In addition, several commenters 

stated that the oversight of pricing 

services requirements under rule 2a–5 

may not be consistent with previous 

guidance regarding the use of pricing 

services in the 2014 Money Market 

Fund Release, particularly regarding the 

role of the board of directors.112 Some 

of these commenters urged us to rescind 

that guidance and holistically address 

oversight of pricing services in this 

Adopting Release.113

We believe that the requirements of 

the final rule and the guidance provided 

in this section effectively address the 

concerns with oversight of pricing 

services discussed as part of the fair 

value guidance in the 2014 Money 

Market Fund Release. We state below 

our views on how oversight and 

selection of pricing services may be 

effectively conducted, which is largely 

consistent with our previous guidance 

from the 2014 Money Market Fund 

Release guidance but reflects the 

process established in rule 2a–5 

allowing the board to designate the 

valuation designee to perform fair value 

determinations.114 The guidance below 

also includes certain additional factors 

that were included in the Proposing 

Release.115 Our views stated below 

supersede the guidance the Commission 

expressed in the 2014 Money Market 

Fund Release regarding the use of 

pricing services, and so we are 

rescinding that guidance.116

We believe that under the final rule, 

before deciding to use a pricing service, 

the fund’s board or valuation designee, 

as applicable, generally should take into 

consideration factors such as: (i) The 

qualifications, experience, and history 

of the pricing service; (ii) the valuation 

methods or techniques, inputs, and 

assumptions 117 used by the pricing 

service for different classes of holdings, 

and how they are affected (if at all) as 

market conditions change; 118 (iii) the 

quality of the pricing information 

provided by the service and the extent 

to which the service determines its 

pricing information as close as possible 

to the time as of which the fund 

calculates its net asset value; 119 (iv) the 

pricing service’s process for considering 

price challenges, including how the 

pricing service incorporates information 

received from price challenges into its 

pricing information; (v) the pricing 

service’s actual and potential conflicts 

of interest and the steps the pricing 

service takes to mitigate such 

conflicts; 120 and (vi) the testing 

processes used by the pricing service.121

In addition, the fund’s board or 

valuation designee, as applicable, 

should generally consider the 

appropriateness of using pricing 

information provided by a pricing 

service in determining the fair values of 

the fund’s investments where, for 

example, the fund’s board or valuation 

designee, as applicable, does not have a 

good faith basis for believing that the 

pricing service’s pricing methodologies 

produce prices that reflect fair value.122

5. Fair Value Policies and Procedures 

The final rule does not include the 

provision in the proposal that would 

have separately required the fund to 

adopt written policies and procedures 

reasonably designed to achieve 

compliance with the requirements of 

rule 2a–5.123 While commenters 

generally supported this requirement,124

other commenters argued that policies 

and procedures required by the 

proposed rule are already required by 

the compliance rule and urged the 

Commission to clarify the interaction 

between fund obligations under the 

compliance rule and the policies and 

procedures required under the proposed 

rule.125

Rule 38a–1 requires a fund’s board, 

including a majority of its independent 

directors, to approve the fund’s policies 

and procedures, and those of each 

adviser and other specified service 

providers, based upon a finding by the 

board that the policies and procedures 

are reasonably designed to prevent 

violation of the Federal securities 

laws.126 We agree that, after our 

adoption of rules 2a–5 and 31a–4, the 

compliance rule by its terms will 

require the adoption and 

implementation of written policies and 

procedures reasonably designed to 

prevent violations of the requirements 

of rules 2a–5 and 31a–4 (‘‘fair value 

policies and procedures’’).127

Accordingly, final rule 2a–5 does not 

include a separate policies and 

procedures requirement. 

While the adopting release for the 

compliance rule included a discussion 


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128See Compliance Rules Adopting Release, 

supra footnote 82, at nn.39–47. 129See Proposing Release, supra footnote 2 at 

n.69. 130Additionally, as discussed below, rule 2a–5 

continues to contain certain board reporting 

requirements specifically tailored to the 

requirements of the final rule. While the 

compliance rule separately requires the fund’s chief 

compliance officer (‘‘CCO’’) to provide an annual 

report to the fund’s board that addresses the 

operation of these policies and procedures, 

including any material changes to these policies 

and procedures, rule 2a–5’s reporting requirements 

address a different set of concerns. See rule 38a– 

1(a)(4)(iii)(A). See also Compliance Rules Adopting 

Release, supra footnote 82. 

131For an internally-managed fund, the fair value 

policies and procedures will be adopted by the fund 

regardless of whether the board determines the fair 

value of investments itself or designates an officer 

of the fund to perform fair value determinations. 

132See Advisor’s Inner Circle Trustees Comment 

Letter (requesting that the Commission clarify that 

a board can fulfill its responsibilities under rule 

38a–1 by approving the adviser’s fair value policies 

as reasonably designed to prevent violation of the 

Federal securities laws, without the investment 

company’s having to ‘‘adopt’’ its own or the 

adviser’s policies); NYC Bar Comment Letter. 

Furthermore, as we stated in the Proposing Release, 

for UITs, the fund’s principal underwriter or 

depositor conducts the functions assigned to 

management company boards under rule 38a–1. 

Rule 38a–1(b). This would not be affected by the 

final rule. 

133See, e.g., SBIA Comment Letter; University of 

Miami Comment Letter; MFS Comment Letter; 

Vanguard Comment Letter; ABA Comment Letter; 

BlackRock Trustees Comment Letter (arguing that 

rule 2a–5 should give fund boards flexibility in 

developing fair value policies and procedures). But 

see IVSC Comment Letter (urging the Commission 

to consider requiring additional prescriptive 

elements that should be included in fair value 

policies and procedures). 

134 In this circumstance, the fund would need to 

adopt and implement policies and procedures 

under rule 38a–1 to address valuation issues and 

keep records consistent with the requirements of 

the rules. See rules 2a–5(b), 31a–4, and 38a–1(a)(1). 

135Rule 2a–5(b). 

136Rule 2a–5(d). See also infra footnotes 178 

through 180 and accompanying text (discussing the 

limited circumstance under which other parties 

may perform the requirements of paragraph (a) of 

the final rule for UITs). 

137Proposing Release, supra footnote 2, at 32. 

138See ABA Comment Letter; MFDF Comment 

Letter; Stradley Comment Letter; Dechert Comment 

Letter (stating that ‘‘assign’’ applies to rights and 

interests, not responsibilities). 

139See ABA Comment Letter (noting that this 

term is used in rule 38a–1). 

140See Stradley Comment Letter (stating that 

‘‘assign’’ seems broader than ‘‘delegate’’); ABA 

Comment Letter. 

of certain policies and procedures for 

determination of fair value that a fund 

should adopt, this discussion occurred 

prior to our adoption of rule 2a–5.128

Rule 2a–5 creates a new framework for 

fair value determinations. As we stated 

in the Proposing Release, the 

requirements of rule 2a–5 and guidance 

in this release will supersede the 

Compliance Rules Adopting Release’s 

discussion of policies and procedures 

for the pricing of portfolio securities and 

fund shares.129 Accordingly, to comply 

with the compliance rule, each fund 

must adopt and implement fair value 

policies and procedures that are 

reasonably designed to prevent 

violations of new rules 2a–5 and 31a– 

4’s requirements. Because rules 2a–5 

and 31a–4 are new rules under the Act 

with new fair value determination 

requirements, and given the intrinsic 

relationship of the rules to the board’s 

own statutory functions relating to 

valuation, the fair value policies and 

procedures must be approved by the 

board pursuant to rule 38a–1 and may 

not be considered material amendments 

to existing fair value policies and 

procedures.130

Where the board determines the fair 

value of investments, the fund will 

adopt and implement the fair value 

policies and procedures under the 

compliance rule.131 Similarly, where the 

board designates the adviser as 

valuation designee to perform fair value 

determinations under rule 2a–5(b), as 

discussed in section II.B, the adviser 

will adopt and implement the fair value 

policies and procedures under the 

compliance rule. As with a fund 

adopting fair value policies and 

procedures, the adviser’s fair value 

policies and procedures must be 

approved by the board pursuant to rule 

38a–1 and may not be considered 

material amendments to existing fair 

value policies and procedures. This 

approach clarifies, as some commenters 

requested, that the board can fulfill its 

responsibilities under the compliance 

rule if the adviser adopts fair value 

policies and procedures without the 

need for the fund to adopt duplicative 

policies separately.132 Additionally, we 

believe that this approach helps to 

ensure that fair value policies and 

procedures include an appropriate 

amount of detail, while preserving a 

certain level of flexibility for the board 

or adviser, as applicable, to tailor the 

fair value policies and procedures to the 

unique facts and circumstances of the 

fund.133

B. Performance of Fair Value 

Determinations 

Largely as proposed, under the final 

rule, a board may choose to determine 

fair value in good faith for any or all 

fund investments by carrying out all of 

the functions required in paragraph (a) 

of the final rule, including, among other 

things, selecting and applying valuation 

methodologies.134 A board could also 

designate the performance of fair value 

determinations relating to any or all 

fund investments to a valuation 

designee, subject to the board’s 

oversight. The final rule will require the 

valuation designee to make certain 

reports to the board, specify 

responsibilities regarding fair value 

determinations, and reasonably 

segregate portfolio management from 

fair value determinations.135 The trustee 

or depositor will generally perform the 

fair value functions in paragraph (a) of 

the final rule for UITs, which do not 

have a board or adviser.136 These 

provisions are designed to provide 

boards, valuation designees, and other 

parties involved with a consistent 

approach to the allocation of fair value 

functions that recognizes the important 

role that valuation designees can play in 

the fair value process, while also 

preserving a crucial role for boards to 

fulfill their obligations under section 

2(a)(41) of the Act by meeting the 

requirements of the final rule.137

Designate or Assign 

Section 2(a)(41) requires that the 

board determine fair value for securities 

that do not have readily available 

market quotations. The final rule 

provides that the board may ‘‘designate’’ 

the performance of these fair value 

determinations to a valuation designee. 

This is a change from the proposal that 

would have provided that the board 

may ‘‘assign’’ such task to an adviser. 

Some commenters questioned the use of 

the phrase ‘‘assign’’ in the proposed 

rule, stating that it was unique in the 

rules adopted under the Act. These 

commenters stated that the scope of an 

assignment was unclear.138 One such 

commenter observed that other terms, 

such as ‘‘designate,’’ are used in other 

Commission rules and connote choosing 

a party for a particular purpose.139 After 

considering comments, we believe that 

a board ‘‘designating’’ a valuation 

designee to perform fair value 

determinations better describes the 

relationship between the board and 

valuation designee under the final 

rule—that is, one where the valuation 

designee performs the fair value 

determinations for the fund on the 

board’s behalf subject to appropriate 

oversight by the fund’s board. Some 

commenters believed that the term 

‘‘assign’’ could suggest that the board 

has completely delegated the entire 

valuation function and related 

obligations to the adviser.140 We do not 

intend this result. Accordingly, the final 

rule uses the term ‘‘designate’’ instead 

of ‘‘assign.’’ 

Who May Be Designated 

In a change from the proposal, which 

would have permitted boards to assign 

only to an adviser of the fund, the final 

rule will permit boards to designate the 


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141Rule 2a–5(b). 

142See Sullivan Comment Letter; ICI Comment 

Letter; Seward & Kissel Comment Letter; Comment 

Letter of Russell Investment Management, LLC (July 

20, 2020) (‘‘Russell Comment Letter’’); Dechert 

Comment Letter. 

143See ICI Comment Letter; IDC Comment Letter; 

Seward & Kissel Comment Letter; Murphy 

Comment Letter (suggesting this would address 

‘‘turnkey’’ fund situations where the adviser 

typically only provides investment advice but the 

administrator performs other functions such as 

valuation); John Hancock Comment Letter 

(suggesting affiliated administrators); Advisor’s 

Inner Circle Trustees Comment Letter; Dechert 

Comment Letter; see also John Hancock Comment 

Letter (stating that if the administrator is an affiliate 

of the adviser, the board can exercise oversight 

through its relationship with the adviser and that 

staff guidance provides some further protections); 

Advisor’s Inner Circle Trustees Comment Letter 

(recommending permitting reporting by nonadvisers, such as fund administrators and pricing 

services). 

144See ICI Comment Letter; Seward & Kissel 

Comment Letter. 

145See CFA Institute Comment Letter; 

Dimensional Comment Letter. But see ICE Data 

Comment Letter (recommending that pricing 

services not be permitted to be assigned). 

146See CFA Institute Comment Letter. But see ICE 

Data Comment Letter (recommending that 

accounting firms not be permitted to be assigned). 

147See Murphy Comment Letter; VRC Comment 

Letter; Advisor’s Inner Circle Trustees Comment 

Letter. 

148See Sullivan Comment Letter; Deloitte 

Comment Letter; Seward & Kissel Comment Letter; 

SBIA Comment Letter; NYC Bar Comment Letter; 

see also Dechert Comment Letter; Franklin 

Comment Letter (recommending permitting officers 

generally). 

149See ICI Comment Letter; IDC Comment Letter; 

Russell Comment Letter; Seward & Kissel Comment 

Letter (stating that advisers could raise their fees in 

response to the proposed rule, resulting in higher 

costs for funds if they can only assign to advisers). 150See Seward & Kissel Comment Letter; Russell 

Comment Letter; see also Harvest Comment Letter 

(stating that fiduciary duties or registration status 

should not matter and that the board should only 

assign to third parties based upon experience, 

expertise, accuracy, and documentation and be 

fully vetted). 

151See generally IHS Market Comment Letter 

(recommending that we agree that pricing services 

are acting as fiduciaries when involved in the 

valuation process). We did not propose to require 

pricing services to act as fiduciaries as part of this 

rulemaking, and do not believe that it is appropriate 

to make such a mandate as part of this adoption. 

152See, e.g., Proposing Release, supra footnote 2, 

at 106. 

153See also supra section II.A.4 (discussing these 

conflicts). 

154See infra footnote 219 and accompanying text. 

155See also infra footnotes 184–186 and 

accompanying text. 

156See, e.g., Commission Interpretation Regarding 

Standard of Conduct for Investment Advisers, 

Investment Advisers Act Release No. 5248 (Jun. 5, 

2019) [84 FR 33669 (July 12, 2019)] (‘‘Commission 

Fiduciary Interpretation’’). 

157See, e.g., supra sections II.A.1 and II.A.2. 

158See section 15(c) of the Act. 

159To the extent that the officers tasked with 

performing these duties have additional conflicts, 

such as by being compensated with fund shares, 

boards should consider those conflicts and any 

other conflicts prior to permitting this delegation. 

See infra section II.B.1. 

160See, e.g., Zirn v. VLI Corp., 621 A.2d 773 (Del. 

1993); Guth v. Loft, Inc., 23 Del. Ch. 255, 5 A.2d 

503, 510 (1939). See also SBIA Comment Letter 

(arguing that officers of internally managed funds 

should be permitted to perform fair value 

determinations because officers of such funds 

generally have fiduciary and similar duties to the 

fund and its equity holders). 

161Rule 2a–5(e)(4). Because these officers are 

‘‘valuation designees’’ under the final rule, they 

will be required to perform all the functions rule 

2a–5 will require of valuation designees, including 

the mandatory board reporting. 

162Proposing Release, supra footnote 2, at 33–34. 

163See, e.g., TRP Comment Letter; IAA Comment 

Letter; CFA Institute Comment Letter; Vanguard 

Comment Letter. 

164See MFS Comment Letter; Seward & Kissel 

Comment Letter. 

165See Capital Group Comment Letter; IAA 

Comment Letter; SIFMA AMG Comment Letter; see 

also TRP Comment Letter (noting it could increase 

costs to assign to a sub-adviser). 

fund’s adviser to perform fair value 

determinations or, if the fund is 

internally managed, an officer of the 

fund.141 Many commenters 

recommended that we expand the types 

of entities that could perform fair value 

determinations on behalf of the board 

beyond the fund’s adviser. Commenters 

suggested that we permit any affiliate of 

the adviser; 142 fund administrators and 

affiliates; 143 committees composed of a 

blend of personnel or officers of the 

fund, adviser, or administrator; 144

pricing services; 145 accounting 

firms; 146 or any party the board has 

determined has sufficient expertise and 

capacity to conduct the fair value 

determinations.147 Some also 

recommended that we permit officers of 

internally managed funds to conduct 

this activity because these funds do not 

have advisers.148

These commenters suggested that an 

expanded list of permissible entities 

would more accurately reflect current 

organizational structures and practices, 

would make it easier for smaller funds 

to comply with rule 2a–5, and would 

facilitate boards that would prefer nonadvisers that may have fewer conflicts 

of interest.149 Some commenters 

believed it was unnecessary for the 

party performing fair value 

determinations to be a fiduciary of the 

fund.150 In contrast, others suggested 

that a fiduciary relationship is 

important.151

We generally decline to expand 

permissible designees beyond the 

adviser in the final rule because we 

believe that it is critical for the entity 

actually performing the fair value 

determinations to owe a fiduciary duty 

to the fund and be subject to direct 

board oversight whenever possible.152

While these other parties may not have 

the same conflicts as an adviser, they 

also generally have other conflicts that 

could influence their fair value 

determinations. For example, pricing 

services may have an interest in 

maintaining continuing business 

relationships with the adviser or fund, 

which could present conflicts 153 and in 

such cases, unlike advisers,154 their 

performance of fair value 

determinations may not be subject to the 

same fiduciary obligations owed to the 

fund.155 We believe that having 

fiduciary obligations to the fund will 

help ensure that the party performing 

fair value determinations acts in the 

fund’s best interest and, as appropriate, 

eliminates, mitigates, or discloses 

conflicts.156 Further, we believe that it 

is important for the valuation designee 

to have a direct relationship with the 

fund’s board and have comprehensive 

and direct knowledge of the fund.157

This is true of the fund’s adviser, whose 

advisory contract is subject to 

substantive board oversight pursuant to 

the Act,158 or, in the case of internallymanaged funds, officers of the fund. To 

the extent that other parties provide 

services that are essential for fair value 

determinations, the board or valuation 

designee can seek their assistance as 

discussed below. 

We recognize, as commenters stated, 

that internally managed funds have no 

adviser. Instead they rely on certain 

officers of the fund to perform the broad 

range of tasks that advisers to externally 

managed funds otherwise perform.159

These officers also have fiduciary 

duties,160 and as employees of the fund 

are subject to oversight by the fund’s 

board of directors. We believe that 

internally managed funds should not be 

excluded from this provision of the final 

rule solely because they have no 

adviser. Thus, in a change from the 

proposal, the final rule also permits 

such a fund’s board to designate an 

officer or officers of the fund to perform 

the fair value determinations if the fund 

does not have an adviser.161

In the Proposing Release, we stated 

that the proposed rule would permit 

boards to assign either to the fund’s 

primary adviser or one or more subadvisers.162 While some commenters 

generally supported the flexibility this 

interpretation would afford,163 others 

opposed or had concerns about it, 

arguing that sub-advisers do not 

currently perform this task and 

permitting them to do so could 

significantly increase costs.164 Some did 

not object to the flexibility but stated 

that having sub-advisers involved in 

valuation was inconsistent with some 

current practices, with some 

questioning if this would be an 

appropriate role for a sub-adviser.165 A 

number of commenters raised concerns 

about how permitting assignment to 


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166See Seward & Kissel Comment Letter; SIFMA 

AMG Comment Letter. 

167See Capital Group Comment Letter; CFA 

Institute Comment Letter; MFS Comment Letter; 

IAA Comment Letter; see also SIFMA AMG 

Comment Letter. 

168Rule 2a–5(e)(4) (defining ‘‘valuation designee’’ 

as, among other things, an adviser other than a subadviser). 

169See MFS Comment Letter; Seward & Kissel 

Comment Letter. 

170Proposed rule 2a–5(d). 

171See ICI Comment Letter; Comment Letter of 

Chapman and Cutler LLP (July 20, 2020) 

(‘‘Chapman Comment Letter’’); Comment Letter of 

Advisers Asset Management, Inc. (July 20, 2020) 

(‘‘AAM Comment Letter’’); Comment Letter of First 

Trust Portfolios L.P. (July 21, 2020) (‘‘First Trust 

Comment Letter’’); Comment Letter of Hennion & 

Walsh, Inc. (July 20, 2020) (‘‘Hennion & Walsh 

Comment Letter’’); Invesco Comment Letter; 

Comment Letter of the Bank of New York Mellon 

(July 20, 2020) (‘‘BNY Mellon Comment Letter’’); 

see also Seward & Kissel Comment Letter 

(suggesting permitting UIT trustees to assign to any 

assignee). 

172See Chapman Comment Letter; AAM 

Comment Letter; First Trust Comment Letter. 

173See BNY Mellon Comment Letter. Some 

commenters also asked that we clarify that the 

oversight elements of paragraph (b) do not apply to 

UITs. See Chapman Comment Letter; AAM 

Comment Letter; First Trust Comment Letter; 

Hennion & Walsh Comment Letter; BNY Mellon 

Comment Letter. Because paragraph (b) only applies 

when a board designates the performance of fair 

value determinations to a valuation designee, which 

a UIT will not have, we agree that it is inapplicable 

to UITs. 

174See, e.g., 17 CFR 270.17j–1(c)(1)(iii) (‘‘rule 

17j–1’’) and 38a–1(b). 

175See section 36 of the Act; see also 

Memorandum on the Regulation of Unit Investment 

Trusts from the Division of Investment Management 

to the Securities and Exchange Commission, Fed. 

Sec. L. Rep. (CCH) 84,328 (Sep. 22, 1988). 

176See, e.g., items 25 through 31 of Form N–8B– 

2 (requiring information regarding depositors that is 

similar to that required of an adviser to a 

management company in item 10 of Form N–1A). 

177Rule 2a–5(d). 

178To be clear, this exception from the 

requirement to utilize a depositor or trustee for fair 

value determinations will not continue to be 

available when a pre-existing UIT is rolled over to 

a new UIT after the termination date of the preexisting UIT. In such a case, when the rollover 

occurs, the new UIT will be required to designate 

either the depositor or trustee to perform fair value 

determinations consistent with the final rule. In 

addition, if a pre-existing UIT has a trustee or 

depositor already designated to perform the fair 

value determination, then that entity would be the 

entity responsible for performing the fair value 

determination requirements under the final rule. 

179See generally Fund of Funds Arrangements, 

Investment Company Release No. 34045 (Oct. 17, 

2020) [85 FR 73924 (Nov. 19, 2020)] (‘‘FOF 

Adopting Release’’) at 92. 

180We believe that the universe of UITs relying 

on this exception will be small. See infra footnote 

550 and accompanying text. Further, as we have 

noted previously, many existing UITs have a 

limited term, sometimes of approximately 12 to 18 

months. FOF Adopting Release, supra footnote 179, 

at n.332 and accompanying text. 

sub-advisers would work in practice, for 

example, how to resolve conflicting fair 

value determinations,166 and requested 

that we provide guidance on how to 

reconcile in such circumstances.167

The final rule will not permit boards 

to designate the performance of fair 

value determinations to fund subadvisers.168 However, consistent with 

the guidance below, boards or their 

valuation designee can seek the 

assistance of sub-advisers as they see 

appropriate. We proposed allowing 

designation to sub-advisers as a method 

to provide additional flexibility to 

boards. After considering the increased 

complexity identified by commenters 

that this flexibility may create, and 

commenters’ assertions that subadvisers typically do not currently serve 

in this role,169 we have determined that 

any benefits provided by this additional 

flexibility would not be justified by the 

additional challenges it may create. We 

also are concerned that allowing 

designation to sub-advisers may create 

complicated reconciliation and 

oversight issues for boards, advisers, 

and sub-advisers. However, we welcome 

engagement with respect to the role of 

sub-advisers in the fair value 

determination process. 

The proposed rule would have 

permitted only the UIT’s trustees to 

perform fair value determinations.170

Commenters stated that the final rule 

should permit the parties specified as 

evaluators in the UIT’s trust indenture 

or similar document, including the 

depositor and other entities, to perform 

fair value determinations under rule 2a– 

5. These commenters argued that these 

evaluators are the entities with relevant 

expertise in valuation matters and this 

change would make rule 2a–5 more 

consistent with current practice.171

Others asked that we not apply the final 

rule’s requirements to existing UITs 

given their trust indentures are 

currently drafted to permit entities other 

than trustees to value the UITs’ 

investments.172 One commenter stated 

that the cost to implement the proposed 

rule could be significant for UITs due to 

the change in practice.173

In other contexts under the 

Investment Company Act, the 

Commission has provided for a UIT’s 

depositor to conduct activities that the 

board of directors would otherwise 

conduct, given that a UIT has neither a 

board of directors nor an adviser.174 UIT 

depositors are subject to liability under 

section 36(a) of the Act for breach of 

fiduciary duty.175 We agree, in light of 

these comments, that UITs should not 

be limited to trustees to perform their 

fair value determinations. As we 

understand that the trustee traditionally 

has not performed fair value 

determinations, and we have recognized 

in the past that depositors generally 

serve the most equivalent function to an 

adviser for UITs,176 the final rule will 

permit either the fund’s depositor or 

trustee to perform the fair value 

determinations required under rule 2a– 

5.177 To the extent that the assistance of 

other parties (such as evaluators) is 

necessary, trustees or depositors can 

seek that assistance consistent with the 

guidance below regarding obtaining the 

assistance of others. 

In recognition of commenters’ 

statements that there would be 

significant costs for pre-existing UITs to 

change who engages in the fair value 

determination as they might need to 

amend their trust indenture (and 

potentially obtain a unit holder vote 

approving the change) we are 

grandfathering existing UITs under 

limited circumstances. Thus, the final 

rule will now require trustees or 

depositors to perform fair value 

determinations if the UIT’s date of 

initial deposit (which would include a 

rollover) of portfolio securities occurred 

after the effective date of rule 2a–5. If 

the initial deposit of securities into the 

UIT took place prior to the effective date 

of the final rule, to the extent that an 

entity other than the UIT’s trustee or 

depositor has been designated in the 

trust indenture to perform fair value 

determinations, that previously 

designated entity may perform such fair 

value determinations pursuant to 

paragraph (a) of the final rule.178 We 

believe that this approach should be 

acceptable, even though the party 

making fair value determinations under 

this provision may not be subject to the 

same fiduciary duties, as this outcome 

reflects a balancing of the costs and 

risks, informed by the unmanaged and 

fixed nature of these UITs, and because 

of the limited nature of this relief.179

Further, we believe that the number of 

these funds that will be able to utilize 

an entity other than a depositor or 

trustee will be small and decrease over 

time.180 We are also concerned that it 

would be unlikely that pre-existing UITs 

could comply with the final rule absent 

this provision given the statutory 

requirement that UITs be organized 

under a trust indenture, contract of 

custodianship or agency, or similar 

instrument (the terms of which, in these 

limited cases, provide for an evaluator 

other than the trustee or depositor). 

Further, we believe that this approach 

should address commenter concerns 

about disrupting existing UIT fair value 

determination designees and the 

associated potential costly changes 

which could affect investors if the costs 

are passed on to them. 


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181Rule 2a–5(e)(3). 

182See IVSC Comment Letter. 

183See Murphy Comment Letter. 

184See John Hancock Comment Letter. 

185See ICE Data Comment Letter. 

186See section 2(a)(20) (defining investment 

adviser of an investment company). See also supra 

footnotes 152–156 and accompanying text 

(explaining why we are generally not permitting 

parties other than the adviser to be valuation 

designees under the final rule). 

187See Sullivan Comment Letter; Fidelity 

Comment Letter; NYC Bar Comment Letter 

(asserting fund boards must be able to rely upon 

fund auditors and counsel); Dechert Comment 

Letter. 

188See Russell Comment Letter. 

189For example, some commenters suggested that 

the administrator may be better positioned to 

perform the fair value determinations under rule 

2a–5 than an adviser. See Sullivan Comment Letter. 

For the reasons discussed above, we determined 

generally to limit the valuation designee to the 

fund’s adviser. See supra footnotes 152–158 and 

accompanying text. 

190See supra footnotes 152–158 and 

accompanying text. 

191Rule 2a–5(b). 

192Proposing Release, supra footnote 2, at nn.84– 

94 and accompanying text. 

193See Council of Institutional Investors 

Comment Letter; Fidelity Comment Letter; VRC 

Comment Letter; Invesco Comment Letter; CFA 

Institute Comment Letter; Comment Letter of Better 

Markets (July 21, 2020) (‘‘Better Markets Comment 

Letter’’); see also IDC Comment Letter (agreeing 

with the lack of specificity of ‘‘oversight’’ in the 

proposed rule). One of these commenters 

recommended that we require that boards have the 

requisite experience, knowledge, and sufficient lack 

of conflicts to fulfill their obligations. Better 

Markets Comment Letter. Another suggested that 

directors be required to have ‘‘valuation literacy.’’ 

CFA Institute Comment Letter. The commenter did 

not clarify what is meant by ‘‘valuation literacy’’ 

and we do not believe that an affirmative 

requirement is necessary. However, the board’s 

statutory obligation for determining fair value in 

good faith, as well its oversight obligation with 

respect to any valuation designee under new rule 

2a–5, generally warrants consideration of the 

appropriateness of director qualifications, such as 

with respect to accounting and valuation matters, 

when funds and boards are identifying potential 

board candidates. The Commission understands 

that board members are often selected to provide a 

variety of specialized knowledge and experience, 

including in accounting and valuation. 

194See Fidelity Comment Letter; see also ICI 

Comment Letter (stating that the proposal correctly 

distinguished oversight from design and 

administration). 

195See MFDF Comment Letter; ABA Comment 

Letter (requesting the Commission to reiterate, as it 

had in the adopting release for 17 CFR 270.22e–4 

(‘‘rule 22e–4’’), that the board role under this rule 

is substantially similar to its roles and 

responsibilities in other contexts under the Act and 

that providing a different standard of care for board 

action would not be appropriate); Advisor’s Inner 

Circle Trustees Comment Letter; see also NYC Bar 

Comment Letter. 

As proposed, the final rule defines 

‘‘board’’ both as the full board or a 

designated committee thereof composed 

of a majority of directors who are not 

interested persons of the fund.181 We 

received limited comments on this 

aspect of the proposal. One commenter, 

however, suggested that the fund should 

be required to develop policies and 

procedures for when the whole board, 

rather than a committee, would be 

required to be involved.182 Conversely, 

another stated that because state law 

permits fund boards to empower 

specific committees to act on behalf of 

the entire board, rule 2a–5 was 

sufficient as proposed.183 We believe 

that no such changes are necessary to 

this provision because it is important 

that boards be able to utilize specialized 

committees, particularly on matters as 

detailed and important as valuation. 

Should a fund choose to develop 

policies and procedures regarding when 

a matter is more appropriate for the full 

board, it can do so, but it will not be 

required under the final rule. 

One commenter wanted clarification 

that the fund’s adviser could perform 

fair value determinations on the board’s 

behalf regardless of whether it is acting 

pursuant to an advisory contract, 

administrative contract, or similar 

agreement.184 Another asked that we 

clarify when a pricing service that is a 

Commission-registered adviser would 

be considered an ‘‘investment adviser’’ 

for purposes of the final rule.185 The 

final rule, consistent with the proposal, 

provides that where the valuation 

designee is an adviser, it must be an 

‘‘adviser of the fund.’’ This would not 

include other service providers, whether 

or not they are registered as advisers, or 

acting under a contract with the fund, 

unless they are actually serving as the 

adviser of the fund as defined under the 

Investment Company Act because they 

may not have a comprehensive and 

direct knowledge of the fund, a direct 

relationship with the board, or the same 

fiduciary duties to the fund in other 

cases.186 As discussed above, it also 

would not include a sub-adviser to the 

fund. 

Guidance on Obtaining the Assistance 

of Others 

Some commenters also asked that we 

clarify that the adviser or the fund board 

could engage third parties to assist with 

certain functions of the fair value 

determination process, such as 

performing back-testing, fund 

accounting, or shareholder reporting, 

other than making the actual 

determinations themselves.187 Others 

urged us to state that advisers assigned 

to perform fair value determinations 

under the proposed rule could, in turn, 

assign their responsibilities to other 

third parties.188

We believe that whether the board or 

the valuation designee makes fair value 

determinations under the final rule, it 

may of course obtain assistance from 

others in fulfilling its duties. It may, for 

example, seek assistance from pricing 

services, fund administrators, subadvisers, accountants, or counsel.189

That assistance can take different forms, 

and may include services such as 

performing back-testing as specified by 

the valuation designee and performing 

calculations required by the valuation 

method selected by the board or 

valuation designee. The board or the 

valuation designee, using this 

assistance, must of course also perform 

its responsibilities under the Act, the 

final rule, and other applicable rules 

under the Act. However, in seeking the 

assistance of others, the entity or officer 

designated to perform the fair value 

determination remains responsible for 

that determination and may not 

designate or assign that responsibility to 

the third party for the same reasons we 

are not permitting the board to designate 

performance of this task to a party other 

than the valuation designee.190

1. Board Oversight 

The final rule, consistent with the 

proposal, specifically requires a board to 

oversee the valuation designee if the 

board has designated the performance of 

fair value determinations to the 

valuation designee.191 In the proposal, 

we provided guidance on our 

expectations related to this board 

oversight.192 A number of commenters 

supported this guidance,193 with one 

commenter stating that the discussion 

properly reflects the general roles of 

boards and advisers under both current 

practices of properly functioning boards 

as well as Federal and state law.194

However, other commenters questioned 

parts of the guidance or asked that we 

provide further guidance on certain 

issues. 

Some of these commenters argued 

that board oversight of the valuation 

process should be the same as the 

oversight of other functions, such as 

liquidity risk.195 While we agree that 

boards should provide oversight in 

those contexts as well, we believe that 

we should provide specific guidance 

with respect to board oversight in the 

context of making fair value 

determinations. We believe that specific 

guidance is appropriate because section 

2(a)(41) is one of the few provisions of 

the Act that specifically imposes a 

requirement on fund boards, requiring 

boards to determine fair value in good 

faith. Therefore, this guidance supports 

our view that a board may still satisfy 

its statutory obligation to determine fair 


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196See section 1(b) of the Act (‘‘it is hereby 

declared that the national public interest and the 

interest of investors are adversely affected . . . 

when investment companies, in computing their 

earnings and the asset value of their outstanding 

securities . . . are not subjected to adequate 

independent scrutiny’’). 

197See IDC Comment Letter; ABA Comment 

Letter; Stradley Comment Letter; Capital Group 

Comment Letter; Advisor’s Inner Circle Trustees 

Comment Letter; see also NYC Bar Comment Letter 

(stating that oversight should consist of reviewing 

reports and determining corrective action); Dechert 

Comment Letter; American Funds Trustees 

Comment Letter. Cf. Proposing Release, supra 

footnote 2, at nn.89–94 and accompanying text. 

198See Fidelity Comment Letter; Invesco 

Comment Letter; CFA Institute Comment Letter; 

Better Markets Comment Letter. 

199See Sullivan Comment Letter; ABA Comment 

Letter. 

200See CFA Institute Comment Letter. 

201See IDC Comment Letter; Stradley Comment 

Letter. 

202See, e.g., Commission Fiduciary 

Interpretation, supra footnote 156, at n.24. 

203See ABA Comment Letter; Stradley Comment 

Letter. 204See IVSC Comment Letter; CFA Institute 

Comment Letter; see also ABA Comment Letter 

(recommending a certification by the adviser 

similar to that required in rule 17j–1); Council of 

Institutional Investors Comment Letter (supporting 

an attestation requirement). 205See ICE Data Comment Letter; Murphy 

Comment Letter. 206See Murphy Comment Letter; Comment Letter 

of Timothy Keehan, Vice President & Senior 

Counsel, American Bankers Association 

(‘‘American Bankers Association Comment Letter’’). 

207See ABA Comment Letter. 

208Proposing Release, supra footnote 2, at nn.84– 

94 and accompanying text. 

209See generally Investment Company 

Governance, Investment Company Act Release No. 

26520 (July 27, 2004) [69 FR 46378 (Aug. 2, 2004)] 

(‘‘Governance Release’’). 

210Cf. Derivatives Adopting Release, supra 

footnote 6 (noting that ‘‘the use of the word 

‘iterative’ is not intended to imply that the board 

is responsible for the day-to-day management of the 

fund’s derivatives risk, but is instead intended to 

clarify that the board’s oversight role requires 

regular engagement with the derivatives risk 

management program rather than a one-time 

assessment’’). 

211Rule 2a–5(b)(1). 

212See also Governance Release, supra footnote 

209 (independent directors should ‘‘bring to the 

boardroom ‘a high degree of rigor and skeptical 

objectivity to the evaluation of management and its 

plans and proposals,’ particularly when evaluating 

conflicts of interest’’). 

value even though it has designated 

another entity to perform the fair value 

determinations under the final rule, 

subject to appropriate oversight.196

A number of commenters questioned 

the guidance stating that boards must be 

active in their oversight role by probing 

reports written by advisers and being 

inquisitive,197 but other commenters 

agreed that board oversight cannot be a 

passive activity.198 We believe that 

boards are not providing appropriate 

oversight if they simply rely on 

information presented to them without 

actively probing it, asking questions, 

and seeking relevant information, 

particularly when there are red flags or 

other indications of problems. Some 

commenters asked us to state that the 

board does not have an independent 

duty to seek to discover conflicts of 

interest but can reasonably rely upon 

the adviser’s identification of these 

conflicts,199 but one stated we should 

clarify that the board has an affirmative 

duty to do so.200 Another stated that the 

board should be able to rely upon the 

adviser much the same way that it can 

reasonably rely upon others, such as 

fund CCOs, administrators, and 

counsel.201 As discussed below in the 

guidance on board oversight, we are 

reiterating our belief, stated in the 

Proposing Release, that boards should 

seek to identify potential conflicts of 

interest as part of their oversight duties 

under the final rule. Boards must work 

with valuation designees, which also 

have a duty to disclose their 

conflicts,202 to address or manage these 

conflicts to the board’s satisfaction. 

Although several commenters asked 

us to confirm that boards may provide 

oversight of the performance of fair 

value determinations consistent solely 

with the business judgment rule under 

state law, we decline to do so.203

Instead, we are providing guidance that 

we believe should be more useful to 

directors than the more generalized 

principles of the business judgment 

rule, as this new guidance specifically 

relates to directors’ oversight 

responsibilities under section 2(a)(41) of 

the Act and the final rule. 

Finally, several commenters 

recommended that we adopt additional 

oversight requirements, such as thirdparty reviews, attestations, or 

certifications by the adviser,204 or that 

we require the board to make specific 

findings.205 Others argued that 

additional requirements were 

unnecessary due to state law duties 

applicable to boards or because the 

expense was not justified by the 

regulatory benefits.206 Several 

commenters also asked that we clarify 

whether directors are expected to ratify 

fair value determinations made by the 

adviser under rule 2a–5.207 We are not 

adding specific oversight requirements 

in the final rule beyond those that were 

proposed. We believe that the oversight 

requirements of boards under the final 

rule, discussed below, taken together 

with the directors’ fiduciary duties, are 

reasonably designed to establish a 

minimum set of requirements for 

addressing the conflict of interest and 

other concerns associated with 

permitting a valuation designee to make 

fair value determinations. As such, we 

believe that additional requirements like 

those suggested by these commenters 

may be duplicative or involve burdens 

that are not justified by their potential 

benefits. The final rule does not require 

boards to ratify fair value 

determinations made by the valuation 

designee, as we believe it is not a 

necessary component of active 

oversight. 

Guidance on Board Oversight 

We reiterate the guidance on board 

oversight of the fair value determination 

process from the Proposing Release.208

When the board designates the 

performance of fair value 

determinations to the valuation 

designee, the final rule will require the 

board to satisfy its statutory obligation 

with respect to these determinations 

through the framework of rule 2a–5, 

including overseeing the valuation 

designee. Boards should approach their 

oversight of the performance of fair 

value determinations by the valuation 

designee of the fund with a skeptical 

and objective view that takes account of 

the fund’s particular valuation risks, 

including with respect to conflicts, the 

appropriateness of the fair value 

determination process, and the skill and 

resources devoted to it.209 Further, in 

our view appropriate oversight cannot 

be a passive activity. Directors should 

ask questions and seek relevant 

information. 

The board should view oversight as 

an iterative process and seek to identify 

potential issues and opportunities to 

improve the fund’s fair value 

processes.210 The final rule will require 

the valuation designee to report to the 

board with respect to matters related to 

the valuation designee’s fair value 

process, in part to ensure that the board 

has sufficient information to conduct 

this oversight.211 Boards should also 

request follow-up information when 

appropriate and take reasonable steps to 

see that matters identified are 

addressed.212

We expect that boards engaged in this 

process would use the appropriate level 

of scrutiny based on the fund’s 

valuation risk, including the extent to 

which the fair value of the fund’s 

investments depend on subjective 

inputs. For example, a board’s scrutiny 

would likely be different if a fund 

invests in publicly traded foreign 

companies than if the fund invests in 

private early stage companies. As the 

level of subjectivity increases and the 

inputs and assumptions used to 

determine fair value move away from 

more objective measures, we expect that 


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213For a discussion of valuation risks generally, 

see supra section II.A.1. 

214See, e.g., Governance Release, supra footnote 

209 (‘‘. . . state law duties of loyalty and care . . . 

oblige directors to act in the best interest of the fund 

when considering important matters the Act 

entrusts to them, such as approval of an advisory 

contract and the advisory fee.’’). 

215See, e.g., id. (‘‘. . . . the Act and our rules rely 

heavily on fund boards of directors to manage the 

conflicts of interest that advisers have with funds 

they manage.’’). See also Division of Investment 

Management, SEC, Protecting Investors: A Half 

Century of Investment Company Regulation, 252 

(1992) (‘‘the [Investment Company] Act . . . 

imposes requirements that assume the standard 

equipment of a corporate democracy: a board of 

directors . . . whose function is to oversee the 

operations of the investment company and police 

conflicts of interest . . . [W]e believe that 

independent directors perform best when required 

to exercise their judgment in conflict of interest 

situations’’). 

216See, e.g., In re Piper Capital Management, et 

al., Investment Company Act Release No. 26167 

(Aug. 26, 2003) (Commission opinion). For 

discussion of the conflicts of the fund’s portfolio 

manager, see infra section II.B.3. Further, officers of 

internally managed funds may have other conflicts 

that boards should consider. See supra footnote 

159. 

217See supra footnote 97 and accompanying text. 

218Cf. In re Morgan Asset Management, 

Investment Company Act Release No. 29704 (June 

22, 2011) (settlement) (‘‘In re Morgan Asset 

Management’’) at 7 (broker-dealer ‘‘induced to 

provide interim price confirmations that were lower 

than the values at which the Funds were valuing 

certain bonds, but higher than the initial 

confirmations that the [broker-dealer] had intended 

to provide’’). See also supra footnote 154 and 

accompanying text. 

219See In re Morgan Asset Management, supra 

footnote 218 (‘‘the Valuation Committee left pricing 

decisions to lower level employees in Fund 

Accounting who did not have the training or 

qualifications to make fair value pricing 

determinations’’). 

220 In the Proposing Release, we had 

characterized the board’s role as requiring that it be 

‘‘fully informed’’ of the adviser’s process. Two 

commenters questioned what that means in this 

context. See Deloitte Comment Letter and ABA 

Comment Letter. Our intent was to make sure that 

the board was not solely relying upon the 

information provided to it by the valuation 

designee, but was thoughtful and sought additional 

information when needed. However, we did not 

intend to imply that the board should be actively 

managing the process. We have therefore deleted 

the word ‘‘fully’’ in this release to avoid that 

implication. 

221Rule 2a–5(b)(1). 

222See also Proposing Release, supra footnote 2, 

at 41–42. 

223Rule 2a–5(b)(1)(i). 

224 Valuation designees can utilize this report to 

notify the board of changes to methodologies that 

are equally or more representative of fair value of 

the investments. See supra section II.A.2.a. 

225Rule 2a–5(b)(1)(i)(A). 

the board’s level of scrutiny would 

increase correspondingly.213

We also believe that, consistent with 

their obligations under the Act and as 

fiduciaries, boards should seek to 

identify potential conflicts of interest, 

monitor such conflicts, and take 

reasonable steps to manage such 

conflicts.214 In so doing, the board 

should serve as a meaningful check on 

the conflicts of interest of the valuation 

designee and other service providers 

involved in the determination of fair 

values.215 In particular, the fund’s 

adviser may have an incentive to value 

fund assets improperly in order to 

increase fees, improve or smooth 

reported returns, or comply with the 

fund’s investment policies and 

restrictions.216 Other service providers, 

such as pricing services or brokerdealers providing opinions on prices, 

may have incentives (such as 

maintaining continuing business 

relationships with the valuation 

designee) 217 or may otherwise be 

subject to pressures to provide pricing 

estimates that are favorable to the 

valuation designee.218 In overseeing the 

valuation designee’s process for making 

fair value determinations, the board 

should understand the role of, and 

inquire about conflicts of interest 

regarding, any other service providers 

used by the valuation designee as part 

of the process, and satisfy itself that any 

conflicts are being appropriately 

managed. 

Boards should probe the 

appropriateness of the valuation 

designee’s fair value processes. In 

particular, boards should periodically 

review the financial resources, 

technology, staff, and expertise of the 

valuation designee, and the 

reasonableness of the valuation 

designee’s reliance on other fund 

service providers, relating to 

valuation.219 In addition, boards should 

consider the valuation designee’s 

compliance capabilities that support the 

fund’s fair value processes, and the 

oversight and financial resources 

available for the fair value process. 

Boards should also consider the type, 

content, and frequency of the reports 

they receive. The final rule will require 

reporting to the board (both periodically 

and promptly) regarding many aspects 

of the valuation designee’s fair value 

determination process as a means of 

facilitating the board’s oversight as 

discussed below. While a board can 

reasonably rely on the information 

provided to it in summaries and other 

materials provided by the valuation 

designee and other service providers in 

conducting appropriate oversight, it is 

incumbent on the board to request and 

review such information as may be 

necessary to be informed of the 

valuation designee’s process for 

determining the fair value of fund 

investments.220 Further, if the board 

becomes aware of material matters 

(whether the board identifies the matter 

itself or the fund’s CCO, valuation 

designee, or another party identifies the 

issue), we believe that in fulfilling its 

oversight duty the board must inquire 

about such matters and take reasonable 

steps to see that they are addressed. 

2. Board Reporting 

As modified in response to comments 

received, the final rule will require a 

valuation designee that the board has 

designated to perform fair value 

determinations to report to the board 

regarding its performance of that 

responsibility, including certain 

periodic reports and prompt notification 

and reporting on matters that materially 

affect the fair value of investments 

whose fair value is determined by the 

valuation designee.221 These 

requirements are intended to assist 

boards in their oversight responsibility 

under the final rule and to help ensure 

that boards receive the amount and type 

of information to oversee the valuation 

designee appropriately by familiarizing 

directors with the salient features of, 

and developments in, the valuation 

designee’s process.222 These are 

minimum requirements and boards may 

find, depending on the facts and 

circumstances, that additional 

information is necessary or appropriate 

in order to discharge their oversight 

responsibilities appropriately. 

(a) Periodic Reporting 

The final rule will require the 

valuation designee to make both annual 

and quarterly written reports to the 

board.223 Specifically: 

• Quarterly Reports. The valuation 

designee must provide at least quarterly, 

in writing, (1) any reports or materials 

requested by the board related to the fair 

value of designated investments or the 

valuation designee’s process for fair 

valuing fund investments and (2) a 

summary or description of material fair 

value matters that occurred in the prior 

quarter. This summary or description 

must include (1) any material changes 

in the assessment and management of 

valuation risks, including any material 

changes in conflicts of interest of the 

valuation designee (and any other 

service provider), (2) any material 

changes to, or material deviations from, 

the fair value methodologies,224 and (3) 

any material changes to the valuation 

designee’s process for selecting and 

overseeing pricing services, as well as 

any material events related to the 

valuation designee’s oversight of pricing 

services.225

• Annual Reports. The valuation 

designee must provide at least annually, 


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226Rule 2a–5(b)(1)(i)(B). 

227Proposed rule 2a–5(b)(1)(i). 

228See, e.g., ICI Comment Letter; SSGA Comment 

Letter; TRP Comment Letter; Guggenheim Comment 

Letter; Vanguard Comment Letter. See also JPMAM 

Comment Letter. 

229See, e.g., Fidelity Trustees Comment Letter; 

BlackRock Trustees Comment Letter; Murphy 

Comment Letter; Fidelity Comment Letter (asserting 

the proposed reporting mechanism would lead to 

reporting designed to fulfill a regulatory 

requirement rather than assist with board 

oversight). 

230See, e.g., Sullivan Comment Letter; JPMAM 

Comment Letter; ICI Comment Letter; IDC Comment 

Letter; ABA Comment Letter; Murphy Comment 

Letter. See also Federated Hermes Comment Letter; 

Baillie Gifford Comment Letter (recommending 

that, to the extent that quarterly reporting is 

retained, it be permitted to focus on material 

changes or exceptions and allow summary 

dashboards). See also generally BlackRock Trustees 

Comment Letter (detailing their current reporting 

mechanism of annual reports on the overall 

framework, quarterly valuation reports with the 

information the board wants, and monthly reports 

concerning NAV accuracy and pricing errors). 

231See, e.g., BlackRock Trustees Comment Letter; 

MFDF Comment Letter; SSGA Comment Letter; 

Fidelity Comment Letter; Dechert Comment Letter; 

Advisor’s Inner Circle Trustees Comment Letter; see 

also American Funds Trustees Comment Letter 

(stating that they rely upon the oversight of the 

compliance process under rule 38a–1 to perform 

oversight); SIFMA AMG Comment Letter (urging 

flexible reporting depending upon the type of 

inputs). 

232See Sullivan Comment Letter; TRP Comment 

Letter; SIFMA AMG Comment Letter; American 

Trustees Comment Letter. 

233See TRP Comment Letter; Fidelity Comment 

Letter; Dechert Comment Letter; SIFMA AMG 

Comment Letter; see also Capital Group Comment 

Letter. 

234See, e.g., Fidelity Trustees Comment Letter; 

JPMAM Comment Letter; IDC Comment Letter; 

BlackRock Trustees Comment Letter; Murphy 

Comment Letter; TRP Comment Letter; Guggenheim 

Comment Letter; SIFMA AMG Comment Letter; 

NYSSCPA Comment Letter; see also ICI Comment 

Letter (recommending removing adequacy of 

resources reporting); Baillie Gifford Comment Letter 

(recommending removing adequacy of resources 

reporting). But see ABA Comment Letter 

(recommending that we further require a narrative 

description of testing results); VRC Comment Letter 

(suggesting requiring the reporting of specific 

information on each individual portfolio holding 

for securities with a higher perceived risk profile). 

235See, e.g., Sullivan Comment Letter; JPMAM 

Comment Letter; ICI Comment Letter; ABA 

Comment Letter; TRP Comment Letter. See also 

Federated Hermes Comment Letter; Advisor’s Inner 

Circle Trustees Comment Letter; IHS Market 

Comment Letter (stating that it had observed best 

practices for reporting on pricing services to be 

board or committee approval of the provider itself 

and at least annual review of performance based 

upon back testing). 

236See, e.g., Sullivan Comment Letter; Fidelity 

Trustees Comment Letter; Murphy Comment Letter; 

Fidelity Comment Letter; see also IAA Comment 

Letter (stating that significant increases in price 

challenges or overrides should not be considered a 

material valuation risk due to their routine nature); 

American Fund Trustee Comment Letter. 

237See section 1(b)(5) of the Act and supra 

footnote 196 and accompanying text discussing the 

need for independent oversight of the valuation 

process. 

238See, e.g., SIFMA AMG Comment Letter. 

239Material fair value matters that occurred in the 

prior quarter related to the items reported on 

annually, such as significant changes to testing 

in writing, an assessment of the 

adequacy and effectiveness of the 

valuation designee’s process for 

determining the fair value of the 

designated portfolio of investments. At 

a minimum, this annual report must 

include a summary of the results of the 

testing of fair value methodologies 

required under the final rule and an 

assessment of the adequacy of resources 

allocated to the process for determining 

the fair value of designated investments, 

including any material changes to the 

roles or functions of the persons 

responsible for determining fair 

value.226

After considering comments, we have 

made certain changes to the proposed 

periodic reporting requirements 

designed to enhance flexibility of 

reporting to better match boards’ needs 

and to minimize the chance that boards 

receive reporting that is too detailed or 

repetitive to facilitate appropriate 

oversight. The proposed rule would 

have required quarterly reporting on a 

variety of valuation matters.227

Commenters raised concerns regarding 

these proposed reporting requirements. 

Some stated that, while some reporting 

is necessary, the proposed reporting 

requirements were overly prescriptive 

and would not result in appropriate 

board oversight in practice.228

Commenters also generally believed that 

we should give greater deference to 

boards to use their business judgment to 

request the information and the 

frequency of reports that they see as 

necessary.229 Some of these commenters 

supported a program where the adviser 

would make quarterly reports on 

material changes to aspects of, or 

deviations from, the program, with a 

broader annual report covering the 

overall design and implementation of 

the program.230 Others recommended 

that we permit the board to set reporting 

standards.231

The proposed rule would have 

included a number of specific items to 

be included in the quarterly assessment 

to boards. Specifically, the proposed 

rule would have required the quarterly 

report to include: (1) A summary or 

description of the assessment and 

management of material valuation risks 

(including material conflicts of interest), 

(2) material changes to, or material 

deviations from, established fair value 

methodologies, (3) testing results, (4) 

adequacy of resources allocated to fair 

value determinations, (5) material 

changes to the adviser’s process for 

selecting and overseeing pricing 

services (including changes in service 

providers and price overrides), as well 

as (6) any other materials requested by 

the board. A number of commenters 

objected to many of these specific items 

being reported on a quarterly basis, 

asserting that the cost to produce them 

on a quarterly basis would exceed the 

costs the Commission assumed 232 and 

the requirements could result in overreporting to satisfy regulatory 

obligations or liability concerns rather 

than to facilitate oversight.233

Commenters also asserted that many of 

the reporting items, and particularly 

valuation risks and adequacy of 

resources, would not change frequently 

enough to justify quarterly reporting.234

Many of these commenters suggested 

that we instead require advisers to 

report some or all of these items on an 

annual basis,235 or remove some of them 

altogether, particularly reporting on 

specific price overrides, to provide more 

relevant information and to reduce 

burdens on boards.236

We agree that boards should have 

latitude to implement a flexible 

reporting mechanism that is tailored to 

their fund, recognizes judgment in 

exercising oversight, and minimizes rote 

reporting. That said, we believe that 

appropriate oversight, facilitated by a 

certain minimum level of reporting, is 

necessary in order for the designation 

process to be consistent with the Act.237

As a result, we are making tailored 

changes to the proposed periodic 

reporting regime in the final rule 

designed to enable boards to receive the 

information they want and need to 

conduct appropriate oversight. We 

believe that the changes we are adopting 

today will allow reporting to address the 

specific circumstances of each fund, and 

reporting should be tailored to address 

the fund’s holdings, valuation 

methodologies, and inputs, as urged by 

some commenters.238

Specifically, we have made 

adjustments to the overall proposed 

periodic reporting requirements. The 

final rule will require that the valuation 

designee report its assessment of the 

adequacy and effectiveness of the 

valuation designee’s process for 

determining the fair value of designated 

investments, testing results, and 

adequacy of allocated resources at least 

annually rather than quarterly as 

proposed. In lieu of quarterly 

assessments of the entire fair value 

process, the final rule will instead 

require quarterly reports to address 

issues about which the board requests 

information, as well as information 

about material changes or events that 

occurred during the period.239 These 


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results or material reductions in the resources 

provided for the determination process, would, 

however, still be reported as part of the quarterly 

material change report. 240However, boards may wish to consider 

periodically requesting a report assessing all 

material valuation risks (not just changes) faced by 

the fund, so that they remain apprised of the fund’s 

overall valuation risk landscape. 241See, e.g., Sullivan Comment Letter; Fidelity 

Trustees Comment Letter; Murphy Comment Letter; 

Fidelity Comment Letter; see also IAA Comment 

Letter (stating that significant increases in price 

challenges or overrides should not be considered a 

material valuation risk due to their routine nature); 

American Fund Trustee Comment Letter. 

242See supra section II.B.1. See also rule 2a– 

5(b)(1)(i)(A)(1). 

243See ABA Comment Letter; MFDF Comment 

Letter; SIFMA AMG Comment Letter (stating that 

the industry will likely look to the serious 

compliance issues standard from rule 38a–1 for 

guidance); AIMA Comment Letter (with regard to 

prompt reporting); Deloitte Comment Letter; see 

also University of Miami Comment Letter 

(suggesting that differences in what constitutes 

materiality could lead to delays in prompt 

reporting); MFS Comment Letter (the prompt 

reporting requirement is unnecessary because of the 

similarity of materiality in this rule with serious 

compliance matters under rule 38a–1). 

244See Stradley Comment Letter; Dechert 

Comment Letter. 

245See Vanguard Comment Letter. 

246See Duff & Phelps Comment Letter. 

247This standard is similar to that of ‘‘material 

compliance matter’’ found in rule 38a–1. See rule 

38a–1(e)(2). 

248To align the material matters that would be 

reported with Commission rules and auditing 

standards better, we are eliminating the term ‘‘could 

have materially affected’’ from the final rule and 

instead are using the term material matter alone. 

Material matters under the final rule would 

generally include, for example, material weaknesses 

and significant deficiencies as defined in 17 CFR 

210.1–02(a)(4) that are related to fair value 

determinations. Some commenters questioned the 

relevance of financial reporting concepts when 

reporting regarding fair value determinations. See 

ABA Comment Letter; TRP Comment Letter 

(regarding prompt, but not periodic, reporting). We 

believe that these issues can be significant as the 

lack of sufficient controls over financial reporting 

could have significant implications in the fund’s 

fair value determinations. See also TRP Comment 

Letter (supporting a system of annual reporting for 

many items but quarterly reporting for significant 

deficiencies and material weaknesses in internal 

controls over financial reporting in lieu of prompt 

reporting on these items). 

249See Proposing Release, supra footnote 2, at 

n.104 and accompanying text. 

250Rule 2a–5(b)(1). 

251See supra section II.B.1 (‘‘Further, in our view 

effective oversight cannot be a passive activity. 

Directors should ask questions and seek relevant 

information.’’). 

252See, e.g., Capital Group Comment Letter; TRP 

Comment Letter. But see CFA Institute Comment 

Letter (arguing that the results of testing methods 

such as calibration/back-testing can assist in 

identifying issues with methodologies, including 

poor performance or conflicts of interest). 

revisions are consistent with the 

suggestions from commenters noted 

above that we require annual overall 

reporting with quarterly updates 

regarding material changes. We believe 

that the changes in the final rule 

establish the necessary minimum 

reporting needed for appropriate 

oversight. Further, by expressly 

recognizing boards’ authority to require 

any additional reports they want on a 

quarterly basis, the final rule seeks to 

empower boards to tailor periodic 

reporting to suit the needs of their fund, 

as recommended by commenters. 

We have also made adjustments, in 

response to comments, from the 

proposal regarding the specific items 

that will be required to be part of 

periodic reports. In lieu of a discussion 

of the assessment and management of 

material valuation risks as part of the 

valuation designee’s assessment, the 

final rule will instead require that the 

quarterly report identify material 

changes, including the identification of 

any material changes in the assessment 

or management of these risks that 

occurred during the quarter. We agree 

with commenters that this reporting 

could become rote if it does not change 

and have focused it upon material 

changes as a result.240

Some commenters suggested that the 

proposed rule, as worded, would have 

required the adviser to report every test 

result, service provider change, or price 

override to the board, which we did not 

intend.241 We agree that these items 

may have provided a level of detail that 

may not be necessary. Therefore, we 

clarified that the annual assessment can 

contain a summary of testing results and 

removed a requirement to report service 

provider changes or price overrides. 

Lastly, we agree with commenters that 

the reporting of the summary of testing 

results and assessment of the adequacy 

of allocated resources is not needed 

quarterly because they are unlikely to 

change on a quarterly basis. Consistent 

with the overall change to an annual 

assessment, the final rule will require 

these results to be reported annually. 

However, based upon the summaries 

that they receive, boards can seek more 

information from the valuation designee 

if necessary to conduct appropriate 

oversight.242

Some commenters requested more 

clarification as to what constitutes 

‘‘material’’ in the context of the final 

rule’s reporting requirements,243

suggesting that we create a ‘‘material 

valuation matter’’ standard that would 

be reported similar to serious 

compliance matters under the 

compliance rule,244 that we permit the 

board to define materiality,245 or use 

different terminology altogether to avoid 

confusion with accounting or auditing 

standards.246 We believe that material 

matters in this context would generally 

be those matters about which the board 

would reasonably need to know in order 

to exercise appropriate oversight of the 

valuation designee’s fair value 

determination process.247 For example, 

material matters include significant 

deficiencies or material weaknesses in 

internal control over financial reporting 

related to fair value determinations that 

have been identified and generally 

would include those items that ‘‘could 

have materially affected’’ the fair value 

of the fund’s investments as 

proposed.248 We believe that material 

matters also include other issues, such 

as a change to a pricing service affiliated 

with the valuation designee or material 

changes to or deviations from 

methodologies, including changes to 

critical inputs or assumptions.249 As 

another example, with regards to 

material changes to the selection or 

oversight of pricing services, a pattern of 

price challenges or overrides over time 

that raise concerns with the overall 

valuation process may be material. The 

valuation designee should identify 

material issues, and the board should 

follow-up as necessary for its oversight. 

The final rule will require the 

valuation designee’s reports to include 

such information as may be reasonably 

necessary for the board to evaluate the 

matters covered in the reports.250 Based 

upon that information, the board can 

determine whether to ask additional 

questions or request additional 

information, as appropriate. For 

example, if a valuation designee reports 

that there is a new material conflict of 

interest, the valuation designee should 

provide, and the board should seek,251

additional information as necessary for 

the board to evaluate the potential 

impact of the conflict on the adequacy 

and effectiveness of the valuation 

designee’s determinations of fair value. 

As another example, where a valuation 

designee has materially changed a fair 

value methodology, the report could 

summarize the relevant market 

conditions or other circumstances 

leading to the decision to apply an 

alternate methodology and the alternate 

fair value methodology used. 

Some commenters were concerned 

that this requirement will result in 

advisers providing extraneous or out-ofcontext information, such as backtesting results, to the board.252 The 

specific content of the periodic or 

prompt reports and supplemental 

information under the final rule is left 

to the board and valuation designees. 

These reports can take the form of 

narrative summaries, graphical 

representations, statistical analyses, 

dashboards, or exceptions-based 


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253See ABA Comment Letter (recommending we 

require the production of narrative summaries of 

testing results). 

254See Proposing Release, supra footnote 2, at 

46–47. 

255See Fidelity Trustees Comment Letter; ICI 

Comment Letter; IDC Comment Letter; ABA 

Comment Letter (further suggesting that it should be 

incumbent upon the adviser, similar to the 

requirements of section 15(c) or 17 CFR 270.12b– 

1, to provide this type of information, rather than 

upon the board to request it); MFDF Comment 

Letter; Fidelity Comment Letter; Vanguard 

Comment Letter; Capital Group Comment Letter; 

SIFMA AMG Comment Letter; see also Federated 

Hermes Comment Letter. 

256See, e.g., Capital Group Comment Letter 

(stating that reporting of trends, outliers, and 

similar analysis of price overrides and challenges 

would be more helpful for board oversight than 

requiring all price overrides or challenges to be 

reported). 

257The proposed rule would have required 

prompt reporting regarding matters associated with 

the adviser’s process that had this effect. The 

purpose of this requirement is to inform boards 

quickly of issues associated with fair value 

determinations that may require their immediate 

attention. See Proposing Release, supra footnote 2, 

at 49. We have updated the text of rule 2a–5 to 

clarify that this reporting is not limited to issues 

relating to the valuation designee’s process. 

258Rule 2a–5(b)(1)(ii). See also supra footnotes 

243 through 249 and accompanying text (discussing 

‘‘materiality’’) and infra footnote 272 through 274 

and accompanying text (discussing price errors). 

259Rule 2a–5(b)(1)(ii). The notifications or 

reports, like the periodic reports discussed above, 

must also include such information as may be 

reasonably necessary for the board to evaluate the 

matter covered in the report. See rule 2a–5(b)(1) and 

supra footnotes 243–256 and accompanying text. 

This information need not be voluminous, 

particularly the prompt notification. If boards want 

more information, however, they should seek it out. 

260Proposed rule 2a–5(b)(1)(ii). The proposed 

rule identified significant deficiencies or material 

weaknesses in the design or implementation of the 

adviser’s fair value determination process or 

material changes in the fund’s valuation risks, but 

not material errors in the calculation of net asset 

value, as examples of these material matters. Id. See 

also Proposing Release, supra footnote 2, at n.115 

and accompanying text. Also, in the Proposing 

Release, we provided guidance that advisers could 

take an additional three days to determine the 

materiality of the issue at hand. Id. at 49–50. 

261See, e.g., ICI Comment Letter; IAA Comment 

Letter (stating that a significant increase in price 

challenges should not be considered a material 

valuation risk); see also Federated Hermes 

Comment Letter. 262See, e.g., Fidelity Trustees Comment Letter; 

ICI Comment Letter; IDC Comment Letter; 

BlackRock Trustees Comment Letter; ABA 

Comment Letter; Fidelity Comment Letter. 263See, e.g., Fidelity Trustees Comment Letter; 

JPMAM Comment Letter; ICI Comment Letter; IDC 

Comment Letter; Murphy Comment Letter; see also 

Federated Hermes Comment Letter. See also supra 

footnote 248 and accompanying text (discussing the 

final rule’s treatment of matters that the valuation 

designee or fund’s auditors have determined ‘‘could 

have’’ materially affected fair value). 

264See JPMAM Comment Letter; Murphy 

Comment Letter; John Hancock Comment Letter. 

265See, e.g., ICI Comment Letter; TRP Comment 

Letter; Vanguard Comment Letter (regarding a 

significant increase in price challenges as a material 

change to the fund’s current valuation risk); Capital 

Group Comment Letter; see also Federated Hermes 

Comment Letter. 

266See ICI Comment Letter; IDC Comment Letter; 

BlackRock Trustees Comment Letter; MFDF 

Comment Letter; AIMA Comment Letter; see also 

Federated Hermes Comment Letter. 

267See, e.g., Fidelity Comment Letter; Stradley 

Comment Letter; NYC Bar Comment Letter; 

Guggenheim Comment Letter; Vanguard Comment 

Letter; see also Duff & Phelps Comment Letter. 

reporting, among other methods.253

Boards should work with valuation 

designees to determine what 

information and the format of such 

information is most useful to the board. 

In the Proposing Release, we provided 

a list of specific items that a board could 

review and consider, if relevant. These 

included a number of data-driven 

reporting items like reports regarding 

portfolio holdings whose price has 

changed outside of pre-determined 

ranges over time, reports regarding stale 

prices, and analyzing trends in the 

number of the fund’s portfolio holdings 

that received a fair value.254

A number of commenters objected to 

this list, suggesting that boards and 

advisers would see these items as 

mandatory, leading to advisers 

providing unwanted data to boards in 

an abundance of caution.255 The items 

we identified in the Proposing Release 

were intended to provide a list of 

examples of the types of information 

that a board could request to facilitate 

data-driven reviews of the fair value 

process if the board found such 

information helpful. We continue to 

believe that boards should request, and 

valuation designees should provide, 

such relevant trend dashboards and 

other analytical tools that the board 

believes it needs in order to perform 

appropriate oversight.256 However, the 

final rule will not require the 

production of any particular data or data 

tool unless the board requests it. We 

also continue to believe that the types 

of potential reporting items included in 

the proposal may be helpful for some 

boards. They are not mandatory, 

however. Boards should use their 

judgment in determining what types of 

optional reporting they wish to receive 

beyond the required reporting contained 

in the final rule. 

(b) Prompt Board Notification and 

Reporting 

With modifications made to address 

comments received on this aspect of the 

proposal, the final rule will require the 

valuation designee to provide a written 

notification of the occurrence of matters 

that materially affect the fair value of 

the designated portfolio of investments 

(defined as ‘‘material matters’’) within a 

time period determined by the board, 

but in no event later than five business 

days after the valuation designee 

becomes aware of the material matter.257

Material matters in this instance 

include, as examples, a significant 

deficiency or material weakness in the 

design or effectiveness of the valuation 

designee’s fair value determination 

process or of material errors in the 

calculation of net asset value.258 The 

valuation designee must also provide 

such timely follow-on reports as the 

board may reasonably determine are 

appropriate.259 This process is designed 

to ensure that the valuation designee 

notifies the board of certain issues that 

may require its immediate attention in 

a timely manner, but also empower 

boards to seek the appropriate level of 

follow-up reporting that they need to 

exercise appropriate oversight. 

The proposal included a reporting 

requirement that would have required 

prompt reporting on matters that could 

have materially affected the fair value of 

the designated portfolio of 

investments.260 Commenters argued that 

this requirement could be interpreted 

broadly and would result in excessive 

reporting, particularly in relation to the 

requirement to report material changes 

in valuation risks.261 They also 

suggested it could involve the board in 

the day-to-day process of determining 

investments’ fair values despite the 

designation of that function to the 

adviser,262 and could open the valuation 

program to post-facto questioning by 

third parties, particularly the proposed 

requirement to promptly report matters 

that ‘‘could have’’ impacted 

valuations.263

Some suggested alternatives, such as 

the adviser making a prompt 

notification within the prescribed 

period and then subsequently providing 

a report to the board following an 

assessment of the issue as soon as 

reasonably practicable.264 Others 

suggested that the specific items 

required to be promptly reported, such 

as significant deficiencies or material 

weaknesses in the design or 

implementation of the adviser’s fair 

value determination process or material 

changes to the fund’s current valuation 

risks, be clarified or made in the 

periodic reports instead.265 Some 

suggested that the prompt reporting 

requirement be eliminated altogether,266

or that the final rule should allow 

boards or advisers to set reporting 

parameters.267

The purpose of this requirement is to 

ensure that boards receive timely 

information that demands their 

immediate attention. We believe that it 

is critical for appropriate oversight 

under the final rule that the board be 


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268Some commenters suggested that the prompt 

reporting element in particular should be oral rather 

than in writing. See JPMAM Comment Letter; John 

Hancock Comment Letter; SIFMA AMG Comment 

Letter; AIMA Comment Letter; MFS Comment 

Letter. We believe that it is important to ensure that 

records are kept of these notifications and thus the 

notification must be in writing. Rule 2a–5(b)(1). 

However, the final rule does not prescribe the 

information that must be included in the written 

notification, and advisers may, if appropriate, 

provide a brief written notification (e.g., in an 

email) of the issue and follow up with 

supplemental information. 

269Consistent with the guidance above regarding 

board oversight, the board can utilize this followup reporting process to inquire about the matter 

raised in the notification and take reasonable steps 

to see that matters identified in the notification are 

addressed. See supra footnote 212 and 

accompanying text. 

270The notifications and reports that will be 

required under this provision are records that will 

need to be maintained pursuant to new rule 31a– 

4. See rule 31a–4(b)(1); see also infra section II.C. 

Further, to the extent that the board does seek 

follow-on reporting, appropriate records of that 

report will need to be maintained, consistent with 

the requirement to maintain appropriate 

documentation to support fair value 

determinations. See rule 31a–4(a). If such reporting 

occurs as part of the valuation designee’s periodic 

reports required under the final rule, a separate 

record will not need to be maintained. 

271We have changed this requirement from the 

proposed ‘‘implementation’’ to ‘‘effectiveness’’ to 

clarify the intent of this provision and better align 

it with auditing concepts of internal control. This 

specific example was, as proposed, based upon 

these auditing concepts. See Proposing Release, 

supra footnote 2, at n.115. This change should help 

address comments that the proposed rule was 

insufficiently clear as to when this report is needed 

as it will now be tied to the auditing concepts with 

which funds and valuation designees are already 

familiar. See supra footnote 261 and accompanying 

text. 

272Rule 2a–5(b)(1)(ii). Some commenters had 

recommended this as a reporting item and we agree 

that valuation designees should promptly notify 

boards of this issue. See Advisor’s Inner Circle 

Trustees Comment Letter. See generally BlackRock 

Trustees Comment Letter; ABA Comment Letter 

(arguing that ‘‘material’’ in the reporting context 

should be considered synonymous with material 

NAV errors); Murphy Comment Letter 

(recommending this as a quarterly reporting item); 

TRP Comment Letter (recommending this as a 

quarterly reporting item); Vanguard Comment Letter 

(suggesting that ‘‘material’’ for prompt reporting 

purposes could be based upon an NAV error 

threshold test). 273See ABA Comment Letter; Vanguard Comment 

Letter. 274See also supra footnotes 243 through 249 and 

accompanying text (discussing materiality). 

275See, e.g., Sullivan Comment Letter; JPMAM 

Comment Letter; MFDF Comment Letter; Fidelity 

Comment Letter; TRP Comment Letter 

(recommending we incorporate the concept of 

‘‘reasonable diligence’’ from certain ‘‘Dear CFO’’ 

staff letters relating to tax liabilities); John Hancock 

Comment Letter (stating that this is particularly 

difficult timing when an adviser would need to 

consult with a sub-adviser); see also ABA Comment 

Letter (stating that three days was arbitrary); Duff 

& Phelps Comment Letter (stating that additional 

time may be necessary); Federated Hermes 

Comment Letter; American Funds Trustees 

Comment Letter; MFS Comment Letter; Advisor’s 

Inner Circle Trustees Comment Letter. But see NYC 

Bar Comment Letter (stating that three days was 

sufficient if the adviser is simply informing the 

board of an error in implementation or risk of 

material effects on the valuation of the fund’s 

portfolio): University of Miami Comment Letter. 

276See, e.g., Sullivan Comment Letter; ICI 

Comment Letter; IAA Comment Letter; AIMA 

Comment Letter; NYSSCPA Comment Letter; ABA 

Comment Letter (recommending ten days). 

277As discussed in more detail below, the final 

rule does not require valuation designees to 

complete their materiality assessment within this 

five-day window. See infra footnote 280 and 

accompanying text. As a result, once materiality has 

been determined, valuation designees must notify 

the board within five business days. 

278 If the materiality of the event is not in 

question, such as when an independent third party 

(for example an auditor), notifies the valuation 

designee of a material matter and that notification 

includes a conclusion as to the impact of the 

material matter upon the fund’s portfolio or the 

fund’s control deficiencies’ severity, then the five 

business day notification period is triggered 

immediately. 

279We believe that taking longer than 20 business 

days to determine materiality, or at least begin the 

five business day period to notify the board if 

materiality cannot be determined that quickly, 

would be excessive and thus not consistent with the 

promptness contemplated by the reporting 

requirement. 

280The proposed rule would have provided three 

business days to report to the board on these 

matters, and the Proposing Release clarified that an 

adviser would have been permitted to take an 

additional three business days to verify and make 

a final determination of the matter’s materiality 

prior to reporting to the board. Proposing Release, 

supra footnote 2, at 50–51. 

kept informed of material changes or 

events in a timely manner, rather than 

waiting until the next periodic report. 

However, we also agree that boards 

should be receiving information tailored 

to this purpose. As a result, in a 

modification from the proposal, the 

final rule will require that the valuation 

designee provide a prompt written 

notification of the material matter,268

with such follow-on reporting as the 

board may determine 269 appropriate.270

Examples of material matters that would 

need to be reported under this provision 

include significant deficiencies or 

material weaknesses in the design or 

effectiveness of the valuation designee’s 

fair value determination process 271 as 

well as material errors in the calculation 

of net asset value.272 Some commenters 

had suggested that we set an NAV error 

threshold, similar to that generally 

utilized in the industry at $0.01 a share 

or 0.5% of the NAV, as the threshold for 

prompt reporting.273 While we decline 

to establish that specific standard as 

what constitutes a ‘‘material error in the 

calculation of net asset value’’ for 

purposes of the final rule, we agree that 

relying upon that standard would not be 

unreasonable.274

Commenters also had concerns about 

the proposed three-business-day time 

period for making these reports, arguing 

that it was insufficient time to provide 

a meaningful report to the board.275

Some suggested that we either remove 

or extend the specified reporting 

period.276 We believe that it is 

important to specify some time period 

for these reports so that the board 

receives timely information within an 

appropriate window of time, but we 

agree with commenters that three 

business days may be insufficient time 

to prepare the necessary 

communication. As a result, we are 

extending the period to five business 

days to give valuation designees 

sufficient time to coordinate and 

prepare communications for the board 

regarding a material matter that meets 

the standard for prompt notification.277

In light of the changes discussed above, 

we are not extending the period beyond 

five business days as we believe it is 

important that boards receive 

information about material matters as 

promptly as practicable. However, the 

final rule also empowers boards to 

require that valuation designees make 

this notification within a shorter time 

frame should boards determine that 

more timely notification or reporting is 

necessary for their oversight of these 

matters. 

Under this revised requirement, a 

valuation designee must promptly 

notify the board of material matters 

related to valuation controls or errors 

that either the valuation designee has 

identified itself or that the valuation 

designee has been notified of by an 

independent third party, including the 

fund’s auditor. We believe that the 

valuation designee should promptly 

determine the materiality of matters it 

identifies consistent with its fiduciary 

duties and then notify the board within 

the five business day period after 

determining that the matter is material. 

In cases where the materiality of a 

matter is immediately apparent, the 

designee would report the material 

matter to the board within the five 

business day period.278 If, after 20 

business days of becoming aware of the 

relevant valuation matter, the designee 

has not been able to determine the 

matter’s materiality, we would expect 

the designee to then notify the board of 

its ongoing evaluation of the matter 

within the five-business-day prompt 

reporting period.279 A valuation 

designee should act promptly in seeking 

to determine the materiality of a matter, 

and not take the 20 business days as a 

matter of course, in order to enable the 

board to provide effective oversight. 

This is a change from the proposal, 

where we would have required 

materiality determinations to be made 

within three business days.280

In combination, these changes should 

clarify and focus the prompt reporting 


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281See, e.g., BlackRock Trustees Comment Letter; 

MFS Comment Letter. 

282See Murphy Comment Letter (stating that such 

an approach would be helpful with small fund 

boards); Fidelity Comment Letter; AIMA Comment 

Letter. 

283Rule 2a–5(e)(3) (‘‘board’’ defined as either 

fund’s entire board of directors or designated 

committee of such board composed of majority of 

directors who are not interested persons of the 

fund). 

284Rule 2a–5(b)(2). To comply with this 

requirement, the fair value policies and procedures 

adopted under rule 38a–1 generally should specify 

the titles of the persons responsible for determining 

the fair value of the designated investments and 

should specify the particular functions for which 

persons with the identified titles are responsible. 

Similarly, if the valuation designee uses a valuation 

committee or similar body to assist in the process 

of determining fair value, the fair value policies and 

procedures should generally describe the 

composition and role of the committee, or reference 

any related committee governance documents as 

appropriate. See Proposing Release, supra footnote 

2, at text following n.117. 

285See also rule 2a–5(a)(4) (requiring the 

oversight of pricing services). 

286Rule 2a–5(b)(2). The valuation designee of an 

internally managed fund would also be required to 

reasonably segregate fair value determinations from 

the portfolio management of the fund. 

287See, e.g., AIMA Comment Letter; ICI Comment 

Letter; ABA Comment Letter; Fidelity Comment 

Letter; Dechert Comment Letter. 

288See Sullivan Comment Letter. 

289See Proposing Release, supra footnote 2, at 

n.118 and accompanying text. See also, generally, 

AIMA Comment Letter; ICI Comment Letter; ABA 

Comment Letter; Fidelity Comment Letter; Dechert 

Comment Letter. See supra section II.A.5. 

290See, e.g., AIMA Comment Letter. 

291SBIA Comment Letter; AIMA Comment Letter; 

IVSC Comment Letter; Duff & Phelps Comment 

Letter; Stradley Comment Letter; Vanguard 

Comment Letter; MFS Comment Letter; Fidelity 

Comment Letter; American Bankers Association 

Comment Letter; Dechert Comment Letter. See 

Proposing Release, supra footnote 2, at text 

accompanying n.122. 

292 Id. See also Investment Company Institute 

Independent Directors Council, Fair Valuation 

Series: The Role of the Board at 10 (2006) (‘‘IDC 

Role of the Board’’), available at http://www.ici.org/ 

pdf/06_fair_valuation_board.pdf (noting that 

portfolio managers can be important sources of 

information about the value of securities, but there 

may be conflict of interest concerns when portfolio 

managers select fair values that boost a fund’s 

performance, particularly when the compensation 

of the portfolio manager is based on the fund’s 

performance). 

293Better Markets Comment Letter; CFA Institute 

Comment Letter; University of Miami Comment 

Letter. 

294SBIA Comment Letter; AIMA Comment Letter; 

IVSC Comment Letter; Stradley Comment Letter; 

Vanguard Comment Letter; MFS Comment Letter; 

Fidelity Comment Letter; American Bankers 

Association Comment Letter; Dechert Comment 

Letter. One commenter further argued that the 

Commission should mandate the involvement of 

portfolio managers in the valuation process because 

they have ‘‘the most relevant investment specific 

information pertaining to an investment.’’ Duff & 

Phelps Comment Letter. 

295 Duff & Phelps Comment Letter; American 

Bankers Association Comment Letter (suggesting 

that, in certain situations where segregation may be 

burdensome, the Commission should allow 

alternative processes for managing conflicts, 

including establishing reconciliation procedures 

and provide boards and valuation 

designees with more flexibility. As 

adopted, the final rule also should be 

better suited for the ongoing dialogue 

between boards and valuation designees 

that commenters stressed as important 

when the board is exercising 

oversight,281 in that it gives boards 

discretion to get in-depth analysis they 

may need to provide appropriate 

oversight rather than mandating a 

quickly produced formal report. We also 

believe that these modifications make 

clear that the board’s role under rule 2a– 

5, where the board has designated the 

valuation designee to perform fair value 

determinations, is one of oversight and 

that the final rule’s prompt reporting 

requirements will help boards to 

effectively perform this function. 

Some commenters recommended that 

we permit a designated board member, 

such as an independent board member, 

to receive the prompt report.282 We 

believe that the reports should be made 

to the board members that are tasked 

with carrying out appropriate oversight 

over valuations, which can be a 

committee. Therefore, the final rule, 

consistent with the proposal, permits 

reporting to either the full board or a 

designated committee of such board 

composed of a majority of directors who 

are not interested persons of the 

fund.283

3. Specification of Functions 

We are adopting the specification of 

functions requirement largely as 

proposed. Under the final rule, if the 

board designates the performance of fair 

value determinations to a valuation 

designee, rule 2a–5 will require the 

valuation designee to specify the titles 

of the persons responsible for 

determining the fair value of the 

designated investments, including by 

specifying the particular functions for 

which the persons identified are 

responsible.284 Consistent with this 

requirement, the specific personnel with 

duties associated with price challenges 

should be identified, including those 

with the authority to override a price, 

along with the roles and responsibilities 

of such persons, and the valuation 

designee is required to establish a 

process for the review of price 

overrides.285 Finally, the final rule 

requires the valuation designee 

reasonably to segregate fair value 

determinations from the portfolio 

management of the fund such that the 

portfolio manager may not determine, or 

effectively determine by exerting 

substantial influence on, the fair values 

ascribed to portfolio investments.286

Commenters generally supported 

these provisions.287 One commenter, 

however, stated that the proposed rule 

lacked clarity as to which individuals 

are required to be identified and stated 

that ‘‘little appears to be gained by the 

mechanical exercise’’ of naming 

individuals and their titles, which may 

be generic, and identifying with 

specificity their roles in the valuation 

function.288 We disagree with the 

commenter because these provisions 

cannot be satisfied by simply listing the 

generic titles of those involved in 

valuation. As we stated in the Proposing 

Release, we believe, and other 

commenters agreed, that it is important 

for funds clearly to identify, in their fair 

value policies and procedures, the titles 

of persons, and a description of their 

roles and responsibilities, who make fair 

value determinations to enhance 

accountability and provide clear lines of 

responsibility.289 We believe requiring 

the identification of the titles of the 

responsible individuals and a 

description of their roles will facilitate 

an effective fair value process and 

promote accountability.290

Additionally, commenters generally 

supported the proposed requirement 

that the adviser reasonably segregate fair 

value determinations from the portfolio 

management of the fund.291 These 

commenters agreed with our assertions 

in the Proposing Release that a 

significant source of potential adviser 

conflicts of interest in the fair value 

determination process is the level and 

kinds of input that fund portfolio 

managers or persons in related functions 

have in the design or modification of 

fair value methodologies, or in the 

calculation of specific fair values.292

Three commenters stated that portfolio 

managers have ‘‘insurmountable’’ 

conflicts of interest because they are 

often compensated based on the returns 

of the fund.293 These commenters urged 

the Commission to prohibit portfolio 

managers from participating in the 

process of fair value determinations in 

any way. Other commenters, however, 

stated that in many circumstances, the 

fund’s portfolio manager may be the 

most knowledgeable person at an 

adviser regarding a fund’s portfolio 

holdings and it is appropriate for him or 

her to provide input into the process for 

determining the fair value of fund 

investments.294 Two commenters also 

stated the segregation requirement may 

create challenges for smaller managers 

due to their limited resources and 

personnel, but recognized the 

importance of appropriately mitigating 

portfolio managers’ biases or conflicts of 

interest.295 One commenter stated that, 


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that are designed to protect against improper 

valuation of fund investments). 

296 Dechert Comment Letter. 

297 Dechert Comment Letter. See also Proposing 

Release, supra footnote 2, at text following n.122 

(stating that the reasonable segregation requirement 

is not meant to indicate that portfolio management 

must necessarily be subject to a communications 

‘‘firewall’’). 

298An example of effectively determining by 

exerting substantial influence would be if the fair 

values ascribed to portfolio investments are based 

solely on information provided by the portfolio 

manager, 

299See Proposing Release, supra footnote 2, at 

text following n.122. 

300See American Bankers Association Comment 

Letter. 

301See Proposing Release, supra footnote 2, at 

n.122. See also supra footnote 189 (noting that an 

evaluation designee, once designated by the board, 

could seek to obtain the assistance from other 

parties such as the fund administrator). 

302See section 64 of the Act (generally applying 

section 31 of the Act to business development 

companies to the same extent as if they were 

registered closed-end investment companies). 

303Except as discussed in more detail below, the 

provisions of this rule are the same as the 

recordkeeping requirements proposed to be part of 

rule 2a–5. See proposed rule 2a–5(a)(6) and (b)(3). 

304Rule 31a–4(a). 

305Rule 31a–4(b). 

306We proposed a five-year retention period for 

these records. See proposed rule 2a–5(a)(6) and 

(b)(3). Other than the list of designated investments, 

this retention period will, as proposed, begin when 

the determination is made for documentation to 

support fair value determinations and from the end 

of the relevant fiscal year for valuation designee 

reports. Rule 31a–4(a) and (b). Cf. Murphy 

Comment Letter (questioning the beginning of the 

retention period) and infra footnote 307 and 

accompanying text (discussing the retention period 

for the list of designated investments). 

307The list of designated investments will be 

required to be kept for a period beginning with the 

designation and ending at least six years after the 

end of the fiscal year in which the designation was 

terminated, in an easily accessible place until two 

years after such termination, instead of the 

proposed period of five years beginning at the end 

of the fiscal year in which the investments or 

investment types were assigned to the adviser, the 

first two years in an easily accessible place. See rule 

31a–4(b)(2) and proposed rule 2a–5(b)(3)(ii). We 

had requested comment on, among other things, 

whether the proposed holding periods were 

sufficient to evidence compliance with the 

proposed rule. See Proposing Release, supra 

footnote 2, at 57. While we did not receive any 

specific comments on this point, we are concerned 

that in cases where a valuation designee’s 

appointment lasts longer than five or six years, 

third parties, including Commission staff, will not 

have access to this information. 

308Rule 31a–4(c). 

309See IVSC Comment Letter; Council of 

Institutional Investors Comment Letter; CFA 

Institute Comment Letter. Some commenters 

approved of the proposed recordkeeping 

requirements, but only for records created by the 

fund or adviser, not records of a pricing service. See 

Fidelity Comment Letter; TRP Comment Letter; 

Vanguard Comment Letter. 

310See, e.g., ICI Comment Letter; Fidelity 

Comment Letter; Vanguard Comment Letter; 

Continued 

by requiring a fund reasonably to 

segregate portfolio management from 

the process of making fair value 

determinations in the text of rule 2a–5, 

the condition could be read to prohibit 

any involvement of fund portfolio 

management in any part of the process 

of making fair value determinations.296

We continue to believe that our 

proposed approach strikes the 

appropriate balance. The final rule will 

not prohibit portfolio managers from 

participating in the process of fair value 

determinations because of the unique 

insights that portfolio management may 

have regarding the value of fund 

holdings. Keeping the functions 

reasonably segregated in the context of 

fair value determinations should help 

mitigate the possibility that a portfolio 

manager’s competing incentives 

diminish the effectiveness of fair value 

determinations. However, in a change 

from the proposal, the final rule would 

remove the phrase ‘‘process of’’ from 

this subsection of rule 2a–5. This 

change is meant to clarify that the 

segregation requirement would not 

prevent portfolio managers from 

providing inputs that are used in the 

process for determining fair value, as 

raised by one commenter.297 However, 

in a change from the proposal, the final 

rule clarifies that, to satisfy the 

reasonable segregation requirement, the 

portfolio manager may not determine, or 

effectively determine by exerting 

substantial influence on, the fair values 

ultimately ascribed to portfolio 

investments.298 A portfolio manager 

determining the fair value of fund 

investments would not be consistent 

with the reasonable segregation of 

functions required by the final rule. 

As discussed in the Proposing 

Release, this requirement is designed to 

address concerns regarding a portfolio 

manager’s conflicts of interest while 

recognizing the important perspective 

and insight regarding the value of fund 

holdings that portfolio management 

personnel can provide.299 Reasonable 

segregation of functions facilitates these 

important checks and balances, and 

funds could institute this requirement 

through a variety of methods, such as 

independent reporting chains, oversight 

arrangements, or separate monitoring 

systems and personnel.300 We recognize 

that this requirement may create certain 

challenges for smaller advisers and 

internally managed funds due to their 

limited numbers of personnel, but we 

believe that this requirement is 

necessary to manage potential conflicts 

of interest. Additionally, to alleviate 

some of these challenges, the final rule’s 

reasonable segregation approach is 

designed to allow funds to structure 

their fair value determination process 

and portfolio management functions in 

ways that are tailored to each fund’s 

facts and circumstances, including the 

size and resources of a particular fund. 

However, the final rule clarifies that a 

fund should limit the extent of 

influence portfolio managers may have 

on administration of the fair value 

process. If portfolio managers provide a 

significant amount of input on the fair 

value of an investment, the segregation 

process should be appropriately 

rigorous and robust to mitigate any 

potential conflicts of interest. For 

example, in such a circumstance, the 

valuation designee could, as part of its 

reasonable segregation process, seek to 

provide independent voices as a check 

on any potential conflicts of interest to 

the extent appropriate.301

C. Recordkeeping 

We are adopting new rule 31a–4 that 

applies to both registered investment 

companies and business development 

companies 302 to contain the 

recordkeeping requirements associated 

with the final rule.303 Rule 31a–4 will 

require, substantially as proposed as 

part of rule 2a–5, funds or their advisers 

to maintain appropriate documentation 

to support fair value determinations.304

In addition, rule 31a–4 provides that, in 

cases where the board has designated 

the performance of fair value 

determinations to a valuation designee, 

the reports and other information 

provided to the board must include a 

specified list of the investments or 

investment types for which the 

valuation designee has been 

designated.305 These records will, in a 

change from the proposal,306 generally 

be required to be maintained for six 

years, the first two in an easily 

accessible place.307 In another change 

from the proposal, rule 31a–4 will 

require funds or their advisers to 

maintain appropriate documentation to 

support fair value determinations, rather 

than requiring a fund or adviser to keep 

records of the specific methodologies 

applied and assumptions and inputs 

that form the basis of the fair value 

determination in all cases. Lastly, as 

proposed, the fund will be required to 

maintain these records unless the board 

has designated the performance of fair 

value determinations to the fund’s 

investment adviser. In that case, the 

investment adviser will maintain the 

records.308

Comments on the recordkeeping 

aspects of the proposal were mixed, 

with some commenters broadly agreeing 

with them,309 and others stating that the 

proposed requirements would add 

significant additional costs.310


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Guggenheim Comment Letter (asserting that funds 

or advisers would need to hire additional personnel 

to comply with the rule as proposed); and 

Guggenheim Trustees Comment Letter. But see 

Comment Letter of Elena Davidson (July 20, 2020) 

(‘‘Davidson Comment Letter’’) (suggesting that the 

Commission provided ample reason to believe that 

the costs of compliance would be on the smaller 

side). 

311See, e.g., ICI Comment Letter; IDC Comment 

Letter; SSGA Comment Letter; Sullivan Comment 

Letter; ICE Data Comment Letter (stating that 

pricing services would need to increase fees to 

compensate for the demands for records under the 

proposed regime). 

312Murphy Comment Letter. 

313NYC Bar Comment Letter. 

314Schedules evidencing and supporting each 

computation of net asset value as required under 17 

CFR 270.31a–2(a)(2) (‘‘rule 31a–2’’) are examples of 

records that could also be considered appropriate 

documentation to support fair value 

determinations. 

315Also, the reports to the board and specified list 

of designated investments that will be required to 

be maintained under rule 31a–4 are not clearly 

required as part of the existing section 31 rules. See 

also Compliance Rules Adopting Release, supra 

footnote 82, at n.94 (adopting a similar requirement 

for rule 38a–1 for similar reasons). 

316ASC Topic 820 categorizes inputs to valuation 

techniques used to measure fair value into three 

levels. The fair value hierarchy gives the highest 

priority to quoted, observable inputs (level 1) and 

the lowest priority to unobservable inputs (level 3). 

See infra section II.D. 

317See TRP Comment Letter; Franklin Comment 

Letter; MFS Comment Letter; Fidelity Comment 

Letter; John Hancock Comment Letter; see also 

Vanguard Comment Letter (stating that the prosed 

requirements differ from industry practice); SIFMA 

AMG Comment Letter. 

318See ICI Comment Letter (noting this approach 

is similar to that in rule 22e–4); IDC Comment 

Letter; SSGA Comment Letter; Fidelity Comment 

Letter; TRP Comment Letter; Franklin Comment 

Letter; Vanguard Comment Letter; Capital Group 

Comment Letter; SIFMA AMG Comment Letter; 

Dechert Comment Letter; ICE Data Comment Letter; 

Dimensional Comment Letter. 

319See Harvest Comment Letter; Guggenheim 

Comment Letter. 

320 Guggenheim Comment Letter. 

321See Proposing Release, supra footnote 2, at 

n.74 and accompanying text. 

322See, e.g., infra section III.B.2.h. 

323We expect that the type of documentation 

discussed in this paragraph would be the type of 

documentation that would be sufficient for a third 

party to verify the fair value determination as 

discussed in the text accompanying n.321. 

324See also supra section II.A.4 regarding various 

matters a board or valuation designee should 

consider in approving, monitoring, and evaluating 

pricing services. 

325Stale price analysis can include an evaluation 

of whether a price quote that may be used to 

support a fair value price is sufficiently timely to 

be useful. 

Specifically, these commenters stated 

that the proposed requirement to 

maintain documentation to support fair 

value determinations, including 

information regarding the specific 

methodologies applied and the 

assumptions and inputs considered 

when making fair value determinations, 

would result in the adviser needing to 

obtain and retain significant amounts of 

data that it would not otherwise obtain 

and retain when it utilizes a pricing 

service, and could hamper flexibility in 

making fair value determinations.311

One commenter suggested that the 

proposed recordkeeping requirements 

were more appropriate as a rule under 

section 31 of the Act, stating that this 

would both help centralize investment 

company recordkeeping provisions and 

would also ensure that a failure to keep 

the required records would not lead to 

a board being found to have not fair 

valued in good faith.312 We agree, and 

are therefore moving these amended 

recordkeeping requirements to a new 

rule under section 31. Another 

suggested that these requirements are 

duplicative with the existing 

recordkeeping rules adopted under 

section 31 of the Act.313 While some 

records currently required to be 

maintained pursuant to the rules 

adopted under section 31 of the Act may 

be the appropriate documentation to 

support fair value determinations in 

some circumstances,314 they may not 

always be sufficient to meet that 

standard. Thus, we do not believe that 

rule 31a–4’s recordkeeping 

requirements are duplicative of the 

existing rules adopted under section 

31.315

A number of commenters also 

recommended that we tie the 

recordkeeping requirements to the 

three-tier fair value hierarchy within 

U.S. GAAP 316 or otherwise not require 

obtaining or maintaining detailed 

records regarding the level 2 categorized 

fair value measurements of securities for 

which funds use pricing services.317

These commenters stated that, because 

the fund or adviser would not have 

access to the appropriate level of 

information on the pricing service’s 

specific inputs considered or 

assumptions applied in each particular 

case, the proposed requirement would 

be a significant departure from industry 

practice. Instead, these commenters 

asked that we only require detailed 

recordkeeping to support fair value 

determinations for those investments for 

which the fund or valuation designee 

establishes or applies its own 

methodologies.318 A number of 

commenters suggested that we provide 

additional guidance regarding exactly 

what records fit within the rule’s 

requirements.319 One commenter 

requested that the Commission confirm 

that the view that funds and advisers 

must maintain documentation sufficient 

for a third party to verify the fair value 

determination is not intended to 

mandate documentation detailed 

enough to fully recreate it.320

We believe that the requirement to 

maintain appropriate documentation to 

support fair value determinations 

should include documentation that 

would be sufficient for a third party, 

such as the Commission’s staff, not 

involved in the preparation of the fair 

value determinations to verify, but not 

fully recreate, the fair value 

determination, as further described 

below.321 We understand that advisory 

personnel currently produce working 

papers supporting fair value 

determinations that include, for 

example, copies of internally developed 

valuation models, including inputs and 

assumptions used therein and relevant 

supporting documentation.322 These 

records that valuation designees 

currently create in the ordinary course 

of performing fair value determinations 

are examples of the types of records that 

we consider to be ‘‘appropriate 

documentation to support fair value 

determinations.’’ 

In a change from the proposal, we are 

not requiring detailed records relating to 

the specific methodologies a pricing 

service applied and the assumptions 

and inputs a pricing service considered 

when providing each piece of pricing 

information as we are persuaded that 

such a requirement would be 

impractical. Rather, we believe 

appropriate documentation to support a 

fair value determination that takes into 

account inputs from pricing services 

consists of the records related to the 

fund or valuation designee’s initial due 

diligence investigation prior to selecting 

a pricing service and records from its 

ongoing monitoring and oversight of the 

pricing services.323 As discussed above, 

for example, this diligence should 

consider the valuation methods or 

techniques, inputs, and assumptions 

used by the pricing service for different 

classes of holdings, and how they are 

affected as market conditions change, 

among other matters.324 Other 

appropriate documentation also 

includes work papers created by the 

valuation designee while overseeing 

pricing services or testing fair value 

methodologies, such as those 

documenting the valuation designee’s 

monitoring and conducting of price 

challenges, stale price analysis, and 

testing such as calibration or backtesting.325 The fund or adviser will not 

be required to maintain the internal 

records of the pricing service or the 

specific inputs the pricing service used 

for each piece of pricing information it 

provides to the fund. 

We also believe that different types of 

records will be appropriate depending 

on the security or fair value 


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326Examples of the records that may be needed 

for level 3 inputs include documentation 

supporting the inputs, assumptions, and calculation 

methodology used in determining fair value, for 

example selected financial models, financial 

reporting information, income or growth 

projections, or public company comparable data. 

327Rule 31a–4(c). 

328Compare CFA Institute Comment Letter; 

Council of Institutional Investors Comment Letter; 

and VRC Comment Letter with Murphy Comment 

Letter and Sullivan Comment Letter. 

329See Sullivan Comment Letter. 

330For internally managed funds that have 

delegated the performance of fair value 

determinations to an officer or officers of the fund, 

the fund will need to preserve these records. See 

rule 31a–4(c). Also, we would expect that, in the 

event of a change in advisers, the fund will take 

appropriate action to ensure that the records are 

transferred. Cf. Murphy Comment Letter. 

331See IVSC Comment Letter (suggesting that the 

Commission require keeping records relating to the 

background details of valuation professionals); MFS 

Comment Letter (stating that the recordkeeping 

requirements should reflect the relevant details of 

prompt board reports by maintaining a log or 

meeting minutes). 

332Rule 38a–1(d)(1). See supra section II.A.5. But 

see Fidelity Comment Letter (stating that it would 

be appropriate to have a separate policies and 

procedures record retention requirement in rule 2a– 

5 and that the interplay between the rules was 

sufficiently explained in the Proposing Release). 

333See Duff & Phelps Comment Letter 

(recommending that the retention period mirror 

fund documents and ‘‘statutory requirements,’’ 

stating that six or seven years is common). But see 

CFA Institute Comment Letter (agreeing with a fiveyear retention period). 

334Section 2(a)(41) requires the use of market 

values only for securities for which market 

quotations are readily available. Non-security 

holdings must always be fair valued regardless of 

whether readily available market quotations exist 

for that holding. See also infra footnote 338. 

335Section 2(a)(41). Neither the Investment 

Company Act nor the rules thereunder currently 

define ‘‘readily available.’’ 

336Rule 2a–5(c). ASC Topic 820 defines level 1 

inputs as ‘‘[q]uoted prices (unadjusted) in active 

markets for identical assets . . . that the reporting 

entity can access at the measurement date.’’ ASC 

Topic 820–10–20 (emphasis added). In ASR 113, 

the Commission interpreted ‘‘readily available 

market quotations’’ to refer ‘‘to reports of current 

public quotations for securities similar in all 

respects to the securities in question.’’ Despite the 

respective references to ‘‘securities similar in all 

respects’’ in the Commission’s prior guidance and 

‘‘identical assets’’ in ASC Topic 820, we view these 

respective definitions as being substantively the 

same. See also Proposing Release, supra footnote 2, 

at n.129 and accompanying text. 

337We decline, as suggested by one commenter, 

to clarify that the final rule’s definition of readily 

available market quotations only applies to 

determinations made pursuant to rule 2a–5. See 

Seward & Kissel Comment Letter. As discussed 

below, we believe that this definition is appropriate 

for all contexts under the Investment Company Act 

and its rules. See infra footnotes 359 through 364 

and accompanying text. 

338Rule 2a–5(e)(2). See also supra section II.A.2. 

One commenter recommended that certain assets 

that are not considered securities under the Act but 

have readily available market quotations should be 

valued at market value rather than fair valued. See 

Comment Letter of Practus, LLP (July 21, 2020) 

(‘‘Practus Comment Letter’’). The Act requires 

boards to determine fair value for all assets other 

than securities regardless of the existence of readily 

available market quotations. See section 2(a)(41). 

However, as we noted in the Proposing Release, 

U.S. GAAP requires funds to maximize the use of 

relevant observable inputs and minimize the use of 

unobservable inputs in valuing any asset. See 

Proposing Release, supra footnote 2, at 59. As a 

result, we believe that application of U.S. GAAP 

would generally provide for consideration of this 

information in determining fair value. 

339AIMA Comment Letter; Better Markets 

Comment Letter; ICI Comment Letter; Murphy 

Comment Letter; Stradley Comment Letter; Duff & 

Phelps Comment Letter. Other commenters asked 

that we go further, and depart from the binary 

approach laid out in the Act and instead mirror the 

approach established in U.S. GAAP that treats all 

values as fair values, but establishes a three-tier 

hierarchy of inputs that are used in making fair 

value determinations. Fidelity Comment Letter; 

TRP Comment Letter; Capital Group Comment 

Letter; Baillie Gifford Comment Letter. We have not 

modified the final rule as they suggested because 

the Investment Company Act provides a binary 

framework in section 2(a)(41) under which a 

security either has readily available market 

quotations or must be fair valued. 

methodology used. For example, the 

documentation to support the fair value 

determination of an investment valued 

with level 3 inputs would typically 

require different and more extensive 

documentation 326 than an investment 

that was valued only with level 2 

inputs. We expect that the records kept 

may vary based on a variety of factors, 

including the subjectivity of the inputs 

used in determining fair value (e.g., 

level 2 or level 3). 

Under rule 31a–4, and consistent with 

proposed rule 2a–5, an adviser 

designated to perform fair value 

determinations will be required to 

maintain the relevant records.327 While 

commenters disagreed about whether 

the fund or adviser should keep these 

records,328 we continue to believe the 

adviser should maintain them when it is 

the valuation designee. As one 

commenter suggested,329 the adviser 

would need to keep valuation records 

anyway. The reporting requirement 

should give boards the access to the 

documentation they deem necessary 

without mandating that the fund also 

directly hold these duplicative 

records.330

We are not expanding the records to 

be maintained under the rule as 

suggested by some commenters.331 We 

believe that further recordkeeping 

requirements are not necessary because, 

as discussed above, we believe that the 

records required under rule 31a–4 

should be sufficient to meet the purpose 

of the recordkeeping requirements, 

which is to assist third party oversight. 

We are also adopting as proposed the 

requirement to maintain records of the 

reports and other information provided 

to the board in accordance with rule 2a– 

5(b)(1) so that we and our staff will have 

access to them. Also, because we are not 

adopting the proposed requirement to 

establish fair value policies and 

procedures in light of the existing 

requirements of rule 38a–1, the final 

rule will not contain the proposed 

requirement to maintain copies of fair 

value policies and procedures, as 

policies and procedures adopted under 

rule 38a–1 have their own existing 

recordkeeping requirements.332

Under the final rule, funds and 

advisers will be generally required to 

maintain these records for a total of six, 

rather than the proposed five, years.333

We had proposed a five year period to 

align with the retention period of rule 

38a–1. In light of the commenters noting 

the relationship between certain records 

required to be maintained under rule 

31a–2 and rule 31a–4, we believe that 

aligning the retention period with rule 

31a–2, regarding schedules evidencing 

and supporting each computation of net 

asset value, is more appropriate. 

D. Readily Available Market Quotations 

We are adopting the definition of 

readily available market quotations as 

proposed. The board’s role in the 

valuation of a portfolio holding for 

purposes of fair value depends on 

whether or not market quotations are 

readily available for such a holding.334

Under section 2(a)(41) of the Investment 

Company Act, if a market quotation is 

readily available for a portfolio security, 

it must be valued at the market value. 

Conversely, if market quotations are 

‘‘not readily available,’’ a portfolio 

security value must be fair valued as 

determined in good faith by the board 

(or the valuation designee under the 

final rule).335

The final rule will provide that a 

market quotation is readily available for 

purposes of section 2(a)(41) of the 

Investment Company Act with respect 

to a security only when that ‘‘quotation 

is a quoted price (unadjusted) in active 

markets for identical investments that 

the fund can access at the measurement 

date, provided that a quotation will not 

be readily available if it is not 

reliable.’’ 336 This definition is 

consistent with the definition of a level 

1 input in the fair value hierarchy 

outlined in U.S. GAAP. Thus, under the 

final definition, a security will be 

considered to have readily available 

market quotations if its value is 

determined solely by reference to these 

level 1 inputs. Fair value, as defined in 

the Act and further defined in rule 2a– 

5,337 therefore must be used in all other 

circumstances.338

Some commenters that addressed our 

proposed definition of readily available 

market quotations generally supported 

it.339 However, some commenters asked 


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340See Guggenheim Comment Letter (suggesting 

that not including bonds, which usually have level 

2 inputs, would face a significant burden under this 

definition); IAA Comment Letter (stating that fund 

boards may treat some securities with level 2 inputs 

as having readily available market quotations); ICE 

Data Comment Letter. But see, e.g., ICI Comment 

Letter (agreeing with the proposed definition). 

341See, e.g., ICI Comment Letter. 

342ASC Topic 820–10–35–48. 

343See Proposing Release, supra footnote 2, at 

nn.133–134 and accompanying text; see also 2014 

Money Market Fund Release, supra footnote 11, at 

text accompanying n.895. 

344See Investment Company Liquidity Risk 

Management Programs, Investment Company Act 

Release No. 32315 (Oct. 13, 2016) [81 FR 82142 

(Nov. 18, 2016)], at nn.800–801 and accompanying 

text. 

345See ASC 820–10–35–59 through 35–62 in 820, 

a topic called ‘‘Measuring the Fair Value of 

Investment in Certain Entities That Calculate Net 

Asset Value per Share (or Its Equivalent) (‘‘A 

reporting entity is permitted, as a practical 

expedient, to estimate the fair value of an 

investment within the scope of paragraphs 820–10– 

15–4 through 15–5 using the net asset value per 

share (or its equivalent, such as member units or an 

ownership interest in partners’ capital to which a 

proportionate share of net assets is attributed) of the 

investment, if the net asset value per share of the 

investment (or its equivalent) is calculated in a 

manner consistent with the measurement principles 

of Topic 946 as of the reporting entity’s 

measurement date.’’). 

346See ICI Comment Letter (recommending that 

mutual funds and other pooled investment vehicles 

with daily NAVs be considered to have readily 

available market quotations); CFA Institute 

Comment Letter (recommending that we not 

consider private funds that utilize NAV as a 

practical expedient as having readily available 

market quotations). 

347See definition of readily determinable fair 

value, item c. with ASC 820–10–20. One 

commenter sought clarification as to whether the 

proposed definition was seeking to incorporate the 

concept of ‘‘readily determinable’’ fair value from 

U.S. GAAP as well. American Bankers Association 

Comment Letter. ‘‘Readily determinable’’ fair value 

is not utilized to value all securities but for certain 

limited purposes under U.S. GAAP. Specifically the 

concept is similar but narrower in that it only 

applies with respect to equity securities. While 

readily determinable is a similar concept to ‘‘readily 

available market quotations’’ in that it utilizes 

similar concepts (e.g., it references prices or 

quotations of securities exchanges), it is not what 

we are utilizing for this definition. 

348 Investments in mutual fund shares are not 

valued using NAV as a ‘‘practical expedient.’’ See 

ASC 820–10–35–54B. See also ICI Comment Letter. 

349See Proposing Release, supra footnote 2, at 

n.213. See also ASC 820–10–65–7. 

350As under our proposal, for purposes of our 

economic analysis we assume that such securities 

had no readily available market quotations, and 

would be thus fair valued under the final rule. See 

Proposing Release, supra footnote 2, at n.213. 

351Practus Comment Letter. 

352See 17 CFR 210.4–01(a)(1). 

353When referencing ASC Topic 820 throughout 

this release, we intend to reference the accounting 

topic on Fair Value Measurements within U.S. 

GAAP and the principles therein. 

354See Proposing Release, supra footnote 2, at 

n.131 and accompanying text and ASC Topic 820– 

10–35–41C (outlining circumstances when a 

reporting entity shall make an adjustment to a Level 

1 input). 

355See ASC Topic 820–10–35–41C at b; see also 

supra footnote 77 and accompanying text. One 

commenter suggested that these adjustments are not 

required, which is inconsistent with our 

understanding of ASC Topic 820–10–35–36B and 

35–41C. See NYC Bar Comment Letter. 

that we treat all securities that are 

valued using level 2 inputs in the U.S. 

GAAP hierarchy, including evaluated 

prices, as also having readily available 

market quotations under our 

definition.340 We believe that the best 

conceptual analogue for readily 

available market quotations are 

securities whose values are determined 

solely by reference to level 1 inputs, as 

we proposed. We also believe that this 

approach is consistent with many funds’ 

practices today.341 We believe that level 

2 inputs under the U.S. GAAP hierarchy 

are not consistent with the concept of 

readily available market quotations 

under the Act and therefore our final 

definition. Securities valued using level 

2 inputs include securities that are not 

traded on an active market, and/or are 

valued using inputs other than quoted 

prices for the specific security (such as 

credit spreads).342 Accordingly, we do 

not believe that securities valued with 

level 2 inputs are consistent with the 

definition of readily available market 

quotations. 

As we stated in the proposal, under 

the final rule, evaluated prices are not 

readily available market quotations as 

they are not based upon unadjusted 

quoted prices from active markets for 

identical investments.343 In addition, for 

the same reason, ‘‘indications of 

interest’’ and ‘‘accommodation quotes,’’ 

would also not be ‘‘readily available 

market quotations’’ for the purposes of 

rule 2a–5(c).344

Two commenters asked whether 

certain pooled investment vehicle 

securities, such as those of funds that 

publish their NAV daily and issue and 

redeem shares at that NAV (such as 

mutual funds), or that are valued using 

their NAV as a practical expedient (such 

as many private fund shares),345 would 

qualify as having readily available 

market quotations.346 We understand 

that, under ASC Topic 820, an 

investment in a mutual fund or similar 

structure that has a readily determinable 

fair value per share that is determined 

and published and is the basis for 

current transactions,347 such as a daily 

NAV for mutual fund shares, is 

generally considered to have observable 

level 1 inputs under U.S. GAAP.348

Accordingly, we agree with the 

commenter and believe that such 

investments are generally consistent 

with the definition of having readily 

available market quotations under the 

final rule. 

Conversely, securities that are valued 

using NAV as a practical expedient, like 

certain private funds, do not require 

disclosure of the level of input 

associated with them under the U.S. 

GAAP fair value hierarchy.349 We 

understand that the fair value of those 

investments for which use of NAV as a 

practical expedient is permitted under 

U.S. GAAP may generally require less 

effort and resources than other 

securities without readily available 

market quotations because fair value 

measurement utilizing such a fund’s 

NAV involves less subjectivity and more 

objective measures. Nevertheless, we 

believe that these securities generally do 

not have readily available market 

quotations under the final definition 

because their value is not based on 

unadjusted quoted prices.350

One commenter stated that securities 

exchanges such as NASDAQ or the 

NYSE often adjust prices to establish a 

closing price or address technical 

issues. This commenter asked that we 

clarify that by ‘‘unadjusted’’ we did not 

mean to disqualify securities adjusted 

by exchanges in this way.351 We agree. 

The word unadjusted in the final 

definition refers to adjustments in 

market prices made by the fund or 

valuation designee, not adjustments 

made by the exchange on which the 

security is listed. 

Consistent with the requirements for 

preparing fund financial statements,352

we will presume a fair value 

methodology not determined in 

accordance with U.S. GAAP to be 

misleading or inaccurate and thus not 

an appropriate methodology under the 

final rule.353 U.S. GAAP requires the 

maximization of the use of relevant 

observable inputs and minimization of 

the use of unobservable inputs. 

However, under U.S. GAAP there are 

circumstances where otherwise relevant 

observable inputs become unreliable.354

Consistent with this, we will generally 

presume that a quote would be 

unreliable under final rule 2a–5(c) 

where it would require adjustment 

under U.S. GAAP or where U.S. GAAP 

would require consideration of 

additional inputs in determining the 

value of the security. For example, 

under the final rule funds would, 

consistent with U.S. GAAP, use 

previous closing prices for securities 

that principally trade on a closed 

foreign market to calculate the value of 

that security, except when an event has 

occurred since the time the value was 

established that is likely to have 

resulted in a change in such value.355 In 

such circumstances, the quote would be 


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356See, e.g., ICI Comment Letter; Capital Group 

Comment Letter. 

357See rule 17a–7. 

358See, e.g., ICI Comment Letter; Murphy 

Comment Letter. One commenter noted that they 

agreed with the Fixed Income Market Structure 

Advisory Committee recommendation on reform of 

rule 17a–7. See https://www.sec.gov/spotlight/fixedincome-advisory-committee/preliminaryrecommendation-re17a-7.pdf. 

359See, e.g., Exemption of Certain Purchase or 

Sale Transactions Between a Registered Investment 

Company and Certain Affiliated Persons Thereof, 

Investment Company Act Release No. 11136 (Apr. 

21, 1980) [45 FR 29067 (May 1, 1980)] (‘‘17a–7 

Proposing Release’’), at 12–13; Exemption of Certain 

Purchase or Sale Transactions Between a Registered 

Investment Company and Certain Affiliated Persons 

Thereof, Investment Company Act Release No. 

11676 (Mar. 10, 1981) [46 FR 17011 (Mar. 17, 1981)] 

(‘‘17a–7 Adopting Release’’) at 10 (‘‘If the rule were 

expanded to include securities for which market 

quotations are not readily available, the 

independent basis for determining the value of 

securities would be eliminated.’’). 

360See 17a–7 Proposing Release, supra footnote 

359, at n.16. 

361 17a–7 Adopting Release supra footnote 359, at 

7 (noting the importance of active secondary 

markets to provide an independent basis for crosstrade pricing). 

362We discuss in the economic analysis section 

below the impact that the adoption of this 

definition may have on such fund cross trading 

practices. See infra section III.D.5 363See, e.g., United Municipal Bond Fund, SEC 

Staff No-Action Letter (Jan. 27, 1995) and Federated 

Municipal Funds, SEC Staff No-Action Letter (Nov. 

20, 2006). 364See Spring 2020 Securities and Exchange 

Commission Regulatory Actions, available at 

https://www.reginfo.gov/public/do/eAgendaMain?

operation=OPERATION_GET_AGENCY_RULE_

LIST¤tPub=true&agencyCode=&showStage=

active&agencyCd=3235&csrf_token=

1A4EE40E5F597FA80ECBE64464FA72F1716FCD8

F60FDF1D26B9A8644E274D25057FE57666

F0C582CC5575C6CC8DC0DCE11D3. 

365See Proposing Release, supra footnote 2 at 

n.150. 366See ICI Comment Letter; Comment Letter of 

PricewaterhouseCoopers LLP (July 21, 2020) (‘‘PWC 

Comment Letter’’); KPMG Comment Letter; ABA 

Comment Letter; Comment Letter of Ernst & Young 

LLP (July 20, 2020) (‘‘E&Y Comment Letter’’); 

Council of Institutional Investors Comment Letter; 

MFDF Comment Letter, Duff & Phelps Comment 

Letter; Invesco Comment Letter; Federated Hermes; 

Comment Letter of Charles E. Andrews, et al. (July 

21, 2020) (‘‘Capital Group Directors Comment 

Letter’’); Capital Group Comment Letter. 

367See ICI Comment Letter. 

368See Scheidt Comment Letter 2. 

369See Scheidt Comment Letter 1; Scheidt 

Comment Letter 2; NYC Bar Comment Letter and 

Vanguard Comment Letters that highlight 

reaffirming certain concepts from ASR 118 and the 

1999 Letter to ICI (there can be differences in 

valuation depending on fund structures). 

370See Duff & Phelps Comment Letter; ICI 

Comment Letter; KPMG Comment Letter; E&Y 

Comment Letter; PWC Comment Letter. 

371See Scheidt Comment Letter 1 (discussing 

previous SEC enforcement actions regarding oddlots, including Pacific Investment Management 

Company LLC, Investment Company Act Release 

No. 4577 (Dec. 1, 2016) and Semper Capital 

Management, LP, Investment Advisers Act Release 

No. 5489 (Apr. 28, 2020)). 

372See, e.g., ICI Comment Letter. 

unreliable and the fund would need to 

fair value the security. 

A number of commenters raised 

concerns that the proposed definition of 

readily available market quotations may 

affect current practices on cross trades 

under 17 CFR 270.17a–7 (‘‘rule 17a– 

7’’).356 For a fund to engage in a cross 

trade under rule 17a–7, the security first 

must have a ‘‘readily available market 

quotation’’ and then the transaction 

must meet the other conditions of that 

rule.357 These commenters stated that 

funds and their affiliates regularly 

engage in cross trades of certain fixedincome securities that they believed 

would not qualify as having readily 

available market quotations under the 

proposed definition, and asked that we 

clarify that the proposed definition was 

not meant to disrupt current crosstrading practices.358

The definition of readily available 

market quotations that we are adopting 

will apply in all contexts under the 

Investment Company Act and the rules 

thereunder, including rule 17a–7.359 In 

the adopting release for rule 17a–7, the 

Commission stated that ‘‘[t]he phrase 

‘which market quotations are readily 

available’ also is found in section 

2(a)(41) of the Act and rule 2a–4 and is 

intended to have the same meaning 

ascribed to it in those other 

provisions.’’ 360 Further, the 

Commission has previously suggested 

that active secondary markets are an 

important indicator of readily available 

market quotations.361 We continue to 

believe it is important to have a 

consistent definition of the term in all 

contexts, including in rule 17a–7, where 

it serves to ensure that there is an 

independent basis for determining the 

value of securities. 

We recognize that whenever we 

define a term, to the extent market 

participants are currently engaged in 

practices that are not consistent with 

that definition, they will need to 

conform their practices. As a result, 

certain securities that had been 

previously viewed as having readily 

available market quotations and being 

available to cross trade under rule 17a– 

7 may not meet our new definition and 

thus would not be available for such 

trades.362 We also understand that many 

cross trades today are done taking into 

consideration certain letters by our staff 

that address, among other things, the 

application of the term readily available 

market quotations in the context of 

certain transactions under rule 17a–7.363

The staff is reviewing these letters to 

determine whether these letters, or 

portions thereof, should be withdrawn. 

Separately, consideration of potential 

revisions to rule 17a–7 is on the 

rulemaking agenda.364 We welcome 

input from the public as we undertake 

our consideration of rule 17a–7. 

E. Rescission of Prior Commission 

Releases 

As proposed, we are rescinding ASR 

113 and ASR 118 in their entirety. We 

believe that rescission is appropriate 

because the guidance included in ASR 

113 and ASR 118 is superseded or made 

redundant by the adoption of rule 2a– 

5 and by the requirements under the 

current accounting and auditing 

standards.365

Commenters generally supported the 

rescission of ASR 113 and ASR 118.366

These commenters agreed with our 

assertion in the Proposing Release that 

the guidance within the ASRs is not 

inconsistent with current accounting 

standards, but they are not considered 

essential or additive to the existing 

accounting standard framework.367 One 

commenter stated that at a minimum the 

Commission should retain ASR 118’s 

interpretive guidance that permits fund 

boards to appoint persons to assist them 

in making fair value determinations, 

and to make actual calculations 

pursuant to the board’s discretion.368

Some commenters opposed rescinding 

ASRs 113 and 118, stating that certain 

specific fair value matters are not 

covered in the relevant accounting 

standards and that certain content 

within those releases should be reissued 

or restated by the Commission.369 Other 

commenters disagreed, generally stating 

that valuation matters are addressed in 

the principles and framework of ASC 

Topic 820 and the concepts that are 

necessary to retain are now either 

included in the relevant accounting 

standards or were included in the rule 

as proposed.370

One commenter argued that we 

should retain the ASRs, as it believed 

that the ASRs addressed certain fund 

specific issues, such as those related to 

the valuation of ‘‘odd lots’’ it believed 

were not addressed in U.S. GAAP.371

Others specifically disagreed with this 

point, and argued that the principles of 

ASC Topic 820 and related U.S. GAAP 

standards address such ‘‘odd lot’’ 

cases.372 We agree that the odd lot 

valuation practices, such as those that 

occurred in the cases referenced by the 

commenter (e.g., a fund with an 

investment, held in an odd-lot quantity, 

valued at a round-lot price when the 

entity has no ability to access the roundlot market to exit such investment at the 

measurement date) do not reflect an 

appropriate methodology consistent 

with the principles of ASC Topic 820 

and the existing U.S. GAAP framework. 


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373ASC Topic 820 requires that the reporting 

entity have access to the principal or most 

advantageous market used to measure fair value 

(see ASC 820–10–35–6A), and so a reporting entity 

may not use round lot pricing if it is not able to 

access the round lot market at the measurement 

date. 

374See Scheidt Comment Letter 1. 

375See Proposing Release, supra footnote 2, at 

n.149 

376See PWC Comment Letter; KPMG Comment 

Letter; E&Y Comment Letter; Deloitte Comment 

Letter; ICI Comment Letter; IDC Comment Letter; 

NYSSCPA Comment Letter. See also Proposing 

Release, supra footnote 2, at n.149, stating that the 

statutory requirement in section 30(g) of the 

Investment Company Act, which requires the 

independent public accountant to verify securities 

owned, implicates the auditors requirement to test 

the existence assertion of all securities. The 

statutory requirement under section 30(g) remains 

distinct from the rescinded valuation guidance in 

ASR 118 and the auditing standards established by 

the PCAOB concerning accounting estimates, 

including fair value. 

377See ICI Comment Letter. 

378See infra footnote 391 and accompanying text 

(stating that a fund may voluntarily comply with 

the final rule in advance of the compliance date). 

379See, e.g., ICI Comment Letter; IDC Comment 

Letter; ABA Comment Letter; MFDF Comment 

Letter; Capital Group Comment Letter; Invesco 

Comment Letter. 

380ABA Comment Letter; MFDF Comment Letter; 

Fidelity Trustees Comment Letter; IDC Comment 

Letter; NYC Bar Comment Letter; American Funds 

Trustees Comment Letter; Council of Institutional 

Investors Comment Letter. 

381See supra section II.A.4. 

382See supra section II.A.2. 

383See supra footnote 116 (noting that the 

guidance in the 2014 Money Market Fund Release 

on the use of amortized cost valuation remains 

valid). 

384 ICI Comment Letter; Federated Hermes 

Comment Letter. See also SIFMA AMG Comment 

Letter. 

385See Investment Company Institute, SEC Staff 

No-Action Letter (Dec. 8, 1999). 

386See supra section II.A.2. For example, under 

U.S. GAAP, investments generally have a range of 

acceptable values. Accordingly, different funds, 

based on the various factors and market conditions 

considered could reasonably come to different 

conclusions on the price of a particular investment. 

387ABA Comment Letter. 

With respect to the comments 

concerning odd lot valuation practices, 

the rescission of the ASRs will not 

change the Commission’s ability to 

bring similar enforcement cases in the 

future. The cases were brought under 

several legal bases, including section 

34(b) of the Act and 17 CFR 270.22c–1, 

because the funds made misstatements 

related to their performance and sold 

shares at a price other than their current 

net asset values. Although the guidance 

in the ASRs has been cited in prior 

cases, these cases were brought under 

independent legal bases as stated above, 

and valuing odd lots at a price that a 

fund cannot access on the measurement 

date will continue to be inconsistent 

with these requirements and ASC Topic 

820 after the rescission of the ASRs.373

Among other things, ASC Topic 820 

provides a principles-based framework 

for valuing all investments. The 

accounting standards are not designed 

to describe specific fair value 

measurement fact patterns; we disagree 

with certain commenters that certain 

fund specific valuation issues are not 

addressed in U.S. GAAP and continue 

to believe that the principles in ASC 

Topic 820 provide a framework 

appropriate to utilize for all fair value 

measurements.374 In light of this, and in 

connection with the adoption of rule 

2a–5, the specific incremental guidance 

included in the ASRs is no longer 

necessary. 

Furthermore, as discussed in the 

proposing release, the guidance in ASR 

118 states that auditors of funds should 

verify all quotations for securities with 

readily available market quotations, 

implicating the auditor’s requirement to 

test the valuation assertion for all 

securities when auditing a fund’s 

financial statements.375 We believe, and 

commenters agreed, that rescinding the 

auditing guidance included in ASR 118 

would allow fund auditors to apply only 

PCAOB standards, which would permit 

sampling and other techniques to verify 

the value of a fund’s investments, and 

believe that such a change is 

appropriate. 376 While this will provide 

the auditors with greater flexibility in 

carrying out their audit procedures, a 

fund board or valuation designee could 

request that its auditor continue current 

practice to verify 100% of the values of 

the fund’s investments if it determines 

that this approach is preferable.377

Therefore, after review of the comments 

received and for the reasons noted 

above, ASR 113 and ASR 118 are 

rescinded in their entirety upon the 

compliance date of the final rule.378

F. Existing Commission Guidance, Staff 

No-Action Letters, and Other Staff 

Guidance 

In addition to our rescission of ASR 

113 and ASR 118, certain Commission 

guidance, staff letters and other staff 

guidance addressing a board’s 

determination of fair value and other 

matters covered by the rules will be 

withdrawn or rescinded in connection 

with this adoption. Upon the 

compliance date of these rules, some 

staff letters and other Commission and 

staff guidance, or portions thereof, will 

be moot, superseded, or otherwise 

inconsistent with the rules and, 

therefore, will be withdrawn or 

rescinded. 

Commenters generally agreed that 

certain existing Commission and staff 

guidance should be withdrawn as part 

of the adoption of rule 2a–5.379 While 

many commenters agreed with the 

scope of the guidance we identified for 

withdrawal in the proposal, others 

suggested that additional guidance be 

withdrawn or rescinded, such as the 

guidance on overseeing pricing services 

contained in the 2014 Money Market 

Fund Release.380 As discussed in 

section II.A.4 above (relating to pricing 

services), the guidance on oversight of 

pricing services contained in the 2014 

Money Market Fund Release is 

superseded by the guidance on pricing 

service oversight contained in this 

release.381 Additionally, as discussed in 

the fair value methodologies section 

above, we are rescinding and restating 

certain guidance the Commission 

provided in the 2014 Money Market 

Fund Release regarding the valuation of 

thinly traded securities.382 As proposed, 

however, we are not modifying or 

supplementing the Commission’s prior 

guidance regarding the use of the 

amortized cost method because the 

Commission continues to believe that 

our prior guidance, as discussed in the 

2014 Money Market Fund Release, 

remains relevant, adequate, and 

appropriate.383 Finally, two 

commenters 384 asked that one staff noaction letter be retained regarding the 

meaning of ‘‘good faith,’’ which 

characterizes ‘‘good faith’’ as ‘‘a flexible 

concept that can accommodate many 

different considerations.’’ 385 Retaining 

the staff letters as recommended by 

these commenters is unnecessary 

because the framework set out in U.S. 

GAAP along with the guidance provided 

in the fair value methodologies section 

of this release supports this flexible 

meaning of good faith.386

Upon the compliance date of the 

rules, certain Commission guidance as 

well as all the staff letters and other staff 

guidance listed below will be 

withdrawn. Some commenters also 

asked that we confirm that, to the extent 

staff guidance not identified in the 

proposal conflicts with the requirements 

of the rules, such guidance is 

superseded.387 To the extent any staff 

guidance is inconsistent or conflicts 

with the requirements of the rules, even 

if not specifically identified below, that 

guidance is superseded. 


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388The compliance date will require boards and 

valuation designees to implement the new rules as 

of that date regardless of their fiscal year end or 

financial reporting period. 

389See, e.g., ICI Comment Letter; Dechert 

Comment Letter; IDC Comment Letter; Invesco 

Comment Letter. 

390See ABA Comment Letter. 

391As evidence of the date of early compliance, 

the records to be kept under rule 2a–5 would also 

need to begin being maintained as of that date. 

392 5 U.S.C. 801 et seq. 

393See rule 2a–5(a). Additionally, upon the 

adoption of rule 2a–5, rule 38a–1 will require the 

adoption and implementation of written policies 

and procedures reasonably designed to prevent 

violations of the requirements of rule 2a–5. 

394See rule 2a–5(b). 

395See rule 2a–5(c). 

396Our analysis of the final rule takes into 

account the rescission of ASR 113 and ASR 118 as 

well as the withdrawal and rescission of certain 

staff letters and Commission and staff guidance 

addressing a board’s determination of fair value and 

other matters covered by rule 2a–5. See supra 

sections II.E and II.F. 

Name Date Topic 

Paul Revere Investors, Inc ........................................................... Feb. 21, 1973 Delegation to a board valuation committee. 

The Putnam Growth Fund and Putnam International Equities 

Fund, Inc.

Jan. 23, 1981 Fair value of portfolio securities which trade on a closed foreign exchange. 

Form N–7 for Registration of Unit Investment Trusts under the 

Securities Act of 1933 and the Investment Company Act of 

1940, Investment Company Act Release No. 15612, Appendix B, Guide 2.

Mar. 17, 1987 Fair value for UITs to be determined by the trustee or its appointed person. 

Investment Company Institute ..................................................... Dec. 8, 1999 .. Fair value generally. 

Investment Company Institute ..................................................... Apr. 30, 2001 Fair value generally. 

Last paragraph of Section III.D.2.(a) and the entirety of Section 

III.D.2.(b) of the 2014 Money Market Fund Release.

July 23, 2014 Guidance regarding the fair value of thinly traded securities 

and use of pricing services. 

Valuation Guidance Frequently Asked Questions (FAQ 1 only) 2014 ............... Fund directors’ responsibilities when determining whether an 

evaluated price provided by a pricing service, or some 

other price, constitutes fair value. 

G. Transition Period 

The Commission is adopting an 

eighteen month transition period 

beginning from the effective date of the 

rules to provide sufficient time for funds 

and valuation designees to prepare to 

come into compliance with rules 2a–5 

and 31a–4.388 Some commenters urged 

the Commission to provide more time 

beyond the one-year transition period 

we discussed in the Proposing Release, 

suggesting an extended time period of 

eighteen months for compliance in light 

of the aspects of the proposed rule that 

they believed may require funds to 

change certain of their practices.389 We 

appreciate these concerns, and 

accordingly, the compliance date will be 

eighteen months following the effective 

date of the rules. We will rescind ASRs 

113 and 118 on the compliance date, 

and the other identified guidance will 

also be withdrawn. Additionally, we 

agree with one commenter that urged 

the Commission to provide funds with 

the option of complying with the rules 

prior to the compliance date.390 Once 

the rules become effective, a fund may 

voluntarily comply with the rules in 

advance of the compliance date. To 

promote regulatory consistency, 

however, any fund that elects to rely on 

rules 2a–5 and 31a–4 prior to the 

compliance date may rely only on rules 

2a–5 and 31a–4, and not also consider 

Commission and staff letters and other 

guidance that will be withdrawn or 

rescinded on the compliance date in 

determining fair value in good faith for 

purposes of section 2(a)(41) of the Act 

and rule 2a–4 thereunder.391

H. Other Matters 

Pursuant to the Congressional Review 

Act,392 the Office of Information and 

Regulatory Affairs has designated these 

rules, collectively, as a ‘‘major rule,’’ as 

defined by 5 U.S.C. 804(2). If any of the 

provisions of these rules, or the 

application thereof to any person or 

circumstance, is held to be invalid, such 

invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

III. Economic Analysis 

A. Introduction 

Rule 2a–5 provides requirements for 

determining fair value in good faith for 

purposes of section 2(a)(41) of the Act 

and rule 2a–4 thereunder. The 

Commission is adopting rule 2a–5 for 

the reasons provided above in section II. 

The final rule provides that 

determination of fair value in good faith 

requires assessing and managing 

material risks associated with fair value 

determinations; selecting, applying, and 

testing fair value methodologies; and 

evaluating any pricing services used.393

The Commission is also adopting rule 

31a–4, which includes the 

recordkeeping requirements associated 

with rule 2a–5. 

Rule 2a–5 permits a fund’s board of 

directors to designate certain parties to 

perform such fair value determinations 

in good faith, who will then carry out 

these functions for some or all of the 

fund’s investments. This designation 

will be subject to board oversight and 

certain reporting and other requirements 

designed to facilitate the board’s ability 

to oversee effectively this party’s fair 

value determinations.394 These 

requirements of the final rule directly 

address conflicts of interest and other 

risks posed when fair value 

determinations are performed by 

persons other than the board. It also 

provides a mechanism for coordinating 

the requirements of the Act with U.S. 

accounting standards. Lastly, rule 2a–5 

defines when market quotations are 

readily available for purposes of section 

2(a)(41) of the Act.395

We are sensitive to the economic 

effects that may result from the rules, 

including the benefits, costs, and the 

effects on efficiency, competition, and 

capital formation.396 Section 2(c) of the 

Investment Company Act requires us, 

when engaging in rulemaking that 

requires us to consider or determine 

whether an action is consistent with the 

public interest, to also consider, in 

addition to the protection of investors, 

whether the action will promote 

efficiency, competition, and capital 

formation. 

We discuss potential effects of the 

rules as well as possible alternatives to 

the rules in more detail below. Where 

possible, we have attempted to quantify 

the costs, benefits, and effects on 

efficiency, competition, and capital 

formation expected to result from the 

rules. In some cases, however, we are 

unable to quantify the economic effects 

because we lack the information 

necessary to provide a reliable estimate. 

Where we are unable to quantify the 

economic effects of the rules, we 

provide a qualitative assessment of the 

potential effects. 


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397See supra footnotes 1, 2, and 4. See also supra 

section I (discussing other aspects of funds’ 

regulatory framework that are related to boards’ fair 

value role (e.g., ASC Topic 820)). 

398See section 2(a)(41) and rule 2a–4. 

399See Proposing Release, supra footnote 2, at 

n.14. 

400 Id. 

401See Proposing Release, supra footnote 2, at 

n.15. 

402See Proposing Release, supra footnote 2, at 

n.16; ASR 118. 

403 2014 Money Market Fund Release, supra 

footnote 11, at 47813. 

404 Id. at 47814. 

405 Id. 

406See supra section II.D. 

407See, e.g., IDC Role of the Board, supra footnote 

215; K&L Gates, Mutual Fund Valuation and

Liquidity Procedures (2013), available at https://

files.klgates.com/files/upload/dc_im_07- 

valuation.pdf (‘‘2013 K&L Report’’); Arthur Delibert, 

Mutual Fund Pricing and Fair Valuation, K&L Gates 

2016 Investment Management Conference; (2016), 

available at https://files.klgates.com/files/upload/ 

2016im_dc_conference_presentations_

sessioniv.pdf; Mutual Fund Directors Forum, 

Practical Guidance for Fund Directors on Valuation 

Oversight (June 2012), available at https://

www.mfdf.org/docs/default-source/defaultdocument-library/publications/white-papers/ 

practical-guidance-for-fund-directors-on-valuationoversight.pdf?sfvrsn=68e27dc6_2 (‘‘MFDF 

Valuation Report’’); supra footnote 10 and 

accompanying discussion. See also ABA Comment 

Letter; Advisors’ Inner Circle Comment Letter; 

AIMA Comment Letter; American Bankers 

Association Comment Letter; American Funds 

Comment Letter; Better Markets Comment Letter; 

Dechert Comment Letter; Duff & Phelps Comment 

Letter; Fidelity Comment Letter; Fidelity Comment 

Letter; Fidelity Trustees Comment Letter; Franklin 

Comment Letter; IAA Comment Letter; ICI 

Comment Letter; IDC Comment Letter; Invesco 

Comment Letter; IVSC Comment Letter; MFS 

Comment Letter; Murphy Comment Letter; New 

York City Bar Association Comment Letter; SIFMA 

AMG Comment Letter; TRC Comment Letter; VRC 

Comment Letter. 

408See, e.g., IDC Role of the Board, supra footnote 

215, at 6–7. See also AIMA Comment Letter; 

Fidelity Trustees Comment Letter; ICI Comment 

Letter; Invesco Comment Letter; SIFMA AMG 

Comment Letter. 

409See supra footnote 8 and accompanying 

discussion, and section II; see also infra footnotes 

407 and 408. 

410See, e.g., Investment Company Institute, 

Independent Directors Council, & ICI Mutual 

Insurance Company, An Introduction to Fair 

Valuation (Spring 2005), at 7, available at https:// 

www.icimutual.com/system/files/ 

Fair%20Valuation%20Series%20An%20

Introduction%20to%20Fair%20Valuation.pdf (‘‘ICI 

Fair Valuation Report’’). Nevertheless, ‘‘[t]here may 

be circumstances at a particular fund group that 

leads a board and adviser to determine that it is 

desirable for an independent director to be involved 

in day-to-day decision-making, whether as part of 

the adviser’s valuation committee or by reviewing 

and ratifying the committee’s decisions daily.’’ See 

MFDF Valuation Report, supra footnote 407, at 9. 

411See, e.g., MFDF Valuation Report, supra 

footnote 407, at 4. In addition, officers of internally 

managed funds may also perform this function in 

lieu of an adviser. See Sullivan Comment Letter; 

Deloitte Comment Letter; Seward & Kissel Comment 

Letter; SBIA Comment Letter; Franklin Comment 

Letter; NYC Bar Comment Letter; Dechert Comment 

Letter; see also supra section II.B. 

412See, e.g., IAA Comment Letter, (stating that 

‘‘while sub-advisers currently may provide input 

and support to the primary adviser on pricing and 

the fair value process, ultimately fund boards rely 

on the primary adviser, not the sub-adviser, to 

conduct the day-to-day valuation work.’’) 

413See, e.g., 2013 K&L Report, supra footnote 407, 

at 14; MFDF Valuation Report, supra footnote 407, 

at 11. 

B. Economic Baseline 

1. Current Regulatory Framework 

To understand the effects of the rules, 

we compare the requirements of the 

rules to the current regulatory 

framework and current industry 

practices. As discussed in greater detail 

in section II above, the regulatory 

framework regarding fair value 

determinations and the role of the board 

of directors in the determination of fair 

value is set forth in the Investment 

Company Act and the rules thereunder. 

The Commission has also expressed its 

views on the role of the board regarding 

fair value under the Investment 

Company Act in several releases, 

including ASR 113 and ASR 118, the 

2014 Money Market Fund Release, and 

the Compliance Rules Adopting 

Release.397

Section 2(a)(41) of the Investment 

Company Act defines the value of assets 

for which market quotations are not 

readily available as fair value as 

determined by the board of directors in 

good faith. Under the Investment 

Company Act, whenever market 

quotations are readily available for a 

security, these market quotations must 

be used to value that security.398

Whenever market quotations are not 

readily available for a fund security or 

if the investment is not a security, the 

fund must value that investment using 

its fair value as determined by the board 

in good faith. 

As discussed in the Proposing 

Release, the Commission stated in ASR 

113 and ASR 118 that the board need 

not itself perform each of the specific 

tasks required to calculate fair value in 

order to perform its role under section 

2(a)(41).399 However, ASR 113 and ASR 

118 stated that the board should choose 

the methods used to arrive at fair value 

and continuously review the 

appropriateness of such methods.400 In 

addition, the Commission stated that 

boards should consider all appropriate 

factors relevant to the fair value of fund 

investments for which market 

quotations are not readily available.401

Finally, the Commission stated that 

whenever technical assistance is 

requested from individuals who are not 

directors, the findings of such 

individuals must be carefully reviewed 

by the directors in order to satisfy 

themselves that the resulting valuations 

are fair.402

The 2014 Money Market Fund Release 

stated that funds ‘‘may consider 

evaluated prices from third-party 

pricing services, which may take into 

account these inputs as well as prices 

quoted from dealers that make markets 

in these instruments and financial 

models.’’ 403 The 2014 Money Market 

Fund Release also stated that ‘‘evaluated 

prices provided by pricing services are 

not, by themselves, ‘readily available’ 

market quotations or fair values ‘as 

determined in good faith by the board 

of directors’ as required under the 

Investment Company Act.’’ 404 In 

addition, the Commission discussed in 

that release the factors that the fund’s 

board of directors may want to consider 

‘‘[b]efore deciding to use evaluated 

prices from a pricing service to assist it 

in determining the fair values of a 

fund’s portfolio securities.’’ 405

Finally, for a fund to engage in a cross 

trade under rule 17a–7, the security first 

must have a ‘‘readily available market 

quotation’’ and then the transaction 

must meet the other conditions of rule 

17a–7. Currently, funds and their 

affiliates rely on rule 17a–7 and 

consider related staff no-action letters 

when engaging in cross trades of certain 

fixed-income securities. Funds’ reliance 

on rule 17a–7 and funds’ practices in 

consideration of related staff no-action 

letters form part of our baseline for the 

economic analysis of the final rules.406

2. Current Practices 

Our understanding of current fair 

value practices is based on fund 

disclosures, staff discussions with 

industry representatives, staff’s 

experience, review of relevant industry 

publications and academic papers, and 

commenters’ letters.407 We expect that 

funds’ policies and procedures generally 

reflect their fair value practices.408 We 

discuss below our understanding of 

current practices but acknowledge that 

practices may vary across funds and 

through time.409

(a) Fair Value Calculation 

Most fund boards or UIT trustees do 

not play a day-to-day role in the pricing 

of fund investments.410 Typically, an 

adviser to a fund or other service 

providers perform the actual day-to-day 

fair value calculations.411 Commenters 

stated that sub-advisers play a role or 

assist in the fair value determination 

process.412 In addition to performing 

day-to-day calculations, advisers also 

typically develop (or assist the board in 

developing) the fund’s fair value 

methodologies.413 Commenters 

generally validated this view of boards’ 

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414See, e.g., ABA Comment Letter; Advisors’ 

Inner Circle Comment Letter; AIMA Comment 

Letter; BNY Mellon Comment Letter; Dechert 

Comment Letter; Scheidt Comment Letter 2; 

Fidelity Comment Letter; First Trust Comment 

Letter; IAA Comment Letter; ICI Comment Letter; 

Invesco Comment Letter; JPMAM Comment Letter; 

Murphy Comment Letter; NYC Bar Comment Letter; 

Seward & Kissel Comment Letter. 

415See ICI Comment Letter; Chapman Comment 

Letter; AAM Comment Letter; First Trust Comment 

Letter; Hennion & Walsh Comment Letter; Invesco 

Comment Letter; BNY Mellon Comment Letter. 

416See supra section II.A.4 and infra section 

III.B.2.c). 

417See ABA Comment Letter; Advisors’ Inner 

Circle Comment Letter; AIMA Comment Letter; 

American Bankers Association Comment Letter; 

American Funds Comment Letter; Baillie Gifford 

Comment Letter; Capital Group Comment Letter; 

Dechert Comment Letter; Deloitte Comment Letter; 

Dimensional Comment Letter; Duff & Phelps 

Comment Letter; Fidelity Comment Letter; Fidelity 

Trustees Comment Letter; First Trust Comment 

Letter; Franklin Comment Letter; Guggenheim 

Comment Letter; Guggenheim Trustees Comment 

Letter; ICE Data Comment Letter; ICI Comment 

Letter; IDC Comment Letter; IHS Markit Comment 

Letter; Invesco Comment Letter; IVSC Comment 

Letter; JPMAM Comment Letter; John Hancock 

Comment Letter; MFDF Comment Letter; Murphy 

Comment Letter; NYC Bar Comment Letter; 

NYSSCPA Comment Letter; Refinitiv Comment 

Letter; SSGA Comment Letter; Stradley Comment 

Letter; Sullivan Comment Letter; TRC Comment 

Letter; VRC Comment Letter. 

418See supra section II.A.1. 

419See, e.g., MFDF Valuation Report, supra 

footnote 407, at 6–8; Paul Kraft et al., Fair Valuation 

Pricing Survey, 17th Edition, Executive Summary, 

DELOITTE INSIGHTS (2019), at 10, available at 

https://www2.deloitte.com/us/en/insights/industry/ 

financial-services/fair-valuation-pricingsurvey.html#:∼:text=The%2017th%20annual

%20Deloitte%20Fair,use%20of%20technology

%2C%20internal%20controls (‘‘Deloitte Survey’’). 

We lack information on how the Deloitte survey 

sample was constructed or how the survey data was 

collected, so we cannot speak to the 

representativeness of the sample or the 

unbiasedness of the survey responses. Nevertheless, 

the results of the survey are largely consistent with 

Commission staff’s experience and in line with 

practices as described in prior Commission staff’s 

letters. See, e.g., staff letters, supra section II.F. 

420See, e.g., ABA Comment Letter; AIMA 

Comment Letter; American Bankers Association 

Comment Letter; American Fund Trustees 

Comment Letter; Baillie Gifford Comment Letter; 

CFA Institute Comment Letter; Duff & Phelps 

Comment Letter; Fidelity Comment Letter; Fidelity 

Trustees Comment Letter; Guggenheim Comment 

Letter; Harvest Comment Letter; IHS Markit 

Comment Letter; Invesco Comment Letter; IVSC 

Comment Letter; JPMAM Comment Letter; John 

Hancock Comment Letter; MFDF Comment Letter; 

Murphy Comment Letter; NYC Bar Comment Letter; 

Stradley Comment Letter; Sullivan Comment Letter; 

Vanguard Comment Letter; VRC Comment Letter. 

421See, e.g., MFDF Valuation Report, supra 

footnote 407, at 6–8. 

422See, e.g., Clifford Rossi, How to Reduce Model 

Risks: 4 Basic Principles, GLOB. ASS’N OF RISK 

PROF’L; https://www.garp.org/#!/risk-intelligence/ 

all/all/a1Z1W000003PzmhUAC; SR 11–7: Guidance 

on Model Risk Management, BD. OF GOVERNORS 

OF THE FED. RESERVE SYS., https://

www.federalreserve.gov/supervisionreg/srletters/ 

sr1107.htm; and Model Risk Management 

Guidance, FED. HOUSING FIN. AGENCY, https:// 

www.fhfa.gov/SupervisionRegulation/ 

AdvisoryBulletins/Pages/AB-2013-07-Model-RiskManagement-Guidance.aspx. 

423According to a Deloitte survey, ‘‘22 percent of 

survey participants noted that their boards seek to 

identify areas in the valuation process where there 

might be a conflict of interest and provide oversight 

relative to these conflicts.’’ See Deloitte Survey, 

supra footnote 419, at 10. The cited statistic does 

not imply that the remaining funds do not have 

policies in place to manage conflicts of interest of 

advisers but it means that any such policies may 

not be valuation specific. 

424See, e.g., MFDF Valuation Report, supra 

footnote 407, at 9. 

425See, e.g., Chapman Comment Letter; ICI 

Comment Letter. 

426See, e.g., MFDF Valuation Report, supra 

footnote 407, at 8. 

427According to a Deloitte Survey, 34% of survey 

participants reported that the board or one of its 

subcommittees met with the chief risk officer or 

members of the risk committee to discuss valuation 

matters. See Deloitte Survey, supra footnote 419, at 

10. 

428See supra section II.A.1 and section III.B.2.b). 

429See Vanguard Comment Letter. 

430See supra section II.A.2. 

431See, e.g., IDC Role of the Board, supra footnote 

215, at 6–7; MFDF Valuation Report, supra footnote 

407, at 5; rule 38a–1. 

to-day fair value calculations.414 We 

understand that for UITs, which do not 

have a board of directors or an adviser, 

it is generally the evaluator designated 

in the UIT’s trust indenture, which is 

often the UIT’s depositor, that conducts 

the valuation activities equivalent to 

fund boards.415 This evaluator may also 

seek assistance from service providers 

(such as pricing services) to perform the 

actual day-to-day fair value calculation. 

As discussed above,416 pricing services 

provide advisers, funds, and depositors 

with information such as evaluated 

prices, matrix prices, price opinions, or 

other information for a wide range of 

investments, including fixed-income 

securities (e.g., corporate and municipal 

bonds), securitized assets, and bank 

loans, that are used as prices or as 

inputs to the fair value determination 

process, as many commenters 

acknowledged.417

(b) Fair Value Practices—Assess and 

Manage Risks 418

It is our understanding that boards, 

advisers, and UIT evaluators currently 

play an important role in identifying 

and managing valuation risks,419 and 

many commenters confirmed this 

understanding.420 Examples of 

valuation risks that funds often address 

include changes in market liquidity, 

reliance on a single source for pricing 

data, reliability of data obtained from 

pricing services for investments that are 

not traded on exchanges, reliability of 

data provided by credit rating agencies, 

use of internal information provided by 

portfolio managers to estimate fair 

values, use of internally developed 

models to value investments, extensive 

use of matrix pricing, the process 

surrounding the adviser’s price 

overrides, timely identification of 

material events, and valuation risks 

arising from new investments.421

Many of these risks are operational in 

nature, such as model risk, which 

includes the risk of loss caused by using 

inaccurate models (methodologies) to 

make decisions such as determinations 

of fair value.422 To the extent that 

valuation is less informed by liquid 

markets and price discovery 

mechanisms and is more informed by 

models, the risk of biased valuations 

rises. Model risk includes misspecified 

models, biased information provided by 

those with conflicts of interest, use of 

inappropriate inputs and assumptions, 

and incorrect implementation. 

Funds’ valuation practices generally 

focus on mitigating potential conflicts of 

interest of the adviser as well as 

conflicts of interest of other parties that 

assist the board with fair value 

determinations (e.g., portfolio 

managers).423 Some advisers currently 

have in place processes to address 

potential conflicts of interest when 

portfolio management personnel 

provides input regarding valuation for a 

fund.424 UIT depositors may have 

weaker conflicts of interest in valuation 

processes because such depositors are 

generally compensated based on the 

number of units, rather than the trust’s 

net assets.425

Valuation risks can change with 

changes in market conditions, changes 

in fund investments, changes in inputs 

and assumptions, and changes in 

methodologies or models. Hence, funds 

may periodically review any previously 

identified valuation risks.426 Some 

boards meet with the fund’s chief risk 

officer or members of the risk committee 

on a periodic basis to discuss the 

valuation of the portfolio investments as 

part of the assessment and management 

of previously identified risks.427

Many commenters noted that 

assessing and managing valuation risks 

is a part of current practice,428 with one 

commenter noting the necessity of 

considering valuation risk in the context 

of determining whether a given fair 

value methodology would be 

appropriate.429

(c) Fair Value Practices—Establish Fair 

Value Methodologies 430

Funds with investments that are fair 

valued currently have in place written 

policies and procedures that describe 

the methodologies used when 

calculating fair values.431 Commenters 

confirmed our understanding of this 


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432See, e.g., ABA Comment Letter; Advisors’ 

Inner Circle Comment Letter; AIMA Comment 

Letter; Capital Group Comment Letter; Chapman 

Comment Letter; Dechert Comment Letter; 

Dimensional Comment Letter; Duff & Phelps 

Comment Letter; First Trust Comment Letter; 

Franklin Comment Letter; Guggenheim Comment 

Letter; Guggenheim Trustees Comment Letter; 

Harvest Comment Letter; IAA Comment Letter; ICE 

Data Comment Letter; ICI Comment Letter; IDC 

Comment Letter; IHS Markit Comment Letter; 

Invesco Comment Letter; University of Miami 

Comment Letter; IVSC Comment Letter; JPMAM 

Comment Letter; John Hancock Comment Letter; 

Murphy Comment Letter; NYC Bar Comment Letter; 

Refinitiv Comment Letter; Russell Investments 

Comment Letter; Scheidt Comment Letter 2; SSGA 

Comment Letter; Stradley Comment Letter; Sullivan 

Comment Letter; VRC Comment Letter. 

433See ICI Comment Letter; Chapman Comment 

Letter; AAM Comment Letter; First Trust Comment 

Letter; Hennion & Walsh Comment Letter; Invesco 

Comment Letter; BNY Mellon Comment Letter. 

434See, e.g., AIMA Comment Letter; ASA 

Comment Letter; CFA Institute Comment Letter; 

Dechert Comment Letter; Duff & Phelps Comment 

Letter; Harvest Comment Letter; ICI Comment 

Letter; Invesco Comment Letter; MFS Comment 

Letter; Murphy Comment Letter; NYC Bar Comment 

Letter; SIFMA AMG Comment Letter; Chapman 

Comment Letter. 

435See, e.g., MFDF Valuation Report, supra 

footnote 407, at 5. 

436According to the Deloitte survey, 72% of 

survey participants performed periodic reviews of 

valuation models relating to private equity 

investments to determine the appropriateness and 

accuracy relative to the investment being valued, 

and 56% of participants reported that the valuation 

models used for private equity investments are 

explicitly subject to internal control policies and 

procedures. According to the same survey, 63% of 

survey participants made a change or revision to 

their valuation policies over the last year. See 

Deloitte Survey, supra footnote 419, at 9 and 14. 

437See, e.g., MFDF Valuation Report, supra 

footnote 407, at 5. 

438See, e.g., IDC Role of the Board, supra footnote 

215, at 6–7 and 10–11; MFDF Valuation Report, 

supra footnote 407, at 5. 

439See supra section II.A.4. 

440See, e.g., AAM Comment Letter; BNY Mellon 

Comment Letter; Chapman Comment Letter; First 

Trust Comment Letter; Hennion & Walsh Comment 

Letter; ICI Comment Letter; Invesco Comment 

Letter. 

441See, e.g., ABA Comment Letter; American 

Bankers Association Comment Letter; Dechert 

Comment Letter; Dimensional Comment Letter; 

Guggenheim Comment Letter; IAA Comment Letter; 

ICE Data Comment Letter; ICI Comment Letter; IDC 

Comment Letter; John Hancock Comment Letter; 

Refinitiv Comment Letter; Russell Investments 

Comment Letter; SSGA Comment Letter; Sullivan 

Comment Letter. 

442See, e.g., ABA Comment Letter; Dechert 

Comment Letter; IAA Comment Letter; ICE Data 

Comment Letter; IDC Comment Letter; John 

Hancock Comment Letter; Russell Investments 

Comment Letter; SSGA Comment Letter; 

443See NYC Bar Comment Letter. 

444See supra section II.A.3. 

445See infra section III.B.2.f). 

446See, e.g., ICI Fair Valuation Report, supra 

footnote 410, at 17–18. 

447See, e.g., IDC Role of the Board, supra footnote 

215, at 6–7. 

448See, e.g., ABA Comment Letter; Advisors’ 

Inner Circle Comment Letter; AIMA Comment 

Letter; American Funds Comment Letter; Capital 

Group Comment Letter; Dimensional Comment 

Letter; Duff & Phelps Comment Letter; Fidelity 

Comment Letter; Franklin Comment Letter; 

Guggenheim Comment Letter; Harvest Comment 

Letter; ICI Comment Letter; IHS Markit Comment 

Letter; Invesco Comment Letter; University of 

Miami Comment Letter; JPMAM Comment Letter; 

John Hancock Comment Letter; MFDF Comment 

Letter; Murphy Comment Letter; NYC Bar Comment 

Letter; NYSSCPA Comment Letter; Refinitiv 

Comment Letter; Stradley Comment Letter; Sullivan 

Comment Letter; TRC Comment Letter. 

449See supra section II.B and section II.B.3. 

450See supra section II.B, footnotes 171–173 and 

accompanying discussion. See also AAM Comment 

Letter; BNY Mellon Comment Letter; Chapman 

Comment Letter; First Trust Comment Letter; 

Hennion & Walsh Comment Letter; Invesco 

Comment Letter; MFS Comment Letter; Seward & 

Kissel Comment Letter. 

451See supra section II.A.4, section III.B.2.a), and 

section III.B.2.c). 

452See ABA Comment Letter; Advisors’ Inner 

Circle Comment Letter; AIMA Comment Letter; 

American Bankers Association Comment Letter; 

American Funds Comment Letter; Baillie Gifford 

Comment Letter; Capital Group Comment Letter; 

Dechert Comment Letter; Deloitte Comment Letter; 

Dimensional Comment Letter; Duff & Phelps 

Comment Letter; Fidelity Comment Letter; Fidelity 

Trustees Comment Letter; First Trust Comment 

Letter; Franklin Comment Letter; Guggenheim 

Comment Letter; Guggenheim Trustees Comment 

Letter; ICE Data Comment Letter; ICI Comment 

Letter; IDC Comment Letter; IHS Markit Comment 

Letter; Invesco Comment Letter; IVSC Comment 

Letter; JPMAM Comment Letter; John Hancock 

Comment Letter; MFDF Comment Letter; Murphy 

Comment Letter; NYC Bar Comment Letter; 

NYSSCPA Comment Letter; Refinitiv Comment 

Letter; SSGA Comment Letter; Stradley Comment 

Letter; Sullivan Comment Letter; TRC Comment 

Letter VRC Comment Letter. 

practice.432 UITs may provide for the 

methodology in which the assets shall 

be valued by the evaluator within the 

UIT’s trust indenture.433

The methodologies provided in 

policies and procedures or trust 

indentures can require multiple data 

sources and entail various 

assumptions.434 Methodologies often 

establish a suggested ranking of the 

pricing sources that an adviser should 

use when valuing investments, and 

different rankings can be established for 

different types of investments.435 Many 

funds and advisers periodically review 

the appropriateness and accuracy of the 

methodologies used in valuing 

investments and make any necessary 

adjustments.436 Further, funds and 

advisers generally monitor the 

circumstances that may necessitate the 

use of fair values.437 For example, many 

funds establish triggering mechanisms 

in their policies and procedures to 

monitor circumstances that require the 

use of fair value methodologies, and 

third-party pricing services may be used 

to identify those triggering events.438 As 

discussed above, pricing services also 

play an important role in the fair value 

determination process and, as such, 

help to establish fair value 

methodologies that are reviewed by 

funds and advisers.439

We understand that fund boards, 

advisers, and UIT depositors and 

evaluators have generally established 

fair value methodologies for their 

investments that lack readily available 

market quotations, which are generally 

applied consistently in accordance with 

policies and procedures or trust 

indentures as described above.440

Similarly, many commenters stated that 

pricing services establish their own 

methodologies,441 subject to the due 

diligence of the board or adviser,442 and 

one commenter stated that pricing 

services recommend methodologies.443

(d) Fair Value Practices—Test Fair 

Value Methodologies 444

We understand that funds or pricing 

services generally test the 

appropriateness and accuracy of 

internally selected methodologies used 

to value investments.445 Funds may 

utilize methods such as back-testing to 

review the appropriateness and 

accuracy of the methodologies used.446

We understand that many funds use 

systems to identify security valuations 

that may require additional attention, 

such as security prices that have not 

changed over a period of time and price 

changes beyond a certain threshold.447

Many commenters confirmed our 

understanding that testing fair value 

methodologies is common practice.448

(e) Fair Value Practices—Identify 

Responsibilities 

As discussed above, a fund’s adviser 

often plays an important and valuable 

role in carrying out the day-to-day work 

of determining fair values, while the 

board reviews periodic reports from the 

adviser regarding the fair value of fund 

investments and fair value practices 

(e.g., methodologies, testing, etc.).449

UITs, which lack a board of directors, 

generally describe who is responsible 

for valuation duties in the UIT’s trust 

indenture, with the depositor or 

evaluator generally performing fair 

value determinations, sometimes with 

the assistance of other parties such as 

evaluators.450 As discussed above 451

and as acknowledged by many 

commenters,452 pricing services provide 

advisers and funds with information 

such as evaluated prices, matrix prices, 

price opinions, or other information that 

is used as prices or as inputs to the fair 

value determination process. Some 

boards create separate valuation 

committees with clearly established 


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453See, e.g., IDC Role of the Board, supra footnote 

215, at 8–10. 

454 Id. at 7. 

455See, e.g., AIMA Comment Letter; ABA 

Comment Letter; Murphy Comment Letter; MFS 

Comment Letter. 

456 ICI Commenter Letter; see also Seward & 

Kissel Comment Letter; 

457See VRC Comment Letter. 

458See AIMA Comment Letter. 

459 Id. 

460See, e.g., ABA Comment Letter; Fidelity 

Comment Letter; IVSC Comment Letter; Murphy 

Comment Letter. 

461See supra section II.A.4. 

462See, e.g., MFDF Valuation Report, supra 

footnote 407, at 10; IDC Role of the Board, supra 

footnote 215, at 10–11. 

463See, e.g., IDC Role of the Board, supra footnote 

215, at 11. 

464See, e.g., MFDF Valuation Report, supra 

footnote 407, at 10. 

465See, e.g., MFDF Valuation Report, supra 

footnote 407, at 11. 

466 Id. 

467 Id. at 10–11. 

468See, e.g., ABA Comment Letter; Advisors’ 

Inner Circle Comment Letter; AIMA Comment 

Letter; Capital Group Comment Letter; Dechert 

Comment Letter; Deloitte Comment Letter; 

Dimensional Comment Letter; Duff & Phelps 

Comment Letter; Fidelity Comment Letter; Fidelity 

Trustees Comment Letter; First Trust Comment 

Letter; Guggenheim Comment Letter; Harvest 

Comment Letter; ICE Data Comment Letter; ICI 

Comment Letter; IDC Comment Letter; IHS Markit 

Comment Letter; Invesco Comment Letter; 

University of Miami Comment Letter; IVSC 

Comment Letter; JPMAM Comment Letter; John 

Hancock Comment Letter; KPMG Comment Letter; 

MFDF Comment Letter; Murphy Comment Letter; 

NYC Bar Comment Letter; Practus Comment Letter; 

Refinitiv Comment Letter; Stradley Comment Letter; 

Sullivan Comment Letter; TRC Comment Letter; 

Vanguard Comment Letter; VRC Comment Letter. 

469See, e.g., MFS Comment Letter; Sullivan 

Comment Letter. 

470See, e.g., ABA Comment Letter; Advisors’ 

Inner Circle Comment Letter; American Funds 

Comment Letter; Capital Group Comment Letter; 

Dimensional Comment Letter; First Trust Comment 

Letter; Guggenheim Comment Letter; ICE Data 

Comment Letter; ICI Comment Letter; IDC Comment 

Letter; Invesco Comment Letter; John Hancock 

Comment Letter; Refinitiv Comment Letter; Russell 

Investments Comment Letter; TRC Comment Letter. 

471See supra section II.B.1. 

472See, e.g., ABA Comment Letter; Advisors’ 

Inner Circle Comment Letter; AIMA Comment 

Letter; American Funds Comment Letter; Capital 

Group Comment Letter; Dechert Comment Letter; 

Fidelity Comment Letter; Fidelity Trustees 

Comment Letter; Guggenheim Comment Letter; IAA 

Comment Letter; IDC Comment Letter; MFS 

Comment Letter; Murphy Comment Letter; SIFMA 

AMG Comment Letter; Vanguard Comment Letter. 

473See, e.g., IDC Role of the Board, supra footnote 

215, at 12–13. 

474See, e.g., MFDF Valuation Report, supra 

footnote 407, at 2 as well as supra section III.B.2.e). 

475See, e.g., MFDF Valuation Report, supra 

footnote 407, at 10. See also Deloitte Survey, supra 

footnote 419, at 10 (stating that 26% of the 

participants mentioned that the board held a 

valuation discussion in the prior 12 months with 

management outside of a regularly scheduled 

meeting to address a valuation matter or question). 

476See, e.g., MFDF Valuation Report, supra 

footnote 407, at 14. 

functions that help the board provide 

oversight of the advisers’ valuation 

practices.453 If used, the structure of the 

valuation committees can differ across 

funds. Finally, fund policies and 

procedures may include ‘‘escalation 

procedures’’ that describe the 

circumstances under which certain 

adviser personnel or board members 

should be notified when fair value 

issues arise that are not addressed in 

existing fair value policies and 

procedures.454

The commenters who weighed in on 

this aspect confirmed our understanding 

of these practices.455 Commenters stated 

that advisers currently have the ‘‘means 

to ensure that portfolio managers do not 

exert undue influence on the fair value 

process’’ 456 and that other practices 

such as ‘‘establish[ing] [a] ‘middle 

office’ that facilitates the establishment 

of [fair value]’’ determinations mitigates 

‘‘undue influence’’ from portfolio 

managers.457 Another commenter 

described segregating duties by 

‘‘delegating the calculation, 

determination, and production of the 

NAV to a suitably independent, 

competent and experienced third-party 

valuation service provider’’ and that 

‘‘[i]f the investment manager is 

responsible for determining the NAV, 

and/or acts as the fund governing body, 

robust controls over conflicts of interest 

should be established.’’ 458 The same 

commenter also described appointing an 

investment manager valuation 

committee to mitigate conflicts of 

interest and ensuring that a broker or 

dealer that provides inputs to fair value 

‘‘is free of relationships with the fund 

through which the investment manager 

can directly or indirectly control or 

influence the broker or dealer.’’ 459

Other commenters underscored the 

importance of segregating duties and 

described practices to mitigate the risk 

from conflicts of interest in the 

valuation process.460

(f) Fair Value Practices—Evaluate 

Pricing Services 461

We understand that, under existing 

practice, fund boards, advisers, and UIT 

depositors frequently use third-party 

pricing service providers to assist in 

determining fair values.462 Before 

engaging a pricing service, boards may 

review background information on the 

vendor, such as the vendor’s operations 

and internal testing procedures, 

emergency business continuity plans, 

and methodologies and information 

used to form its recommended 

valuations.463 Boards may develop an 

understanding of the circumstances in 

which third-party pricing services 

would provide assistance in the 

valuation of fund investments.464 In 

reviewing the performance of these 

pricing services, boards also may seek 

input from the fund’s adviser or the 

pricing service itself, including probing 

whether the adviser performed adequate 

due diligence when selecting the 

service.465 In particular, boards may 

consider whether the adviser tests 

prices received from pricing services 

against subsequent sales or open prices, 

whether the pricing services are 

periodically reviewed, and to what 

extent the pricing service considers 

adviser input. Funds may establish 

procedures for ongoing monitoring of 

the pricing services—including the 

pricing service’s presentations to the 

board, the adviser’s due diligence, and 

on-site visits to the pricing service—to 

determine whether the pricing service 

continues to have competence in 

valuing particular investments and 

maintains an adequate control 

environment.466 Further, boards may 

seek to understand the circumstances 

under which the adviser may challenge 

or override the prices obtained from the 

pricing service provider.467 Many 

commenters confirmed our 

understanding of common practices in 

the evaluation of pricing services.468

While some commenters stated that 

some advisers (e.g., small advisers) lack 

the resources or staffing to perform due 

diligence of pricing services, backtesting of methodologies, analysis of 

pricing challenge efficacy, and backtesting of fair value determinations,469

most commenters stated that funds 

routinely rely on advisers to conduct 

due diligence on pricing services.470

(g) Board Reporting 471

Many commenters confirmed our 

understanding of current practices of 

board reporting.472 On a periodic basis, 

as part of their current fair value 

oversight, boards may review reports 

from the adviser regarding the fair value 

of fund investments 473 and fair value 

methodologies, but rely on the adviser 

for the day-to-day calculation of fair 

values.474 Many boards review fair 

value determinations based on 

information provided in quarterly 

reports, but some boards review the 

determinations in more or less frequent 

reporting depending on the type of fund 

investments and the market 

conditions.475 Boards also may have adhoc discussions on valuation matters 

outside of their regular meetings.476 In 

some circumstances, board members 

may play an active role in shaping the 

type of information contained in and the 

format of valuation reports given to the 


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477See, e.g., MFDF Valuation Report, supra 

footnote 407, at 14. 

478 Id. 

479See, e.g., IDC Role of the Board, supra footnote 

215, at 12. 

480 Id. at 12–13. 

481 Id. at 13. See also Deloitte Survey, supra 

footnote 419, at 10 (noting that 74% of the 

participants in the 2019 survey reported that their 

boards receive price challenge information as part 

of the valuation reports). 

482See, e.g., IDC Role of the Board, supra footnote 

215, at 13. 

483See, e.g., MFDF Valuation Report, supra 

footnote 407, at 14. 

484 Id. 

485See supra section II.C. 

486See, e.g., Advisors’ Inner Circle Comment 

Letter; AIMA Comment Letter; Baillie Gifford 

Comment Letter; Duff & Phelps Comment Letter; 

Fidelity Comment Letter; Franklin Comment Letter; 

Guggenheim Comment Letter; Guggenheim Trustees 

Comment Letter; ICE Data Comment Letter; ICI 

Comment Letter; IDC Comment Letter; Invesco 

Comment Letter; University of Miami Comment 

Letter; JPMAM Comment Letter; John Hancock 

Comment Letter; MFS Comment Letter; NYC Bar 

Comment Letter; SIFMA AMG Comment Letter; 

SSGA Comment Letter; Stradley Comment Letter; 

Sullivan Comment Letter; TRC Comment Letter; 

Vanguard Comment Letter; VRC Comment Letter. 

487See, e.g., American Bankers Association 

Comment Letter; Baillie Gifford Comment Letter; 

Capital Group Comment Letter; ICE Data Comment 

Letter; John Hancock Comment Letter; SSGA 

Comment Letter; TRC Comment Letter; Vanguard 

Comment Letter. 

488See, e.g., Vanguard Comment Letter. 

489See, e.g., IDC Comment Letter. 

490See, e.g., SSGA Comment Letter. 

491See, e.g., Franklin Comment Letter; Baillie 

Gifford Comment Letter. 

492See supra section II.C. 

493See supra footnotes 356, 357, and 358 and 

accompanying discussion. 

494See, e.g., ABA Comment Letter; Capital Group 

Comment Letter; Dechert Comment Letter; 

Dimensional Comment Letter; ICE Data Comment 

Letter; ICI Comment Letter; Murphy Comment 

Letter; NYC Bar Comment Letter; Stradley Comment 

Letter; Sullivan Comment Letter; TRC Comment 

Letter. 

495See supra section II.D. 

board.477 The content of reports boards 

receive depends on the type of fund and 

fund investments.478 The type of general 

information that boards may receive 

includes a summary of back-testing data 

and an analysis of the impact of fair 

values on the fund’s NAV.479 The 

reports also may include more specific 

information about fund investments that 

are more difficult to value, such as the 

fair values assigned to each investment, 

the size of the holding, the effect of the 

fair value on the fund’s NAV, and the 

rationale for the decision to fair 

value.480 Some board reports may also 

include security-specific information in 

cases where advisers override prices 

provided by pricing services.481 Finally, 

some funds also include in board 

reports the minutes of, or summary 

memoranda and other written 

documentation from, valuation 

committee meetings held during the 

prior period.482

Valuation reports may vary depending 

on the volume and complexity of fair 

value determinations.483 For example, 

some boards require a case-by-case 

review of each asset that received fair 

value, whereas other boards require the 

adviser to provide a sample report on an 

asset that was assigned a fair value to 

illustrate the methodology that is used 

by the adviser.484

(h) Recordkeeping 485

It is our understanding that funds and 

advisers currently retain records related 

to fair value determinations. These 

records generally include identifying 

information for each portfolio 

investment, data used for pricing, and 

any other information related to price 

determinations and fund valuation 

policies and procedures. Commenters 

generally confirmed our understanding 

of common practices in 

recordkeeping.486 We recognize that 

some fund boards may not apply these 

same recordkeeping practices for some 

investments, including, for example, 

those for which the board relies on 

pricing services for fund investments 

using level 2 inputs for fair value 

determinations.487 Furthermore, 

commenters described common 

recordkeeping practices such as 

maintaining specific methodologies, 

inputs, and assumptions for investments 

fair valued with level 3 inputs and 

conducting due diligence of pricing 

services’ methodologies and testing for 

investments fair valued with level 2 

inputs; 488 maintaining records of 

methodologies and other detailed inputs 

and assumptions for cases when a fund, 

board, or adviser establishes and applies 

its own methodologies; 489 maintaining 

only prices from a pricing service (e.g., 

evaluated prices for securities fair 

valued with level 2 inputs) that were 

actually used as an input by the 

adviser; 490 and not maintaining records 

for investments for which the funds rely 

on pricing services to calculate fair 

value for assets valued with level 2 

inputs.491

(i) Cross Trades 492

It is our understanding that some 

funds currently rely on rule 17a–7 and 

consider staff no-action letters when 

engaging in cross trades in investments, 

including fixed-income securities.493

Commenters confirmed our 

understanding of the common practice 

of cross trades.494 Furthermore, some 

commenters noted that some funds may 

currently cross trade certain assets that 

rely on level 2 inputs.495

3. Affected Parties 

Rules 2a–5 and 31a–4 potentially 

affect all registered investment 

companies and BDCs (because their 

fund investments must be fair valued 

under the Act), those funds’ boards of 

directors, advisers, and investors. The 

rules also affect funds that engage in 

cross trades. Table 1 below presents 

descriptive statistics for the funds that 

could be affected by the rules. As of 

September 11, 2020, there were 14,010 

registered investment companies: (i) 

12,680 open-end funds; (ii) 664 closedend funds; (iii) 661 UITs; and (iv) 14 

variable annuity separate accounts 


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496We estimate the number of registered 

investment companies by reviewing the most recent 

filings of Forms N–CEN filed with the Commission 

as of September 2020. Open-end funds are series of 

trusts registered on Form N–1A. Closed-end funds 

are trusts registered on Form N–2. UITs are variable 

annuity separate accounts organized as UITs 

registered on Form N–4, variable life insurance 

separate accounts organized as UITs registered on 

Form N–6, or series, or classes of series, of trusts 

registered on Form N–8B–2. Separate accounts 

registered as management companies are trusts 

registered on Form N–3. 

497Estimates of the number of BDCs and their net 

assets are based on a staff analysis of Form 10–K 

and Form 10–Q filings as of September 2020, which 

are the most recent available filings. Our estimates 

include BDCs that may be delinquent or have filed 

extensions for their filings, and they exclude eight 

wholly owned subsidiaries of other BDCs and 

feeder BDCs in master-feeder structures. 

498According to ASC Topic 820, assets and 

liabilities are classified as using level 1, level 2, or 

level 3 inputs. Level 1 inputs are ‘‘quoted prices 

(unadjusted) in active markets for identical assets 

or liabilities that the reporting entity can assess at 

the measurement date.’’ Level 2 inputs are ‘‘inputs 

other than quoted prices included within level 1 

that are observable for the asset or liability, either 

directly or indirectly.’’ Level 3 inputs are 

‘‘unobservable inputs for the asset and liability.’’ 

See ASC Topic 820, supra footnote 1. 

499See rule 2a–5(c). See also supra section II.D. 500See, e.g., Capital Group Comment Letter; IAA 

Comment Letter. 501UITs (other than the ETFs registered as UITs) 

and BDCs do not file Form N–PORT, and thus are 

excluded from Table 2. We estimate the statistics 

in Table 2 by reviewing the most recent filings of 

Forms N–PORT filed with the Commission as of 

September 2020. The average ratio of securities by 

fair value hierarchy (i.e., Columns 3 to 6 in Table 

2) is retrieved from Item C.8 of Form N–PORT. Our 

analysis excludes funds with non-positive net 

assets and funds with total assets less than net 

assets because these observations are likely data 

errors. The Average Level 1, Level 2, and Level 3 

Inputs is the average ratio of level 1, level 2, or level 

3 long positions divided by the fund’s total gross 

assets across all funds within each fund category. 

Open-end funds are series of trusts registered on 

Form N–1A. Closed-end funds are trusts registered 

on Form N–2. ETFs registered as UITs are series, or 

classes of series, of trusts registered on Form S–6. 

Separate accounts registered as management 

companies are trusts registered on Form N–3. The 

last row in Table 2 represents the sum of the 

previous rows within the same column for Columns 

1 and 2, and it represents the asset-weighted 

average of the previous rows within the same 

column for columns 3 to 6. 

502The numbers of open-end funds, closed-end 

funds, and separate accounts registered as 

management companies that filed Form N–PORT 

reported in Table 2 differ from those that filed Form 

N–CEN reported in Table 1 due to differing 

reporting requirements and the frequency of 

reporting. Total net assets in Form N–CEN also may 

be different from total net assets in Form N–PORT 

because Form N–CEN reports average net assets 

estimated over the reporting period while Form N– 

PORT reports point-in-time net assets as of the 

reporting date. 

503 Investments that are valued at NAV, and thus 

do not have a level associated with them, are 

classified as ‘‘N/A’’ in Form N–PORT. These 

investments have no level under the U.S. GAAP fair 

value hierarchy and for purposes of this analysis we 

assume they are securities for which there are no 

readily available market quotations. Nevertheless, 

the valuation of those investments arguably requires 

less effort than the valuation of investments valued 

using level 2 and 3 inputs because funds’ NAVs are 

easily obtainable. About 1% of the fund assets are 

classified as ‘‘N/A’’ investments. For open-end 

funds, approximately 1% of ‘‘N/A’’ investments are 

classified as private fund investments and 

approximately 85% are classified as registered fund 

investments; for closed-end funds, approximately 

68% are classified as private fund investments and 

approximately 23% are classified as registered fund 

investments. The sum of the average using level 1, 

2, 3, and ‘‘N/A’’ within each fund category may not 

sum up to 100% due to rounding error. 

registered as management companies.496

As of the same date, (i) open-end funds 

held total net assets of $27,112 billion; 

(ii) closed-end funds held total net 

assets of $308 billion; (iii) UITs held 

total net assets of $2,113 billion; and (iv) 

variable annuity separate accounts 

registered as management companies 

held total net assets of $226 billion. As 

of September 2020, there were 97 BDCs 

with $62 billion in total net assets.497

Not all funds hold investments that 

must be fair valued under the Act, and 

not all funds engage in cross trades. In 

addition, for those funds that hold 

investments that must be fair valued 

under the Act or that engage in cross 

trades, the extent of those investments 

and activities varies. Hence, the rules 

affect only a subset of the funds listed 

in Table 1 below. 

TABLE 1—DESCRIPTIVE STATISTICS FOR FUNDS

Number of funds Total net assets 

(in billion $) 

(1) (2) 

Open-end funds ........................................................................................................................................... 12,680 27,112 

Closed-end funds ......................................................................................................................................... 664 308 

UITs ............................................................................................................................................................. 661 2,113 

Management company separate accounts ................................................................................................. 14 226 

BDCs 1 ......................................................................................................................................................... 97 62 

Total ...................................................................................................................................................... 14,116 29,821 

Note 1. Out of 97 BDCs reporting on Form N–CEN, nine were reported as being internally managed. 

Sources: Form 10–K; Form 10–Q; Form N–CEN. 

To understand the extent of current 

boards’ involvement in the valuation of 

funds’ investments and the extent to 

which the rules could affect funds’ 

operations (including for funds that 

engage in cross trades), we examine 

funds’ investments under the U.S. 

GAAP fair value hierarchy.498 For 

purposes of this economic analysis, we 

treat investments that are valued using 

level 1 inputs as investments for which 

readily available market quotations are 

available, and investments valued using 

level 2 and 3 inputs as investments that 

must be fair valued in good faith under 

the Act’s definition of value.499 We 

therefore expect that funds that hold 

more investments that are valued using 

level 2 and level 3 inputs will be more 

affected by the rules than funds with no 

or fewer such investments. In particular, 

as commenters noted, some funds 

currently treat some investments valued 

with level 2 inputs as having readily 

available market quotations and perform 

determinations of fair value in good 

faith on other investments valued with 

level 2 inputs.500

Table 2 provides descriptive statistics 

on funds’ investments measured based 

on level 1, 2, and 3 inputs using Form 

N–PORT data as of September 2020.501

As Table 2 shows, there are 13,101 

funds with $24,417 billion in net assets 

that filed Form N–PORT.502 About 62% 

of fund assets are valued using level 1 

inputs. Nevertheless, the average 

percentage of investments valued using 

level 1 inputs varies depending on the 

type of fund, ranging from 26% for 

closed-end funds to 99% for ETFs 

registered as UITs. About 34% of fund 

assets are valued using level 2 inputs, 

which also varies depending on the type 

of fund. Only a small percentage of fund 

assets are valued using level 3 inputs.503


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504Based on Form ADV Items 5.G.(3), 5.F.2.(c), 

5.D.(d)(3), and 5.D.(e)(3) of Part 1A of Forms ADV 

filed with the Commission as of September 2020. 

505 Investment Company Institute, Investment 

Company Fact Book: A Review of Trends and 

Activities in the Investment Company Industry, 

60th Edition (2020), available at https://

www.ici.org/pdf/2020_factbook.pdf, (last accessed 

on Sept. 4, 2020). 

506 29% = (3,810 open-end funds with 

investments valued using only level 1 inputs that 

filed Form N–PORT + 45 closed-end funds with 

investments valued using only level 1 inputs that 

filed Form N–PORT + 5 ETFs registered as UITs 

with investments valued using only level 1 inputs 

that filed Form N–PORT + 3 variable annuity 

separate accounts registered as management 

companies with investments valued using only 

level 1 inputs that filed Form N–PORT)/13,101 

funds that filed Form N–PORT. See supra footnote 

502. 

507 9,804 funds = 13,101 funds that filed Form N– 

PORT from Table 2—3,863 funds that hold 

investments valued using only level 1 inputs and 

filed Form N–PORT + 97 BDCs from Table 1 above 

+ 469 affected UITs. 469 = 661 UITs that filed Form 

N–CEN * (1—29% of funds that only report 

securities valued using level 1 inputs based on N– 

PORT data). This calculation assumes that the 

distribution of investments valued using level 1 

inputs for registered investment companies that 

filed Form N–PORT is similar to the distribution of 

investments valued using level 1 inputs for UITs 

that filed Form N–CEN. This calculation also 

assumes that all 97 BDCs in our sample hold a nonzero amount of investments valued using level 2 

and level 3 inputs. This assumption is made 

because BDCs are required to invest at least 70% 

of their assets in private or public U.S. firms with 

market values of less than $250 million, and these 

investments usually are securities valued using 

level 2 or level 3 inputs. See 15 U.S.C. 80a–54(a). 

508See Comment Letter of Will Gornall and Ilya 

Strebulaev (May 19, 2020) (describing the difficulty 

of valuation and consequences of low quality 

valuations, including mismeasurement of risk and 

returns, which in turn leads to overly smoothed 

valuations, inflated risk-adjusted performance 

measures, misallocation of capital, and, ultimately, 

economic inefficiency). 

509See supra section II for more discussion on the 

importance of unbiased valuation of fund 

investments. 

510See supra section II.B.1 and footnote 201 as 

well as section III.B.2. 

TABLE 2—DESCRIPTIVE STATISTICS FOR FUNDS BY ASC TOPIC 820 FAIR VALUE HIERARCHY1 

Number of 

funds 

Total 

net assets 

(in billion $) 

Average level 

1 inputs 

(percent) 

Average level 

2 inputs 

(percent) 

Average level 

3 inputs 

(percent) 

Average ‘‘N/A’’ 

inputs 

(percent) 

(1) (2) (3) (4) (5) (6) 

Open-end funds ....................................... 12,387 23,475 62 35 0.2 1 

Registered closed-end funds ................... 696 305 26 53 6 12 

ETFs registered as UITs .......................... 5 423 99 0 0 0 

Management company separate accounts ................................................... 13 212 75 26 0 0 

Total/Average .................................... 13,101 24,415 62 34 0 1 

Note 1: Out of the 12,387 open-end funds, two reported being internally managed with net assets of $7 billion. Out of the 696 registered 

closed-end funds, 12 reported being internally managed with net assets of $18 billion. No ETFs registered as UITs or management company 

separate accounts reported being internally managed. Approximately 19.5% of assets of open-end funds were foreign holdings; less than 1% of 

assets of closed-end funds, ETFs registered as UITs, and management company separate accounts were foreign holdings. 

Source: Form N–PORT. 

As of September 2020, there were 

1,518 advisers that reported providing 

portfolio management for investment 

companies or BDCs with regulatory 

assets under management of $61.6 

trillion, of which $33.6 trillion was 

attributable to investment company and 

BDC clients.504 Among the open-end 

funds reported in Table 2, 

approximately 2% reported not 

engaging a pricing service. Among the 

closed-end funds reported in Table 2, 

approximately 12% reported not 

engaging a pricing service. No ETF 

registered as a UIT reported engaging a 

pricing service, and all management 

company separate accounts reported 

engaging a pricing service. As of 

December 2019, there were 59.7 million 

U.S. households and 103.9 million 

individuals owning U.S. registered 

investment companies that could be 

affected by the rules.505 Untabulated 

analysis shows that 29% of the funds 

report having 100% of their investments 

valued using level 1 inputs.506 Based on 

this, we estimate that approximately 

9,804 funds may be affected by the 

rules, of which 9,335 are not UITs.507

However, foreign holdings made up 

approximately (1) 20% of assets of 

open-end funds; (2) 24% of assets of 

closed-end funds; (3) 23% of assets of 

ETFs registered as UITs; and (4) 3% of 

assets of management company separate 

accounts. Overall, approximately 20% 

of assets were foreign holdings. Thus, to 

the extent that funds determined that 

these foreign holdings had readily 

available market quotations (i.e., are 

reported falling in level 1 in the fair 

value hierarchy), the 29% estimate of 

funds unaffected by the rules may be 

overstated. Furthermore, approximately 

28% of funds reported relying on 17a– 

7 for cross trades, but we cannot 

determine to what extent reliance on 

17a–7 is limited to investments meeting 

the definition under the final rule of 

having readily available market 

quotations. 

C. General Economic Considerations 

1. Investment Adviser Role in Fair 

Value Determinations 

Unbiased valuation of fund 

investments is important because it 

affects the prices at which fund shares 

are purchased or redeemed by 

shareholders. Similarly, to the extent 

that valuation reflects what would be 

obtained in a current arm’s length 

transaction, such valuation could also 

provide fund managers and investors a 

more accurate picture of the funds’ 

volatility.508 This could help fund 

managers better tailor their portfolios to 

specific risk-reward profiles or 

benchmarks and ensure that their 

portfolios comply with the fund’s risk 

appetite statement. Likewise, investors 

could better evaluate how a given fund 

fits their risk appetite and ability to bear 

risk. Valuation of fund investments is 

also important because it can affect 

funds’ fee and performance calculations, 

and also can affect funds’ compliance 

with regulatory requirements. Finally, 

properly valuing a fund’s investments is 

a critical component of the accounting 

and financial reporting for investment 

companies.509

As explained above, we understand 

that boards typically rely on fund 

advisers to perform the day-to-day 

calculation of fair value determinations 

for fund investments that do not have 

readily available market quotations.510

Because a board’s role is focused on 

oversight rather than day-to-day 

involvement in fund activities such as 

valuation, this is appropriate to ensure 

that boards are not engaging in duties 

that distract them from oversight and 

governance of the fund and its fair value 

process. Furthermore, a board’s 

members are unlikely to have the 

necessary experience, knowledge, skills, 


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511Some academic literature suggests that fund 

fair values are not always measured in an accurate 

and unbiased way. See, e.g., Vikas Agarwal et al., 

Private Company Valuations by Mutual Funds 

(Working Paper, Aug. 2019), available at https://

ssrn.com/abstract=3066449; Rahul Bhargava, Ann 

Bose, & David A. Dubofsky, Exploiting International 

Stock Market Correlations with Open-End 

International Mutual Funds, 25 J. BUS. FIN. & 

ACCT. 765 (1998); Scott Cederburg & Neal 

Stoughton, Discretionary NAVs (Working Paper, 

Nov. 2019), available at https://www.wu.ac.at/ 

fileadmin/wu/d/i/finance/BBS-Papers/SS2019/ 

20190515_STOUGHTON.pdf; John M. R. Chalmers, 

Roger M. Edelen, & Gregory B. Kadlec, On the Perils 

of Financial Intermediaries Setting Security Prices: 

The Mutual Fund Wild Card Option, 56 J. FIN. 2209 

(2001); Nandini Chandar & Robert Bricker, 

Incentives, Discretion, and Asset Valuation in 

Closed-End Mutual Funds, 40 J. ACCT. RES. 1037 

(2002) (‘‘Chandar and Bricker 2002’’); Jaewon Choi, 

Mathias Kronlund, & Ji Yeol Jimmy Oh, Sitting 

Bucks: Zero Returns in Fixed Income Funds 

(Working Paper, Aug. 2020), available at https://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=3244862; Gjergji Cici, Scott Gibson, & John J. 

Merrick Jr., Missing the marks? Dispersion in 

corporate bond valuations across mutual funds, 101 

J. Fin. Econ. 206 (2011) (‘‘Cici et al. 2011’’); 

Vladimir Atanasov, John J. Merrick Jr., & Philipp 

Schuster, Mismarking Fraud in Mutual Funds 

(Working Paper, Apr. 2019), available at http://

www.fmaconferences.org/Glasgow/Papers/Fraud_

in_OpenEndMutualFunds_2018_1126.pdf. As noted 

above, officers of internally managed funds that 

perform these functions in lieu of an adviser may 

face conflicts that are different from those of 

advisers. See supra footnote 159. 

512See, e.g., AAM Comment Letter; ABA 

Comment Letter; AIMA Comment Letter; American 

Bankers Association Comment Letter; American 

Funds Trustees Comment Letter; Better Markets 

Comment Letter; BlackRock Trustees Comment 

Letter; CFA Institute Comment Letter; Chapman 

Comment Letter; Dechert Comment Letter; Duff & 

Phelps Comment Letter; Fidelity Comment Letter; 

Fidelity Trustees Comment Letter; First Trust 

Comment Letter; Franklin Comment Letter; 

Guggenheim Comment Letter; Hennion & Walsh 

Comment Letter; ICE Data Comment Letter; IDC 

Comment Letter; IHS Markit Comment Letter; 

University of Miami Comment Letter; IVSC 

Comment Letter; John Hancock Comment Letter; 

MFS Comment Letter; Murphy Comment Letter; 

NYC Bar Comment Letter; Scheidt Comment Letter 

2; Seward & Kissel Comment Letter; SIFMA AMG 

Comment Letter; TRC Comment Letter; VRC 

Comment Letter. 

513See, e.g., Joseph Golec, Regulation and the 

Rise in Asset-Based Mutual Fund Management 

Fees, 26 J. FIN. RES. 19 (2003) for evidence on the 

percentage of mutual funds that use asset-based 

management fees. In addition to explicit contracts 

that link advisers’ compensation to fund size, there 

may be implicit contracts that provide incentives to 

advisers to mismeasure fund investments. For 

example, advisers may mismeasure fund 

investments to meet or beat certain benchmarks. 

See, e.g., Chandar and Bricker 2002. 

514See, e.g., Judith Chevalier & Glenn Ellison, 

Risk Taking by Mutual Funds as a Response to 

Incentives, 105 J. POL. ECON. 1167 (1997); Erik R. 

Sirri & Peter Tufano, Costly Search and Mutual 

Fund Flows, 53 J. FIN. 1589 (1998). Portfolio 

managers also have incentives to inflate fund asset 

values and thus increase fund performance because 

fund performance is positively related to the 

portfolio managers’ compensation and negatively 

related to the probability that a portfolio manager 

will be terminated. See, e.g., Judith Chevalier & 

Glenn Ellison, Career Concerns of Mutual Fund 

Managers, 114 Q.J. ECON. 389 (1999); Linlin Ma, 

Yuehua Tang, & Juan-Pedro Gomez, Portfolio 

Manager Compensation in the U.S. Mutual Fund 

Industry, 74 J. FIN. 587 (2018). 

515See, e.g., Cici et al. 2011. 

516Advisers may have incentives to underinvest 

in effort (or ‘‘shirk’’) because they do not internalize 

the benefits accruing to the fund board of directors 

and fund investors from the expenditure of effort 

to estimate accurate and unbiased fair values. See, 

e.g., David Brown & Shaun Davies, Moral Hazard 

in Active Asset Management, 125 J. FIN. ECON. 311 

(2017) (‘‘Brown and Davies 2017’’). 

517See, e.g., AAM Comment Letter; Chapman 

Comment Letter; First Trust Comment Letter; 

Hennion & Walsh Comment Letter on the notion 

that UITs pose a lower level of concern in regard 

to such conflicts of interest. 

518Pricing services may mitigate conflicts of 

interest by, for example, contributing to a clearer 

segregation between fair value determinations and 

portfolio management. On the other hand, pricing 

services also may be incentivized to provide higher 

or more aggressive valuations generally to retain 

business. See, also, e.g., AIMA Comment Letter; 

American Bankers Association Comment Letter; 

Dechert Comment Letter; Fidelity Trustees 

Comment Letter; Guggenheim Comment Letter; ICE 

Data Comment Letter; IHS Markit Comment Letter; 

John Hancock Comment Letter; Murphy Comment 

Letter; VRC Comment Letter. 

519See, e.g., AIMA Comment Letter; American 

Bankers Association Comment Letter; American 

Funds Comment Letter; Fidelity Comment Letter; 

Guggenheim Comment Letter; SIFMA AMG 

Comment Letter; TRC Comment Letter. 

520See, e.g., Brown and Davies 2017. 

521See supra footnote 423. 

522See rule 2a–5(b). 

or resources to carry out the day-to-day 

calculation of fair value determination. 

Fund advisers’ interests may conflict 

with the interest of shareholders,511 an 

issue that many commenters echoed.512

In particular, advisers have incentives to 

inflate fund asset values (or deflate fund 

liability values) because they typically 

receive a management fee that is 

calculated as a percentage of the value 

of net assets under management.513

Relatedly, advisers have incentives to 

inflate fund asset values because 

investors tend to invest more in funds 

with good recent performance, which 

would increase assets under 

management and ultimately increase 

advisers’ compensation.514 Advisers 

also have incentives to mismeasure fund 

investments in a way that would smooth 

reported fund performance over time to 

lower the funds’ perceived risk.515

Finally, advisers may mismeasure 

values of fund investments as a result of 

expending less effort than the effort 

required to ensure more accurate and 

unbiased valuations.516 Any such 

mismeasurement likely will be more 

pronounced for investors of funds 

whose shares are not publicly traded 

(e.g., open-end funds (other than ETFs), 

UITs, and some BDCs) because there is 

no secondary market for the shares of 

those funds, and fund investors can 

transact only at a price based on NAV, 

which is determined by the fund’s fair 

value determinations. 

The degree of such conflicts of 

interest may vary across funds,517

depending on the extent to which funds 

or their advisers rely on pricing services 

for fair value determinations,518 the 

types of assets being subjected to fair 

value determinations 519 (e.g., there may 

be a tension between expertise that an 

adviser may provide for particularly 

complex assets or alternative 

investments and the consequent lack of 

independence), and the manner in 

which an adviser or depositor is 

compensated. In particular, advisers’ 

incentives to misreport fund 

investments may be more pronounced 

for funds that face higher competition to 

attract new investors and for actively 

managed funds that face higher 

demands from investors to beat certain 

benchmarks. Relatedly, advisers’ 

incentives to underinvest in effort may 

be higher for funds whose performance 

is more difficult to measure and 

evaluate, and thus advisers’ 

performance is also more difficult to 

measure and evaluate (e.g., funds that 

hold complex investments).520 Conflicts 

of interest may be lower for parties 

whose compensation is not based on the 

value of assets, as is the case with 

depositors or evaluators of some UITs. 

Officers of internally managed funds 

who make determinations of fair value 

may also be subject to conflicts of 

interest to the extent that their 

compensation is related to the value of 

assets. Boards of directors currently 

serve as a check on the conflicts of 

interest of the adviser, officers of the 

fund, and the other service providers 

involved in the calculations of fair 

values.521 BDCs face similar conflicts of 

interest, which likewise should be 

managed by their boards. The final rule 

retains the important safeguard of board 

oversight of fair value determinations, 

while making more efficient use of 

boards’ time and expertise and 

recognizing the important role of 

valuation designees in the fair value 

determination process. 

2. Board Considerations When 

Designating Fair Value Determinations 

Under the final rule, boards may 

designate the performance of fair value 

determinations for investments of the 

fund to a valuation designee.522 It is our 

understanding that funds’ advisers or 

officers of internally managed funds 

already perform or assist the board with 

respect to many of those functions 

subject to the board’s oversight. When 

deciding whether to designate a party to 

perform fair value determinations for 

the fund, we anticipate that a board will 


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523See supra footnote 295 and accompanying 

discussion. 

524The industry reports cited in section II above 

only provide qualitative information on certain 

aspects of funds’ current practices. See also supra 

footnote 419 for a discussion of limitations of the 

Deloitte survey data. Funds have discretion in the 

type of disclosures they provide regarding their fair 

value determinations. As discussed throughout 

section III.B.2, commenters provided descriptions 

of current practice. 

525Commenters agreed with this view. See, e.g., 

IDC Comment Letter. 

consider certain trade-offs. In particular, 

fund boards’ decisions to oversee 

valuation designees’ fair value 

determinations instead of determining 

fair value themselves may depend on 

the number, amount, or allocation of 

investments that must be fair valued, 

the nature and complexity of the 

valuation of those investments, the type 

of fund, the valuation designee’s 

willingness to assume additional fair 

value responsibilities, and the fund’s 

current practices. Boards’ decisions may 

also depend on the resources of the 

valuation designee.523 Boards of funds 

that hold more investments that must be 

fair valued and harder-to-value 

investments may be more likely to 

designate a valuation designee to 

perform these fair value determinations 

and to oversee the process of 

determining fair value by the valuation 

designee because valuation designees 

may be better suited to value those types 

of investments. A board’s decision may 

also depend on the type of fund. For 

example, a board of an open-end fund 

that must calculate NAVs on a daily 

basis may be more likely to designate 

the performance of fair value 

determinations (on which the fund’s 

NAV is based) to a valuation designee 

than the board of a fund that calculates 

value less regularly. As another 

example, the board of a BDC may 

choose to determine fair value itself 

through its officers due to specialized 

expertise retained internally. 

The decision to oversee valuation 

designees’ fair value determinations 

may also depend on valuation 

designees’ willingness to assume the 

designated responsibilities. Such 

willingness may depend on the 

valuation designee’s valuation expertise 

and experience, whether the valuation 

designee has available resources to 

satisfy new obligations, and the extent 

to which the valuation designee could 

be compensated for those increased 

responsibilities, including by passing 

through to the fund and its investors 

any higher costs. Finally, a board’s 

decision to designate responsibilities 

under the final rule may depend on the 

expected costs of compliance, which 

ultimately depend on how different the 

fund’s current practices and policies 

and procedures are from the 

requirements of the final rule. 

We lack comprehensive information 

on funds’ current fair value practices 

and do not have visibility into boards’ 

decision-making processes when 

seeking assistance with fair value 

determinations from valuation 

designees.524 Further, boards’ decisionmaking processes with respect to 

seeking assistance with fair value 

determinations from valuation 

designees is complex. Hence, we are 

unable to estimate precisely the number 

of fund boards that will designate 

responsibilities to a valuation designee 

under the final rule instead of the 

boards making fair value determinations 

in good faith themselves. Nevertheless, 

we believe the vast majority of boards 

will designate these responsibilities to a 

valuation designee 525 because the 

valuation designee has valuation 

experience and expertise, is involved 

with the fund’s operations on a daily 

basis and, thus, may be better suited 

than the board to deal with fair value 

matters that arise on a daily basis. We 

believe this is true regardless of whether 

the board designates an adviser or an 

officer of the fund to perform the 

valuation responsibilities. Further, 

valuation designees already provide 

significant assistance with the fair value 

determinations to the board of directors 

and so funds that designate a valuation 

designee to perform fair value 

determinations under the final rule 

should not need to modify their 

operations significantly to comply with 

the final rule. For the purpose of our 

economic analysis, we assume all funds 

with some investments that need to be 

fair valued under the final rule are 

affected parties. 

3. General Discussion of Benefits and 

Costs of Good Faith Determinations of 

Fair Value 

Overall, the requirements of the final 

rule provide a framework for 

appropriate oversight of determinations 

of fair value in good faith. As such, the 

final rule helps the board oversee the 

fund and helps to promote, for example, 

the mitigation of conflicts of interest of 

those involved in the fair value process 

and in the management of investments 

and the management of the fund for the 

benefit of the fund’s shareholders. 

Another benefit arising from appropriate 

oversight of the fair value process is that 

fair value determinations will be more 

likely to reflect a price that could be 

obtained in arm’s length transactions 

with less bias. This will contribute to 

better measurement of the risk and 

return profile of individual investments 

and their contribution to the risk and 

return profile of the fund, which will 

help promote the management of the 

fund in accordance with its investment 

objectives; ensure the accuracy of assetbased and performance-based fee 

calculations; and affect the accuracy of 

disclosures of fund fees, performance, 

NAV, and portfolio holdings. 

Similarly, as less biased fair value 

determinations help to ensure that a 

fund’s value more accurately reflects the 

value that a current arm’s length 

transaction would produce when 

purchasing or selling fund shares, as 

well as in cross trades, the final rule 

aims to provide investors their pro rata 

share of the fund’s assets. Thus, proper 

valuation promotes the purchase and 

sale of fund shares at fair prices, and 

helps to avoid dilution of shareholder 

interests. Furthermore, investors may 

have stronger assurance that they can 

rely on valuations to express the risk 

and return profile of a fund, making 

investors’ decisions better informed. 

Thus, investors may be better able to 

evaluate a fund and consider whether a 

fund fits into their investment goals in 

terms of returns and risk (e.g., ability 

and willingness to bear risk). Improper 

valuation can cause investors to pay fees 

that are too high or to base their 

investment decisions on inaccurate 

information. 

Finally, as described in the proposal, 

the increased specificity of the rules 

could reduce compliance costs for some 

funds that may expend less effort and 

time to design policies and procedures, 

reporting, and recordkeeping than trying 

to determine appropriate compliance 

under the statute alone. For funds 

whose current practices are more 

burdensome than the requirements of 

the rules, this increased specificity also 

could reduce compliance costs to the 

extent that funds might be less likely to 

put in place overly burdensome and 

unnecessary policies and procedures, 

reporting, and recordkeeping to comply 

with the statute. Relatedly, the rules and 

rescission of existing no-action letters 

and guidance may increase certainty 

because funds will follow a single rule 

rather than following various no-action 

letters and guidance when determining 

fair values, which could ultimately 

reduce compliance costs. Conversely, to 

the extent that the specificity of the 

requirements of the rules prompts some 

funds or advisers to devote greater 

resources to ensure compliance with 

their fair value obligations, the 

requirements of the rules may impose 

greater costs on such funds and 

advisers. Changes in costs of 

compliance for funds or advisers 


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526See supra section II.A. 

527See supra section II.A.1. 

528See supra section III.B.2.b). 

529See, e.g., Capital Group Comment Letter; IAA 

Comment Letter. 

530See supra section II.A.2. 

531See supra footnote 57 and accompanying 

discussion in section II.A.2.a). 

532See supra section III.B.2. 

533See supra section III.B.2.c). 

534See supra section II.A.2.c). 

535See supra section III.B.2.c). 

ultimately could affect fund investors to 

the extent that any changes in costs 

would be passed down to them in the 

form of changed fund operating 

expenses. 

In the next section, we discuss the 

benefits and costs; in a subsequent 

section, we discuss effects on efficiency, 

competition, and capital formation. 

D. Benefits and Costs 

1. Fair Value as Determined in Good 

Faith Under Section 2(a)(41) of the Act 

Rule 2a–5 sets forth certain required 

functions that must be performed to 

determine the fair value of the fund’s 

investments in good faith. As discussed 

above,526 we are adopting these required 

functions substantially as proposed, 

with several changes from the proposal 

based on the comments the Commission 

received. These required functions 

constitute an important part of the 

framework that the final rule establishes 

and thus contribute to the benefits 

described in section III.C.3 To the extent 

that a function required by the final rule 

is in line with a fund’s current practice, 

the additional costs and benefits 

described below are likely to be limited 

with respect to the fund. 

(a) Periodically Assess and Manage 

Valuation Risks 

The final rule will require the 

periodic assessment of any material 

risks associated with the determination 

of the fair value of the fund’s 

investments, including material 

conflicts of interest, and management of 

those identified valuation risks. The 

final rule does not specify which risks 

are to be assessed or the frequency of 

reassessments.527 As discussed above, 

many funds or their advisers already 

periodically assess and manage their 

valuation risks.528 Some fund boards 

may not, however, assess such risks for 

all investments, including, for example, 

those with level 2 inputs.529

To the extent that funds or valuation 

designees do not currently assess and 

manage valuation risks, the final rule 

will impose both one-time costs to 

develop or augment practices that 

conform to the requirements of the final 

rule as well as ongoing costs associated 

with implementing those practices. 

Likewise, to the extent that funds 

experience additional costs associated 

with developing or augmenting 

practices to conform with the 

requirements of the final rule to assess 

and manage valuation risks, these costs 

may be less burdensome for larger funds 

that could spread any such costs across 

a larger amount of assets under 

management. The final rule will, 

however, provide investors the benefit 

of assurances that mechanisms are in 

place to identify, assess, and manage 

valuation risks. To the extent that funds 

or valuation designees already assess 

and manage valuation risks in a manner 

consistent with rule 2a–5, the final rule 

will not impose any additional ongoing 

costs or present any additional ongoing 

benefits; such funds or valuation 

designees may have a one-time cost 

associated with reviewing the 

requirements of the final rule and 

ensuring that their practices conform to 

the requirements. 

(b) Establish and Apply Fair Value 

Methodologies 

(1) Select and Apply Appropriate Fair 

Value Methodologies 

The final rule will require funds or 

valuation designees to select and apply 

in a consistent manner appropriate fair 

value methodologies for determining 

(which includes calculating) the fair 

value of fund investments.530 The final 

rule permits methodologies to be 

changed (so long as the different 

methodology is equally or more 

representative of the fair value of fund 

investments) 531 and does not require 

funds or valuation designees to specify 

methodologies that will apply to 

anticipated or intended investments. As 

a matter of course in performing fair 

value determinations, we understand 

that funds or valuation designees 

currently establish and apply fair value 

methodologies.532 Some fund boards 

may not, however, consistently use 

these methodologies for all investments. 

To the extent that funds currently 

deviate from the requirements of the 

final rule to select and apply in a 

consistent manner fair value 

methodologies, the final rule will 

impose additional costs on funds or 

valuation designees. For example, a 

fund currently may make fair value 

determinations for certain securities, but 

not clearly select and apply the fair 

value methodology used to do so; under 

the final rule, the fund would have to 

clearly select and apply that 

methodology in a consistent manner. 

We recognize that there will be costs for 

funds that do not currently select and 

apply fair value methodologies in a 

consistent manner for all fund 

investments without readily available 

market quotations as defined in the final 

rule. These costs include one-time costs 

to evaluate the requirements of the final 

rule and make changes to practices as 

well as ongoing additional costs due to 

implementing these changes on an 

ongoing basis (e.g., determining fair 

value in good faith for assets that rely 

on level 2 inputs). Likewise, to the 

extent that funds experience additional 

costs associated with developing or 

augmenting practices to conform to the 

requirements of the final rule to select 

and apply fair value methodologies in a 

consistent manner, these costs may be 

less burdensome for larger funds that 

could spread any such costs across a 

larger amount of assets under 

management. 

(2) Periodically Review Appropriateness 

and Accuracy of Selected 

Methodologies 

The final rule will require the 

periodic review of the appropriateness 

and accuracy of the valuation 

methodologies selected. The final rule 

will also require that funds make 

changes or adjustments to existing 

methodologies where necessary. As 

discussed above, many funds already 

incorporate such reviews into their 

current practices.533 However, some 

fund boards may not conduct these 

periodic reviews for all methodologies. 

To the extent that funds already 

periodically engage in such reviews that 

are currently consistent with the final 

rule, the final rule will not impose any 

additional ongoing costs or present any 

additional ongoing benefits; such funds 

will have a one-time cost associated 

with reviewing the requirements of the 

final rule and ensuring that their 

practices conform to the requirements. 

However, for funds that do not currently 

conduct such reviews, the final rule will 

impose both one-time costs to create 

practices that conform to the 

requirements of the final rule as well as 

ongoing costs arising from these new 

reviews, but will provide the benefit of 

promoting appropriate methodologies 

and improving the governance for such 

funds. 

(3) Monitor for Circumstances That May 

Necessitate the Use of Fair Value 

The final rule will require that funds 

or valuation designees monitor for 

circumstances that may necessitate use 

of fair value.534 As discussed above, this 

monitoring is common in practice,535


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536See, e.g., ABA Comment Letter; IAA Comment 

Letter; Scheidt Comment Letter 1 (stating that 

‘‘funds are required to adopt policies and 

procedures that require monitoring for 

circumstances that may necessitate the use of fair 

value prices’’ under the compliance rule); SIFMA 

AMG Comment Letter. 

537See supra section II.A.3. 

538See supra section III.B.2.d). 

539See SIFMA AMG Comment Letter. 

540See supra section II.A.2.b) and section II.A.3. 

541See supra section III.B.2.d). 

542See supra section II.A.4. 

543See supra section III.B.2.f). 

544See Proposing Release, supra footnote 2, at 

n.16; ASR 118. 

though some fund boards may not 

monitor for such circumstances with 

respect to all fund investments.536 To 

the extent that funds already engage in 

such monitoring, the final rule will not 

impose any additional ongoing costs or 

present any additional ongoing benefits; 

such funds may have a one-time cost 

associated with reviewing the 

requirements of the final rule and 

ensuring that their practices conform to 

the requirements. However, for funds 

that did not previously conduct such 

monitoring, the final rule will impose 

both one-time costs to create practices 

that conform to the requirements of the 

final rule as well as ongoing costs of 

monitoring, but will provide the benefit 

of ensuring that investments for which 

market quotations become unreliable 

will have fair value determined for 

them. Likewise, to the extent that funds 

bear additional costs associated with 

developing or augmenting practices to 

conform to the requirements of the final 

rule to monitor for circumstances that 

may necessitate the use of fair value, 

these costs may be less burdensome for 

larger funds that could spread any such 

costs across a larger amount of assets 

under management. 

(c) Test Fair Value Methodologies for 

Appropriateness and Accuracy 

The final rule will require that the 

board or valuation designee, as 

applicable, test the appropriateness and 

accuracy of the fair value methodologies 

that have been selected, including by 

identifying testing methods to be used 

and determining the minimum 

frequency with which such testing 

methods are used.537 As discussed 

above, this practice is common.538 Some 

funds may not, however, currently 

conduct this type of testing or apply 

these testing methods as the final rule 

requires with respect to all fund 

investments. To the extent that funds 

already engage in such testing, the final 

rule will not impose any additional 

ongoing costs or present any additional 

ongoing benefits; such funds may have 

a one-time cost associated with 

reviewing the requirements of the final 

rule and ensuring that their practices 

conform to the requirements. However, 

for funds that did not previously 

conduct such testing or conducted 

testing in a manner that differs from the 

requirements of the final rule, the final 

rule will impose both one-time costs to 

create practices that conform to the 

requirements of the final rule as well as 

ongoing costs associated with testing of 

fair value methodologies. Likewise, to 

the extent that funds bear additional 

costs associated with developing or 

augmenting practices to conform to the 

requirements of the final rule to test fair 

value methodologies for appropriateness 

and accuracy, these costs may be less 

burdensome for larger funds that could 

spread any such costs across a larger 

amount of assets under management. 

One commenter noted specifically 

that ‘‘requirements around back testing, 

calibration, transparency and evaluation 

of inputs may require valuation 

designees to develop additional data 

science capabilities to analyze valuation 

data and perform necessary testing.’’ 539

We recognize that, to the extent that the 

board or valuation designee, as 

applicable, determines that tests for 

which the board or valuation designee 

does not currently have capabilities 

should be performed, there will be costs 

attendant to the development or 

acquisition of these capabilities. 

However, these costs may be mitigated 

for a number of reasons. First, not all 

boards or valuation designees, as 

applicable, will need to perform such 

tests. For example, as noted above, 

while we continue to believe that 

calibration and back-testing can be 

particularly useful testing methods, the 

final rule does not require that 

calibration and back-testing be 

performed, nor does it preclude boards 

or valuation designees, where 

applicable, from using other appropriate 

testing methods on fair value 

methodologies.540 Second, experience 

in back-testing, calibration, and 

evaluation of inputs is common in the 

industry.541 Relatedly, special data 

science capabilities are not required for 

standard testing techniques that have 

been common for decades. As such, 

there is unlikely to be a need to develop 

additional capabilities for all funds. 

(d) Pricing Services 

The final rule provides that 

determining fair value in good faith 

requires the oversight and evaluation of 

pricing services, where used. The final 

rule will require that, where funds or 

valuation designees engage a pricing 

service, the fund or valuation designee 

establish a process for approvals, 

monitoring, and evaluation of each 

pricing service.542 Funds or valuation 

designees, as applicable, must establish 

a process for price challenges. As 

discussed above, it is common practice 

for funds or valuation designees to 

evaluate and monitor pricing services 

and to challenge prices from pricing 

services.543 The Commission has 

previously stated that technical 

assistance by non-directors must be 

carefully reviewed by the directors.544

Valuation designees (including, for 

example, small advisers) may not, 

however, currently have the exact 

processes for monitoring and evaluating 

pricing services prescribed by the final 

rule. 

To the extent that funds already have 

a process for the approval, monitoring, 

and evaluation of pricing services in the 

precise manner prescribed by the final 

rule, the final rule will not impose any 

additional ongoing costs or present any 

additional ongoing benefits; such funds 

may have a one-time cost associated 

with reviewing the requirements of the 

final rule and ensuring that their 

processes conform to the requirements. 

Likewise, to the extent that funds bear 

additional costs associated with 

developing or augmenting practices to 

conform to the requirements of the final 

rule to oversee and evaluate pricing 

services, these costs may be less 

burdensome for larger funds that could 

spread any such costs across a larger 

amount of assets under management. 

The requirement to establish a process 

for price challenges will impose some 

burdens on some funds or valuation 

designees. To the extent that funds 

already have processes for price 

challenges, the final rule will not 

impose any additional ongoing costs or 

present any additional ongoing benefits; 

such funds will have a one-time cost 

associated with reviewing the 

requirements of the final rule and 

ensuring that their practices conform to 

the requirements. However, for funds 

that did not previously establish such 

processes, the final rule will impose 

both one-time costs to create practices 

that conform to the requirements of the 

final rule as well as ongoing costs, such 

as implementation of these processes. 

The final rule will also provide the 

benefit of oversight of price challenges 

that should mitigate conflicts of interest 

between shareholders and valuation 

designees to the extent that such 

conflicts exist. For example, the final 

rule should mitigate conflicts of interest 

where valuation designees may 


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545See supra section II.A.5. 

546See supra section III.B.2. 

547See supra section II.B. 

548See, e.g., AAM Comment Letter; Chapman 

Comment Letter; First Trust Comment Letter; 

Hennion & Walsh Comment Letter. 

549See supra section III.B.2.a). 

550While this benefit will accrue to internally 

managed funds that will now similarly be permitted 

to designate to an officer or officer of the fund, it 

will not accrue to UITs because they do not have 

boards that may designate. Under the final rule the 

trustees or depositors of UITs (or other entities 

designated in the documentation of existing UITs) 

will carry out the requirements of the final rule. See 

final rule 2a–5(d). However, see, e.g., Capital Group 

Comment Letter and American Funds Comment 

Letter, in which commenters characterized the 

proposed rule as prescriptive, requiring boards to be 

involved ‘‘in the weeds’’ and distracted by 

‘‘voluminous reports’’ rather than freeing up board 

resources and effectively focusing the board on 

oversight. Changes to the rules reduce the 

prescriptiveness compared to the proposed rule. 

See supra section II.B.2. 

551See Capital Group Comment Letter; 

Guggenheim Trustees Comment Letter. 

otherwise engage in price challenges 

that distort determinations of fair value 

in order to increase their compensation 

or make their performance appear to be 

better than it otherwise would. 

(e) Fair Value Policies and Procedures 

In connection with the final rule, and 

as discussed above, to comply with the 

compliance rule, each fund must adopt 

and implement written policies and 

procedures that are reasonably designed 

to prevent violations of the final rule. To 

comply with the compliance rule, these 

fair value policies and procedures must 

be tailored to the final rule’s 

requirements. 545 A fund may rely on an 

adviser’s policies, which should 

eliminate duplication and mitigate 

costs. In a change from the proposed 

rule, the final rule does not have an 

explicit requirement to adopt written 

policies and procedures as this is 

already required by the compliance rule. 

As discussed above, funds must adopt 

and implement written policies and 

procedures for fair value determinations 

under the compliance rule, so all funds 

must maintain written fair value 

policies and procedures.546 To the 

extent that funds already maintain 

written fair value policies and 

procedures that are aligned with 

reasonably preventing violations of the 

requirements of the final rule, the final 

rule will not impose any additional 

ongoing costs or present any additional 

ongoing benefits; such funds will have 

a one-time cost associated with 

reviewing the requirements of the final 

rule and conforming their policies and 

procedures accordingly. Likewise, to the 

extent that funds bear additional costs 

associated with changes to policies and 

procedures to conform to the 

requirements of the final rule, these 

costs may be less burdensome for larger 

funds that could spread any such costs 

across a larger amount of assets under 

management. 

2. Performance of Fair Value 

Determinations 

As discussed above,547 the final rule 

will permit the board to carry out all of 

the fair value functions required in 

paragraph (a) of the final rule or to 

designate the fund’s adviser or an officer 

or officers of the fund to perform fair 

value determinations relating to any or 

all fund investments, subject to the 

board’s appropriate oversight. Boards 

may only designate to these valuation 

designees, though the trustee or 

depositor will perform the fair value 

functions in paragraph (a) of the final 

rule for UITs, which do not have a board 

or adviser. 

A number of commenters suggested 

that the costs of rule 2a–5 as proposed 

would be significant for UITs, 

particularly for pre-existing ones,548 as 

valuations for UITs are generally 

performed by parties other than trustees. 

We believe that the universe of existing 

UITs that will be relying upon this 

provision will be small, as we believe 

that (1) the insurance company (acting 

as depositor) generally provides 

valuation services for separate accounts 

formed as UITs, (2) similarly, ETF UITs 

typically utilize the trustee for valuation 

services, and generally hold investments 

that have readily available market 

quotations, and (3) other UITs often 

already use a trustee or depositor to 

perform valuation and, to the extent 

otherwise, generally have a short, fixedterm existence. 

As discussed above, funds commonly 

engage advisers to assist them in 

performing fair value determinations, 

and the Commission has stated that the 

board need not itself perform each of the 

specific tasks required to calculate fair 

value in order to perform its role under 

section 2(a)(41).549 To the extent that 

funds’ practices conform precisely to 

what is required under the final rule, 

the final rule will not impose any 

additional ongoing costs or present any 

additional ongoing benefits; such funds 

may have a one-time cost associated 

with reviewing the requirements of the 

final rule and ensuring that their 

practices conform to the requirements. 

However, for boards that did not 

previously engage valuation designees 

to assist in performing fair value 

determinations, the final rule permits a 

board to leverage the expertise of 

valuation designees with deeper and 

more specialized experience to conduct 

fair value determinations. Doing so will 

come with a cost, but will also come 

with the benefit of permitting the fund’s 

board to focus on providing appropriate 

oversight under the final rule. 

Explicitly allowing boards to 

designate a valuation designee to 

perform fair value determinations 

allows boards to allocate the fair value 

responsibilities to that party, and thus 

could free board resources tied to 

valuation and redirect them to oversight 

or other matters in which board action 

may be more valuable.550 The final rule 

will have larger effects on any boards 

that choose, under the final rule, to 

designate a valuation designee. 

For a fund whose board designates the 

fund’s adviser to perform fair value 

determinations, one-time costs 

associated with reviewing the final rule 

to ensure that practices conform to 

requirements of the final rule may be 

borne by the adviser, the fund, or both, 

depending on the fund’s governing 

documentation or advisory agreements, 

and could be ultimately passed through 

to the fund’s shareholders in the form of 

higher management fees or other 

expenses in the future.551 For funds 

whose boards determine the fair values 

themselves, these costs will be borne by 

the fund, and those one-time costs, if 

any, could be ultimately passed through 

to the fund’s shareholders in the form of 

higher operating expenses. 

Relatedly, to the extent that an adviser 

to the fund is designated to perform fair 

value determinations that it is not 

currently performing, depending on the 

fund’s governing documentation or 

advisory agreements, such an adviser or 

the fund may incur ongoing costs to 

satisfy its new fair value obligations. 

Similarly, to the extent that an officer of 

the fund performs the fair value 

determinations, the fund itself could 

directly incur higher ongoing costs, if 

any higher costs occur, though it would 

also benefit from improved governance 

of the fair value process. Those costs 

and benefits will be attributable to 

adopting and implementing assessment 

and testing practices, methodologies, 

reporting, and recordkeeping to ensure 

compliance with the rules’ 

requirements. The magnitude of those 

costs and benefits will depend on how 

funds’ or their advisers’ current 

practices compare to the requirements 

of the rules. To the extent that advisers 

currently engage in the fair value 

process as permitted by the final rule 

and in accordance with its requirements 

(and thus currently incorporate the costs 

of doing so in their compensation), 

additional ongoing costs (including the 

extent to which any costs are passed on 


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552See supra section II.B. See also supra footnote 

141 (discussing the change to permit designation to 

officers of internally managed funds). 

553See supra section II.B.1. 

554See supra section III.B.2. 

555See supra section III.C.1 for a discussion 

related to advisers’ conflicts of interest. 

556See supra section III.B.2. These costs and 

benefits are similar for internally managed funds 

seeking to designate to an officer or officers under 

the final rule. 

557See final rule 2a–5(d). 

558As discussed above, the final rule has been 

made less prescriptive than the proposed rule, thus 

narrowing the gap between practice and the 

requirements. 

559See, e.g., ABA Comment Letter; JPMAM 

Comment Letter; NYC Bar Comment Letter. 

560See, e.g., ABA Comment Letter; Baillie Gifford 

Comment Letter; Fidelity Comment Letter; IAA 

Comment Letter; MFS Comment Letter. 

561We do not believe that the final rule will result 

in cost savings associated with boards’ involvement 

in the determination of fair values because we 

believe that boards will reallocate time and 

attention to overseeing the valuation designee’s fair 

value determinations or other activities unrelated to 

fair valuing fund investments. 

562See supra section II.B. 

563See supra section II.B.2. 

564See, e.g., American Funds Comment Letter; 

Capital Group Letter; Dechert Comment Letter; 

Guggenheim Comment Letter; ICI Comment Letter; 

SIFMA AMG Comment Letter. 

565See supra text accompanying footnote 229. 

to fund investors) and benefits are likely 

to be limited. 

Similarly, to the extent that an officer 

of the fund currently performs fair value 

determinations in accordance with the 

requirements of the final rule and is 

already compensated for such duties 

and responsibilities, such an officer is 

unlikely to demand higher wages. A 

valuation designee designated by the 

board to perform fair value 

determinations relating to any or all 

fund investments will, as discussed 

above, also be subject to appropriate 

oversight, including through board 

reporting.552

We discuss the costs and benefits of 

this oversight and reporting below. The 

elements of oversight and reporting 

constitute an important part of the 

framework that the final rule establishes 

and thus contribute to the benefits 

described in section III.C.3. To the 

extent that a requirement of the final 

rule is in line with a fund’s current 

practice, additional costs and benefits 

are likely to be limited with respect to 

the fund. 

(a) Board Oversight 

As discussed above, the final rule, 

similar to the proposed rule, will 

require a board to oversee any valuation 

designee designated to perform fair 

value determinations.553 Also, as 

discussed above, it is a common 

practice that boards provide oversight of 

valuation designees engaged to perform 

fair value determinations.554 Because 

boards already provide oversight of 

valuation designees engaged to perform 

fair value determinations, the final rule 

is not likely to impose any additional 

ongoing costs or present any additional 

ongoing benefits; such funds will have 

a one-time cost associated with 

reviewing the requirements of the final 

rule and ensuring that their practices 

conform to the requirements. There 

may, however, be some boards that, in 

exercising their oversight obligations, 

currently undertake to perform more 

tasks than will be required by the final 

rule, including, for example, the 

ratification of specific fund fair values 

daily or periodically. To the extent that 

these boards choose to cease these 

practices, this could result in a 

reduction in benefits that are associated 

with a board undertaking these 

additional duties as well as a reduction 

in any associated costs. Such a change 

in oversight practice may reduce the 

costs of boards’ resources spent on such 

day-to-day involvement and provide the 

benefit of directing those resources to 

more productive and critical areas of 

board oversight of the fair value process 

or to other oversight obligations that the 

board has with respect to the fund. 

To the extent that certain funds’ fair 

value practices currently are less 

thorough than those required under the 

final rule the final rule could decrease 

the likelihood that fund investments are 

inappropriately fair valued.555 This is 

because, for these funds, the final rule 

should create a more robust valuation 

framework to address conflicts of 

interest of the valuation designee, which 

could result in less biased 

determinations of asset valuations. 

Nevertheless, the final rule’s effect on 

mitigating conflicts of interest and on 

the accuracy of fair value 

determinations may be limited, as it is 

our understanding that many funds 

currently have in place fair value 

practices that are similar to the 

requirements of the final rule and that 

boards oversee the valuation designee’s 

assistance with fair value calculations, 

including the role of pricing services in 

the fair value process.556

In addition, under the final rule, if the 

fund is a UIT, the fund’s trustee or 

depositor must carry out the fair value 

determinations.557 Hence, UITs will not 

bear any costs associated with oversight 

and reporting. We expect the effects of 

all other aspects of the final rule to be 

similar for UITs and other funds. 

We believe that funds’ incremental 

ongoing costs associated with this 

aspect of the final rule will be limited 

to the extent that boards or funds 

currently engage in appropriate 

oversight of a valuation designee’s 

assistance with fair value calculations 

and that boards currently review 

periodic and ad-hoc reports related to 

fair value determinations prepared by 

the fund’s valuation designee in a 

manner and to an extent consistent with 

the requirements of the final rule.558

Commenters stated that boards lack the 

expertise and resources to perform fair 

value determinations in good faith 559

and that few boards perform this 

function themselves.560 Hence, we 

believe that incremental ongoing costs 

on boards and fund investors compared 

to the ongoing costs under current 

practices will be limited to the extent 

that boards are already performing 

appropriate oversight in a manner and 

to an extent consistent with the final 

rule.561 We acknowledge, however, that 

to the extent boards’ current oversight of 

valuation designees’ fair value 

calculations and boards’ current 

practices with respect to review of 

valuation reports are inconsistent with 

appropriate oversight as discussed 

above,562 funds may bear higher 

additional ongoing costs to comply with 

the final rule. 

(b) Board Reporting 

The final rule will require the 

valuation designee to provide periodic 

reports and prompt notification of 

matters that materially affect the fair 

value of the designated portfolio of 

investments.563 For funds whose boards 

will designate valuation designees to 

perform fair value determinations, the 

final rule could impose additional 

ongoing costs associated with boards’ 

appropriate oversight of the valuation 

designee’s fair value determinations and 

review of board reports. Some 

commenters suggested the ongoing costs 

of reporting would be high, due in part 

to ‘‘substantially more information’’ 

being provided to boards prompted by 

the proposed rule, and would provide 

little or no benefit.564 In response to 

these commenters, the final rule 

contains certain changes to the 

proposed board reporting requirements 

designed to, among other things, reduce 

the chance that boards receive reporting 

that is too detailed or repetitive.565 We 

discuss the costs and benefits of these 

periodic and prompt reporting 

requirements below. 

(1) Periodic Reporting 

The final rule, like the proposed rule, 

will require that certain reporting be 

provided to the board on a quarterly 

basis and certain reporting on an annual 


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566See supra section II.B.2.a). 

567See supra section III.B.2.g). 

568See supra section II.B.3. 

569See supra section III.B.2.e). 

basis.566 As discussed above, periodic 

reporting to boards on matters of fair 

value determination is common 

practice.567 Currently, the board may 

not receive quarterly or annual reports, 

and may receive more or less frequent 

reporting depending on the type of fund 

investments and the market conditions. 

Funds will have a one-time cost 

associated with reviewing the 

requirements of the final rule and 

ensuring that their practices conform to 

the requirements. To the extent that 

boards do not receive periodic reporting 

that conforms to the requirements of the 

final rule, the final rule will impose 

additional ongoing costs to valuation 

designees, such as providing additional 

reports or more frequent reports as 

required by the final rule or reports of 

different information. Similarly, the 

boards of these entities will incur 

ongoing costs related to reviewing such 

reports. The final rule’s requirement to 

assess the adequacy and effectiveness 

on an annual basis will, for example, to 

the extent that a valuation designee does 

not do so on an annual basis, increase 

a valuation designee’s costs as well as 

the board’s costs of reviewing such 

reports. Further, the final rule’s 

requirement that quarterly reports 

include material changes in assessment 

or management of valuation risks will, 

to the extent that a valuation designee 

does not report material changes in 

assessment or management of valuation 

risks or does not do so on a quarterly 

basis, increase a valuation designee’s 

costs as well as the board’s costs of 

reviewing such reports. The final rule’s 

requirement for a summary of testing 

results and assessment of adequacy of 

resources on an annual basis will, to the 

extent that a valuation designee does 

not report testing results or an 

assessment of adequacy of resources or 

does not do so on an annual basis, 

increase their costs as well as the 

board’s costs of reviewing such reports. 

In addition, to the extent that these 

reporting requirements increase the 

volume of information that boards must 

review, board members may seek higher 

fees or may devote less time to other 

issues, which may impact the general 

effectiveness of the board. Furthermore, 

to the extent that the board consults 

outside counsel or other experts, such as 

accountants, with respect to such 

reporting, there may be additional 

external expenses incurred. These costs 

could be passed on to investors. 

However, to the extent that the 

requirement of the final rule for periodic 

reporting aligns with a fund’s current 

practice, this requirement of the final 

rule may impose additional costs or 

contribute additional benefits of 

improved board oversight of the fair 

value process. 

Certain funds might put in place 

reporting procedures to comply with the 

final rule that are more costly than those 

funds’ current practices, while other 

funds might set up reporting as a result 

of the final rule that will result in lower 

ongoing costs than the costs of current 

practice. We acknowledge that funds 

whose reporting is less costly than that 

required under the final rule will bear 

additional ongoing costs under the final 

rule. 

(2) Prompt Board Notification 

The final rule will require the 

valuation designee to provide a written 

notification of the occurrence of 

material matters, including significant 

deficiencies or material weaknesses in 

the design or effectiveness of the 

valuation designee’s fair value 

determination process or material errors 

in the calculation of net asset value. 

This notification must take place within 

a time period determined by the board, 

but in no event later than five business 

days after the valuation designee 

becomes aware of the material matter. 

The valuation designee must also 

provide such timely follow-on reports as 

the board may reasonably determine are 

appropriate. As discussed above, it is 

common practice to require that certain 

matters be reported promptly to the 

board, though the content and frequency 

of current ad hoc reporting to boards 

may vary depending on the type of fund 

and fund investments. 

To the extent that funds do not 

already provide boards with prompt 

reporting on matters as required in the 

final rule, the final rule will impose 

additional ongoing costs such as 

preparing reports more quickly or more 

often than waiting for routine reporting. 

Specifically, the final rule requires 

written notification of the occurrence of 

material matters in no event later than 

five business days after the valuation 

designee becomes aware. This will 

impose costs on valuation designees, 

including costs of diverting or 

expending additional resources, to meet 

the required timeline. In addition, the 

final rule’s definition of material matters 

may include matters for which some 

boards do not currently receive reports, 

which could impose additional burdens 

on valuation designees producing 

additional reports and on boards’ time 

and attention and related external costs. 

The requirement to provide such timely 

follow-on reports as the board may 

reasonably determine are appropriate 

may impose similar costs to the extent 

boards do not receive such reporting 

already. Also, funds and valuation 

designees may have a one-time cost 

associated with reviewing the 

requirements of the final rule and 

conforming their practices to the 

requirements. 

Overall, as discussed previously, the 

changes to the reporting requirements of 

the final rule reduce the burden and 

cost of required prompt board reporting 

under the final rule compared to the 

requirements of the proposed rule. 

Valuation designees will have relatively 

reduced reporting burdens and the 

relatively reduced reporting to the board 

will permit the board to more effectively 

and more efficiently focus on its 

oversight role. 

(c) Specification of Functions and 

Reasonable Segregation From Portfolio 

Management 

The final rule, like the proposed rule, 

will require that the valuation designee 

(a) specify the titles of the persons 

responsible for determining the fair 

value of designated investments, 

including by specifying the particular 

functions for which they are 

responsible, and (b) reasonably 

segregate portfolio management from 

fair value determinations.568 As 

discussed above, similar practices are 

common among advisers performing fair 

value determinations.569

To the extent that funds do not 

already specify functions as required in 

the final rule, the final rule will impose 

additional ongoing costs, such as 

reviewing and specifying functions in 

accordance with the final rule. 

Specifically, the requirement to specify 

the titles of the persons responsible for 

determining the fair value of the 

designated investments, including by 

particular function and as related to 

price challenges, may impose costs, 

including those related to identifying 

clearly those responsible for price 

challenges to the extent funds do not do 

so already. In addition, the final rule’s 

requirement for the valuation designee 

to segregate fair value determinations 

from the portfolio management of the 

fund reasonably will impose costs to the 

extent that such reasonable segregation 

results in a decrease in quality or 

quantity of information provided by 

portfolio managers or an increase in 

staffing to ensure compliance with the 

final rule. Costs will vary, based in part 

on whether a fund establishes new 

processes to institute this requirement, 

which could include independent 


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570See supra section II.B.3 for a discussion 

related to advisers’ conflicts of interest. 

571See Sullivan Comment Letter. 

572See supra footnote 288 and accompanying 

discussion. 

573See supra section II.C. 

574See supra section III.B.2.h). 

575See supra section III.B.2.h). 

576See, e.g., Baillie Gifford Comment Letter; 

Capital Group Comment Letter; ICE Data Comment 

Letter; ICI Comment Letter; MFS Comment Letter; 

SSGA Comment Letter; TRC Comment Letter; 

Vanguard Comment Letter. See also supra footnotes 

310 and 311 and accompanying discussion. 

577As discussed above, the final rule has been 

made less prescriptive than the proposed rule, thus 

narrowing the gap between practice and the 

requirements. 

578See John Hancock Comment Letter; SIFMA 

AMG Comment Letter. 

579See supra section III.C.3. 

580See supra section II.D. 

581See, e.g., Capital Group Comment Letter; IAA 

Comment Letter. 

reporting chains, oversight 

arrangements, or separate monitoring 

systems and personnel. All funds 

subject to this requirement may have a 

one-time cost associated with reviewing 

the requirements of the final rule and 

ensuring that their practices conform to 

the requirements. 

Whenever the fund’s adviser is 

designated to perform fair value 

determinations, the requirement to 

segregate fair value determinations from 

portfolio management reasonably may 

be more costly for smaller advisers, and 

smaller internally managed funds, with 

limited resources and personnel, than 

for larger ones. The reason is that 

smaller advisers, and smaller internally 

managed funds, may lack the staff and 

resources to segregate portfolio 

management personnel from those 

making fair value determinations 

reasonably as efficiently as larger 

advisers, and internally managed funds, 

or may only be able to meet this 

requirement by hiring additional 

personnel. As such, the reasonable 

segregation requirement of the final rule 

allows a fund to make decisions about 

tradeoffs it faces (e.g., costs, benefits, 

risks) in the context of the specific facts 

and circumstances of the fund. 

Finally, to the extent that the board 

designates the valuation designees to 

perform the fair value determinations 

relating to any or all of fund 

investments, the final rule will provide 

the valuation designee—which has 

conflicting interests—a greater 

permissible role in fair value 

determinations relative to current 

practices.570 Nevertheless, we believe 

that any impact from such conflicts may 

be mitigated because the final rule 

contains explicit requirements related to 

the identification, assessment, and 

management of any material conflicts of 

interest of the valuation designee as 

well as the requirement to reasonably 

segregate the valuation designee’s fair 

value determinations from portfolio 

management, and most funds currently 

have in place policies to manage 

conflicts of interest of valuation 

designees that may not be valuation 

specific. 

One commenter stated that the 

proposed rule lacked clarity as to which 

individuals are required to be identified 

and stated that ‘‘little appears to be 

gained by the mechanical exercise’’ of 

naming individuals and their titles, 

which may be generic, and identifying 

with specificity their roles in the 

valuation function.571 As discussed 

more extensively above, we disagree 

with the commenter because this 

requirement in the final rule cannot be 

satisfied by simply listing the generic 

titles of those involved in valuation.572

As a result, this requirement may result 

in costs, as described above, but also 

benefits resulting from the improved 

oversight and accountability which 

would not be provided by listing generic 

titles. 

3. Recordkeeping 

Rule 31a–4 will require that a fund or 

designated adviser maintain appropriate 

documentation to support fair value 

determinations.573 As discussed above, 

maintenance of such documentation is a 

common practice.574 Some funds may 

not, however, maintain these records for 

all investments. For example, a fund 

may not maintain records for which the 

board relies on pricing services and 

investments with level 2 inputs as 

required under rule 31a–4.575

Some commenters stated that the 

recordkeeping requirements associated 

with rule 2a–5 as proposed would 

represent a significant change from 

current practice and would entail 

additional costs.576 Funds will have a 

one-time cost associated with reviewing 

the requirements of rule 31a–4 and 

ensuring that their practices conform to 

the requirements. To the extent that 

funds do not already maintain 

documentation to support fair value 

determinations that conforms to rule 

31a–4, it will impose additional ongoing 

costs, including costs associated with 

updating documentation as practices 

change and evolve and maintaining 

records for six years. Certain funds or 

advisers might put in place 

recordkeeping practices to comply with 

rule 31a–4 that are more costly than the 

funds’ or advisers’ current practices, 

while other funds or advisers might set 

up recordkeeping practices as a result of 

rule 31a–4 that will result in lower 

ongoing costs than the costs of current 

practice. We continue to believe that 

funds’ or advisers’ incremental ongoing 

costs associated with rule 31a–4 will, 

however, be limited to the extent that, 

as discussed in section II.C above, funds 

or advisers currently have in place 

recordkeeping practices associated with 

fair value determinations that are 

similar to rule 31a–4’s requirements.577

Some commenters suggested that the 

time and resources required in order to 

comply with the recordkeeping 

requirements would be higher than 

stated in the proposal, but without 

providing estimates.578 While 

recordkeeping costs may be higher than 

estimated for some funds, to the extent 

that a fund’s current recordkeeping 

practices are similar to the requirements 

of rule 31a–4, a fund will incur minimal 

additional ongoing costs. Likewise, to 

the extent that a fund’s recordkeeping 

practices fail to meet the requirements 

of rule 31a–4, a fund will incur higher 

ongoing costs. 

Maintaining certain documentation to 

support fair value determinations is an 

important element of the oversight 

framework that rule 2a–5 establishes 

and thus contributes to the benefits 

described in section III.C.3.579 To the 

extent that rule 31a–4’s requirements 

are in line with a fund’s current 

practice, additional costs and benefits 

are likely to be limited. 

4. Readily Available Market Quotations 

The final rule defines a market 

quotation as readily available only when 

that ‘‘quotation is a quoted price 

(unadjusted) in active markets for 

identical investments that the fund can 

access at the measurement date, 

provided that a quotation will not be 

readily available if it is not reliable.’’ 

This definition will apply in all contexts 

under the Investment Company Act and 

the rules thereunder, including rule 

17a–7.580

To the extent that funds currently 

consider some or all investments valued 

with level 2 inputs as investments with 

readily available market quotations, 

funds will incur costs related to fair 

valuing these investments. Specifically, 

if a fund currently treats certain 

investments valued with level 2 inputs 

as having readily available market 

quotations,581 the fund will likely 

experience additional costs associated 

with the application of fair value 

practices and requirements of the final 

rule to those investments, as discussed 

above. For example, if such a fund 

currently views a level 2 input or the 

product of level 2 inputs for some 


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582See supra section III.D.2.b) and section III.D.3. 

583See Alexander Eisele, Tamara Nefedova, 

Gianpaolo Parise, & Kim Peijnenburg, Trading out 

of sight: An analysis of cross-trading in mutual fund 

families, 135 J. Fin. Econ. 359 (2020) (‘‘Eisele et al. 

2020’’), which provides evidence of strategic 

reallocation of performance among sibling funds; 

and Gerald Abdesaken, Conflicts of interest in 

multi-fund management, 20 J. Asset Mgmt. 54 

(2019) (‘‘Abdesaken 2019’’), which provides 

evidence of conflicts of interest among asset 

managers that simultaneously manage multiple 

mutual funds. 

584Approximately 28% of funds reported relying 

on 17a–7 for cross trades, but we cannot determine 

to what extent reliance on 17a–7 is limited to 

investments meeting the definition under the final 

rule of having readily available market quotations. 

See supra section III.B.3. 

585See supra section II.C. 

586See, e.g., AIMA Comment Letter; American 

Bankers Association Comment Letter; American 

Funds Comment Letter; Baillie Gifford Comment 

Letter; Capital Group Comment Letter; Dechert 

Comment Letter; Guggenheim Comment Letter; IAA 

Comment Letter; ICE Data Comment Letter; ICI 

Comment Letter; IDC Comment Letter; SIFMA AMG 

Comment Letter; SSGA Comment Letter; TRC 

Comment Letter; Vanguard Comment Letter. 

587See, e.g., Capital Group Comment Letter; 

SIFMA AMG Comment Letter. 

588See supra section II.C and section III.B.2.h). 

589See Guggenheim Comment Letter. 

590See Dechert Comment Letter. 

securities as readily available market 

quotations, the fund will need to subject 

those securities to the fair value process. 

Depending on the fund’s practices, this 

may merely mean documenting the due 

diligence it already performs; however, 

if the fund does not perform due 

diligence, then it will have to establish 

procedures to do so and document such 

due diligence. These costs could be 

passed on to investors. To the extent 

that the final rule reflects current 

industry practice (e.g., properly fair 

valuing such securities and board 

reporting), there will be fewer, if any, 

additional costs or benefits arising from 

the definition in the final rule. As 

mentioned above, funds will incur onetime costs of reviewing the final rule 

and ensuring that practices conform to 

the final rule.582

The final rule’s definition of readily 

available market quotations may also 

impose costs on funds that currently 

cross trade securities not captured by 

the definition. The application of this 

definition may result in funds that had 

previously viewed certain securities as 

having readily available market 

quotations, and thus eligible for cross 

trades under rule 17a–7, to re-evaluate 

practices for trading those securities or 

change their practices for trading those 

securities. This re-evaluation will 

impose costs on those funds and may 

result in those funds having a more 

restricted set of securities being 

available for cross trades than they had 

previously viewed as being available for 

cross trades. 

Depending on the reasons for trading, 

cross trading may impact fund investors 

both positively and negatively. First, 

cross trading allows both trading funds 

to avoid commissions or other 

transaction costs that would otherwise 

be borne in a market transaction. 

Second, cross trading can allow a fund 

facing liquidity constraints to avoid 

depressed or fire-sale prices when it is 

selling an asset for which market prices 

would otherwise be depressed. 

However, since these transactions are 

not market transactions and can be 

affected by conflicts of interest, rule 

17a–7 requires securities to have readily 

available market quotations to serve as 

an independent basis, and the ‘‘prices’’ 

at which cross trades execute are set 

internally based on the requirements of 

rule 17a–7.The final rule, by defining 

readily available market quotations, 

further mitigates the risk that one fund 

will ‘‘subsidize’’ another fund through 

cross trading of assets with more 

subjective values.583

Funds may also bear the cost of going 

to market for trades that otherwise 

would have been implemented via a 

cross trade if the securities in question 

lack readily available market quotations. 

Such costs include transaction costs 

(such as bid-ask spreads or 

commissions) and search costs for hardto-find securities. Based on the 

estimates presented in Table 2, 

approximately 33% of fund assets are 

fair valued with level 2 or level 3 

inputs. However, we lack detailed data 

on funds’ engagement in cross trading in 

such securities to estimate what fraction 

of this subset will be affected by the 

definition of readily available market 

quotation.584 Likewise, we lack detailed 

data to estimate the transactions and 

other costs that a fund might incur if 

forced to go to the market for 

transactions that otherwise would have 

been executed with a cross trade. The 

final rule will have a larger effect on 

funds for which a larger percentage of 

their investments does not have readily 

available market quotations because 

those funds will be required to 

determine the fair value of a larger 

percentage of their investments. 

As discussed above, commenters were 

concerned about requirements in the 

proposed rule to maintain records of 

specific methodologies, assumptions, 

and inputs for determining fair values, 

in particular for investments valued 

with level 2 inputs.585 Commenters 

stated that the definition of readily 

available market quotations would 

effectively prompt funds to treat all 

investments valued with level 2 inputs 

as not having readily available market 

quotations.586 Many suggested, in 

particular, that applying the proposed 

recordkeeping provisions to investments 

valued with level 2 inputs is not 

necessary and would impose additional 

costs.587 To the extent that some funds 

currently treat some investments relying 

on level 2 inputs as having readily 

available market quotations, those funds 

will face higher costs associated with 

determining the fair value of those 

investments in good faith as required by 

the final rule. These costs could include 

compliance costs (e.g., updating 

procedures for fair value 

determinations) or devoting greater 

resources to conduct due diligence of 

pricing services. As discussed above,588

commenters described varying 

recordkeeping practices for investments 

relying on level 2 inputs, including 

documenting the due diligence and 

oversight of pricing services and 

maintaining prices received from a 

pricing service. To the extent that a 

fund’s practices with respect to 

investments relying on level 2 inputs 

conform to the final rules, a fund will 

face few, if any, additional ongoing 

costs. 

One commenter also stated that 

‘‘challenges associated with the 

proposed rule’s definition of ‘readily 

available market quotations’ ’’ could 

discourage purchases of certain 

investments, particularly for smaller 

firms.589 Another commenter expressed 

a similar concern about the definition 

and the costs of the proposed rule’s 

requirements for establishing 

methodologies, inputs, and assumptions 

for prices provided by pricing 

services.590 As discussed above, we 

agree that there will be additional costs 

for funds that currently treat 

investments that rely on level 2 inputs 

as having readily available market 

quotations. While there is a potential 

risk that initial purchases of certain 

investments may be discouraged, the 

commenter’s concern with the ‘‘rigidity 

of the proposed rule,’’ which required 

the specification of methodologies that 

would apply to new types of 

investments in which the fund intended 

to invest, is mitigated by changes to rule 

2a–5, which does not include this 

requirement. Similarly, the other 

commenter’s concern with the proposed 

rule’s requirement to establish 

methodologies, inputs, and assumptions 

for prices provided by pricing services 

is mitigated by changes to the final rule, 

which allows the due diligence process 


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792 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 

591See supra section II.E. 

592See Proposing Release, supra footnote 2, at 

n.150 and accompanying discussion. 

593See KPMG Comment Letter. 

594See ABA Comment Letter; E&Y Comment 

Letter. 

595Academic literature provides evidence 

consistent with the idea that uncertainty has 

negative effects on investment and growth. See, e.g., 

Nicholas Bloom, Stephen Bond, & John Van 

Reenen, Uncertainty and Investment Dynamics, 74 

Rev. Econ. Stud. 391 (2007); Nicholas Bloom, The 

Impact of Uncertainty Shocks, 77 Econometrica 623 

(2009); Scott R. Baker, Nicholas Bloom, & Steven J. 

Davis, Measuring Economic Policy Uncertainty, 131 

Q.J. Econ. 1593 (2016). 

596See supra section II.E. 

597The one-time cost estimates used in the 

economic analysis may differ from the cost 

estimates in section IV below because (i) the cost 

estimates in the economic analysis capture all costs 

associated with the final rule, while the cost 

estimates in section IV capture only costs related to 

information collection burdens and (ii) the cost 

estimates in the economic analysis capture 

incremental costs associated with the final rule, 

while the cost estimates in section IV capture total 

costs. Hence, the cost estimates in section IV below 

serve as an upper bound of costs related to 

information collection burdens for funds that do not 

have in place currently any practices that are 

similar to the final rule’s requirements. 

598The final rule does not specify a requirement 

for policies and procedures beyond that in the 

compliance rule, but the final rule may affect the 

content of policies and procedures required for 

documentation of fair value determinations under 

the compliance rule. See supra section II.A.5, 

section III.B.2, and section I.A.1.e. 

599See supra section II.B.2, section III.B.2.g), and 

section III.D.2.b). 

600See supra section II.C, section III.B.2.h), and 

section III.D.3. 

601See supra section II.A.1, section III.B.2.b), and 

section III.D.1.a). 

602See supra section II.A.2, section III.B.2.c), and 

section III.D.1.b). 

603See supra section II.A.3, section III.B.2.d), and 

section I.A.1.c. 

604See supra section II.A.4, section III.B.2.f), and 

section I.A.1.d. 

605See, e.g., Dechert Comment Letter; 

Guggenheim Trustees Comment Letter; ICI 

Comment Letter; IDC Comment Letter; Invesco 

Comment Letter; John Hancock Comment Letter; 

NYSSCPA Comment Letter; Scheidt Comment 

Letter 2; Stradley Comment Letter. 

606See, e.g., Guggenheim Comment Letter; ICI 

Comment Letter; John Hancock Comment Letter. 

for pricing services to fulfill this 

requirement. 

5. Rescission of Prior Commission 

Releases and Guidance 

The final rule, like the proposed rule, 

rescinds certain Commission releases 

and guidance, including ASR 113, ASR 

118, and prior guidance on the oversight 

of pricing services contained in the 2014 

Money Market Fund Release.591 To the 

extent that funds’ interpretations of 

such Commission releases and guidance 

have led to funds’ adoption of practices 

that do not conform to the requirements 

of the final rule, the final rule will 

impose additional initial and ongoing 

costs, but come with additional ongoing 

benefits. Furthermore, as described in 

the Proposing Release, some parts of the 

Commission releases and guidance have 

been superseded or made obsolete.592

Similarly, one commenter stated that 

rescinding ASR 113 and ASR 118 will 

avoid potentially contradictory 

requirements 593 and other commenters 

stated that U.S. GAAP and related 

accounting rules play an informative 

role in the valuation process.594 Because 

U.S. GAAP standards are commonly 

understood and used in the industry in 

financial reporting, both the additional 

one-time and ongoing costs of 

conforming to these standards and the 

final rule, rather than relying on 

Commission releases and guidance, 

should be limited. Finally, we believe 

that rescinding the auditing guidance 

included in ASR 118 will have little or 

no impact on funds or valuation 

designees because a fund board or 

valuation designee could request that its 

auditor continue current practice to 

verify 100% of the values of the fund’s 

investments if it determines that this 

approach is preferable. 

The final rule provides a minimum, 

consistent framework for fair value and 

standard of baseline practices across 

funds to help ensure that boards fulfill 

their oversight roles appropriately, and 

these will encourage funds to adopt best 

practices to support more rigorous fair 

value determinations. The rescission of 

prior Commission releases and guidance 

obviates a fund’s need to analyze and 

interpret those releases and guidance, 

thus reducing compliance costs.595 As 

discussed above, some commenters 

opposed rescission of ASR 113 and ASR 

118 stating that certain specific fair 

values are not covered in the relevant 

accounting standards and that certain 

content within those releases should be 

reissued or restated by the Commission, 

but we continue to believe that in light 

of the existing framework in U.S. GAAP, 

and upon adoption of rule 2a–5 in this 

document, these specific valuation 

matters do not require the specific 

incremental guidance included in the 

ASRs.596 Lower costs of compliance for 

funds resulting from relying on the final 

rule rather than various guidance 

ultimately could benefit fund investors 

to the extent that any cost savings 

would be passed down to them in the 

form of lower fund operating expenses. 

6. Cost Estimates 

Rules 2a–5 and 31a–4 will affect all 

funds with investments that do not have 

readily available market quotations, 

their boards of directors, the advisers of 

most funds, and the depositors or 

trustees of UITs, though not all of those 

funds will have to materially change 

their practices to comply with the final 

rule. The effects of these rules depend 

on the extent to which funds’ current 

practices differ from their requirements. 

Our staff estimates that the one-time 

incremental costs necessary to ensure 

compliance with these rules range from 

$100,000 to $600,000 per fund, 

depending on the current fair value 

practices of the fund.597 These 

estimated costs are attributable to the 

following activities: (i) Reviewing the 

rules’ requirements; (ii) developing new 

(or modifying existing) fair value 

policies and procedures,598 reporting,599

recordkeeping,600 valuation risk 

assessment,601 fair value 

methodology,602 testing,603 and pricing 

service oversight 604 practices to align 

with the requirements of the rules; (iii) 

implementing those policies and 

procedures, reporting, recordkeeping, 

valuation risk assessment, fair value 

methodology, testing, and pricing 

oversight practices and integrating them 

into the rest of the funds’ activities; (iv) 

preparing new training materials and 

administering training sessions for staff 

in affected areas; and (v) independent 

board members consulting their 

independent counsel on whether the 

valuation designee should be designated 

to perform fair value determinations and 

how to set up appropriate policies and 

procedures, reporting, and 

recordkeeping requirements. 

Many commenters agreed that the 

requirements of the proposed rule 

would impose such costs 605 and some 

commenters stated that our estimates 

understated the costs described in the 

proposed rule.606 However, such 

commenters did not provide specific 

estimates or data to inform more 

accurate cost estimates. As described 

above, the requirements of these rules 

will be less prescriptive and 

burdensome than the requirements of 

the proposed rule. Nonetheless, our 

estimates have not changed because 

these estimates are for the one-time 

costs described here. Such costs are 

unlikely to vary as a result of the 

differences between the requirements of 

the proposed rule and those of rules 2a– 

5 and 31a–4 as adopted. We expect that 

the one-time incremental cost necessary 

to ensure compliance with the rules 

depends on each fund’s current fair 


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607See supra footnote 509. 

608 $980.4 million = 9,804 affected funds × 

$100,000. $5.9 billion = 9,804 affected funds × 

$600,000. See supra footnote 509. 

609See infra footnote 637 and associated text. 

610The ongoing burden associated with board 

reporting is based on 20 hours × $368 (senior 

programmer) + 1.5 hours × $4,770 (combined rate 

for 4 directors) + 0.44 hours × $368 (compliance 

attorney) + an external burden of $3,180 = $17,859 

for each affected fund, implying a total ongoing 

industry burden of $17,859 × 9,335 affected funds 

= $166,709,616. See infra section IV.B. The ongoing 

burden associated with recordkeeping is based on 

35 hours × $63 (general clerk) + 35 hours × $96 

(senior computer operator) + 35 hours × $368 

(compliance attorney) = $18,445 for each affected 

fund, implying a total ongoing industry burden of 

$18,445 × 9,335 affected funds = $172,184,075. See 

infra section IV.B. The ongoing burden associated 

with rule 38a–1 is based on 5 hours × $329 (senior 

manager) + 5 hours × $466 (assistant general 

counsel) + 2 hours × $530 (chief compliance officer) 

+ 1 hour × $365 (compliance attorney) + 2 hours 

× $4,770 (Board of Directors as a whole), implying 

a total ongoing industry burden of $16,940 × 9,804 

affected funds = $166,079,760. See infra section 

IV.B. Therefore, the total ongoing industry burden 

associated with the final rule is $166,709,616 + 

$172,184,075 + $166,079,760 = $504,973,451. 

611See Dechert Comment Letter. 

612See ICI Comment Letter; American Funds 

Trustees Comment Letter; Capital Group Comment 

Letter; SIFMA AMG Comment Letter. 

613As discussed above, some commenters 

disagreed that this would free up board resources. 

See, e.g., Russell Comment Letter; Fidelity 

Comment Letter; MFS Comment Letter; John 

Hancock Comment Letter. The final rule does not 

impose requirements on the board that go beyond 

its present obligations, but does impose various 

specific requirements that are not currently 

expressly required. However, the final rule does 

provide an express mechanism such that a board is 

permitted to designate a valuation designee to 

perform actual determinations of fair value on a 

daily basis, thus avoiding a board’s involvement in 

the day-to-day activities of fair value determination, 

while maintaining its critical oversight role. 

614See section II.B. See also footnotes 174, 176, 

and 177 and accompanying discussion. 

value practices and the amount and 

valuation complexity of fund 

investments that must be fair valued. In 

particular, the one-time costs will be 

closer to the lower end of the range for 

funds whose current practices are more 

similar to the requirements of the rules 

and funds with fewer and easier-tovalue fund investments. Further, the 

one-time costs will be closer to the 

lower end of the range for funds that 

belong to fund complexes because 

certain aspects of the one-time costs are 

fixed costs that could be spread across 

multiple funds in the case of fund 

complexes. 

As discussed above, we estimate that 

9,804 funds will be affected by the rules, 

and thus incur one-time costs associated 

with the rules.607 We estimate that 70% 

of one-time costs are attributable to 

funds reviewing and updating their 

current practices and related policies 

and procedures to comply with the final 

rule’s requirements; 15% of one-time 

costs are attributable to funds reviewing 

and updating current recordkeeping 

processes to align with rule 31a–4’s 

requirements; and the remaining 15% of 

one-time costs are attributable to funds 

reviewing and updating the current 

board reporting processes to comply 

with the final rule’s requirements. 

Hence, we estimate the aggregate onetime costs of the final rule to range 

between $980.4 million and $5.9 

billion.608

Section IV below presents estimates of 

‘‘collection of information’’-related 

burdens 609 associated with rule 2a–5’s 

board reporting and rule 31a–4’s 

recordkeeping requirements and with 

the requirement, to comply with rule 

38a–1 after our adoption of rule 2a–5, to 

adopt and implement written policies 

and procedures reasonably designed to 

prevent violations of the requirements 

of rule 2a–5. Our estimates of one-time 

costs in the economic analysis above 

subsume the estimates of initial burdens 

in section IV, as the former cover costs 

associated with a broader set of 

activities, as described above, that do 

not all relate to the collection of 

information. In addition, some funds 

with investments valued using nonlevel 1 inputs may incur ongoing costs, 

in addition to the one-time costs 

described above, associated with the 

rules’ requirements. However, we 

believe that the level of ongoing costs 

associated with the requirements of the 

rules are generally similar to that 

associated with existing practices of 

funds with investments valued without 

readily available market quotations. As 

a result, the estimate of ongoing 

industry burdens of $504,973,451 per 

year 610 in section IV represents an 

upper bound on the incremental 

ongoing costs for funds affected by the 

rules. 

7. Other Cost Considerations and 

Comments on Costs 

Many commenters stated that costs 

would likely be higher than we 

estimated in the Proposing Release 

without quantifying those higher costs. 

In addition, some commenters 

presented a number of other costs—also 

without quantification—that were not 

included in our estimates in the 

Proposing Release. For example, one 

commenter stated that the proposed 

reporting requirements could even lead 

to increased self-imposed costs 

becoming industry standards.611 As 

discussed above, to the extent that 

funds’ reporting practices already 

conform to the requirements of the final 

rule, additional costs will be limited. 

Likewise, we believe it is unlikely that 

funds will engage in additional 

reporting that is not necessary for 

compliance with the final rule. A few 

commenters suggested the proposed 

rule would result in increased liability 

of funds, boards, and advisers in 

fulfilling their fair value 

responsibilities.612 It is possible funds, 

boards, and advisers may incur liability 

in connection with their fair value 

responsibilities under the final rule, but 

they already may incur liability in this 

regard under the law. 

E. Effects on Efficiency, Competition, 

and Capital Formation 

Rules 2a–5 and 31a–4 may also have 

effects on efficiency, competition, and 

capital formation. Under the final rule, 

boards may designate a valuation 

designee to perform fair value 

determinations and may oversee the 

valuation designee’s fair value 

determinations instead of determining 

fair value themselves, which could free 

board resources tied to valuation and 

redirect them to oversight or other 

matters. As a result, to the extent that 

boards currently determine fair value of 

investments themselves, the final rule 

could lead to more efficient use of 

boards’ resources and therefore improve 

funds’ governance of determinations of 

fair value in good faith for the benefit of 

investors.613 Conversely, to the extent 

that fund boards do not currently 

determine fair value themselves and 

instead rely on an adviser to compute 

fair value in line with the requirements 

of the final rule, such boards are not 

likely to benefit from more efficient use 

of their resources. The final rule also 

could improve the efficiency of fund 

operations because it will explicitly 

allow boards more flexibility to oversee 

the valuation designees’ fair value 

determination, whether the fund boards 

currently make fair value 

determinations themselves or not. 

As discussed above, for UITs, a UIT’s 

trustee or depositor must conduct fair 

value determinations under the final 

rule.614 To the extent that the assistance 

of other parties (such as evaluators) is 

necessary, trustees or depositors can 

seek that assistance consistent with the 

guidance above regarding obtaining the 

assistance of others. Thus, for UITs, the 

final rule explicitly places the 

responsibility on a UIT’s trustee or 

depositor, as specified in the trust 

indenture of the UIT, to fulfill the 

requirements of the final rule to ensure 

appropriate oversight of the fair value 

determination process. 

As discussed above, the final rule 

mandates oversight of a valuation 


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615See IVSC Comment Letter. 

616See Davidson Comment Letter. 

617See supra section III.D.4. 

618See Guggenheim Comment Letter. The 

commenter’s concern was focused on investments 

that rely on prices provided by pricing services, 

particularly those which ‘‘frequently use Level 2 

inputs.’’ 619See IHS Markit Comment Letter. 

designee, which could ultimately 

improve the efficiency and reduce the 

bias of funds’ valuations. Similarly, the 

requirements for UITs to provide 

oversight of the fair value determination 

process could improve the efficiency 

and reduce the bias of UITs’ valuations. 

The final rule could improve the 

efficiency of valuations because it may 

create a more rigorous valuation 

framework and could help mitigate any 

conflicts of interest of the valuation 

designees or, in the case of UITs, the 

trustee or depositor, which ultimately 

could result in less biased valuations. A 

potential increase in asset valuation 

efficiency could improve boards’ 

monitoring of funds’ and of valuation 

designees’ performance and could 

benefit capital formation because less 

biased valuations permit the allocation 

of resources to more efficient use. As 

mentioned by a commenter, ‘‘[b]etter 

standards improve the transparency and 

stability of financial markets, contribute 

to the growth of stronger economies and 

lead to improved confidence for 

investors and users of valuation 

services.’’ 615 Similarly, another 

commenter noted that ‘‘more accurate 

and neutral information’’ could lead to 

positive economic consequences and 

improved decision-making.616

Nevertheless, we believe that any such 

effects likely will be limited to the 

extent that funds currently have in place 

fair value practices that are generally 

similar to the requirements of the rules 

and that boards oversee the valuation 

designee’s and any pricing service’s role 

in fair value calculations. Similarly, we 

believe that any such effects likely will 

be small to the extent that UITs 

currently have in place fair value 

practices that are generally similar to 

the requirements of the final rule and 

that UITs’ trustee or depositor oversees 

the fair value process and any pricing 

service’s role in fair value calculations. 

As discussed above, the final rule 

includes a definition of readily available 

market quotations and this definition 

may affect the ability of funds to cross 

trade certain investments.617 Any such 

reduction in cross trades may have some 

implications for efficiency, competition, 

and capital formation. Any reduction in 

the extent of cross trades, to the extent 

that such trades are executed in the 

market, may affect market efficiency by 

contributing to price discovery for such 

investments that otherwise would not 

have gone to market. In this regard, 

transactions that are brought to market 

rather than being transacted internally 

will contribute to an increase in more 

efficient capital allocation and foster 

capital formation by subjecting more 

investments to price discovery. 

One commenter stated that the 

requirements of the proposed rule for all 

investments without readily available 

market quotations could discourage the 

purchase of certain securities, 

particularly for smaller and mid-sized 

firms and could ‘‘impair the ability of 

such firms to offer funds that invest in 

fixed income securities, resulting in 

fewer investment options for mutual 

fund investors.’’ 618 To the extent that 

the final rule increases compliance 

burdens with respect to securities 

valued with level 2 or level 3 inputs, the 

final rule could provide incremental 

disincentives to purchase these 

securities, particularly by smaller and 

mid-sized funds. To the extent that 

these disincentives affect smaller and 

mid-sized funds more than other funds, 

the requirements of the final rule may 

affect the competitive landscape (e.g., by 

resulting in fewer investment options 

for investors). However, it is our 

understanding that the requirements of 

the final rule align with current practice 

of fair value determinations of 

investments without readily available 

market quotations. 

Overall, we do not believe that the 

rules will have any material effects on 

competition because the effects of the 

rules likely will be limited to the extent 

that the rules are similar to current 

practices. Even though costs could be 

more burdensome for smaller fund 

complexes, we believe that these costs 

will not significantly affect competition 

in the fund industry because few funds 

will incur costs at the higher end of the 

cost range estimate (i.e., between 

$100,000 and $600,000). Furthermore, 

the extent to which the costs of the 

requirements of the final rule are 

relatively more burdensome for a fund 

is likely to be correlated to the fund’s 

current lack of appropriate oversight of 

the fair value process. As the 

requirements of the final rule establish 

a framework for appropriate oversight of 

the fair value process, this may improve 

the competitive landscape in the fund 

industry. Any decrease in the ability of 

certain funds’ engagement in cross 

trades due to the definition of readily 

available market quotations and the 

requirement to fair value all investments 

that are valued using level 2 inputs 

should affect all such funds and not 

result in any change in the competitive 

landscape in this regard; at most it 

would level the playing field among 

funds and thus contribute to a fairer 

competitive landscape. Thus, we 

continue to believe that the rules will 

not negatively affect competition in the 

fund industry, though it may have 

unfavorable effects on funds and 

valuation designees currently lacking an 

effective framework for appropriate 

oversight of their fair value processes. 

In addition, the requirement of the 

final rule reasonably to segregate fair 

value determinations from portfolio 

management likely will more 

significantly affect those smaller 

valuation designees or funds that lack 

the staff and resources necessary to 

effect such segregation as efficiently as 

larger advisers or larger funds. For 

example, such funds or valuation 

designees that lack the staff or resources 

to effect such segregation may hire 

additional personnel to ensure (or to 

assure a board) that they can reasonably 

segregate the fair value process from 

portfolio management. Similarly, the 

requirement to segregate determinations 

of fair value from portfolio management 

may present a barrier to entry to smaller 

advisers. This barrier may be realized 

through boards’ unwillingness to hire 

advisers that cannot ensure such 

segregation to the boards’ satisfaction. 

To the extent that boards may be 

unwilling to hire advisers who cannot 

reasonably segregate these functions, 

small advisers without the resources to 

provide such segregation will face a 

competitive disadvantage. Nevertheless, 

we do not believe that this requirement 

of the final rule will have a material 

effect on competition in the fund 

adviser industry because many smaller 

advisers to funds and internally 

managed funds currently have in place 

processes to address the potential 

conflicts of interest whenever portfolio 

management personnel provide input to 

valuation. To the extent that boards 

currently consider such risks and the 

need to segregate such functions in their 

selection of advisers—including small 

advisers—as we understand is current 

practice, the requirement is unlikely to 

affect competition in the fund adviser 

industry. 

Another commenter suggested that 

one of the valuation risk factors 

discussed above—‘‘reliance on service 

providers that have more limited 

expertise in relevant asset classes’’— 

could ‘‘deter competition in the market 

for pricing services.’’ 619 We do not 

believe evaluation of valuation risks 

will prevent funds from engaging a 

pricing service with limited experience, 


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620See supra section III.B.2. 

621See supra section III.C.3 and sections III.D.1 to 

III.D.4. 

622See, e.g., Rafael La Porta, Florencio Lopez-deSilanes, Andrei Schleifer, & Robert Vishny, Investor 

Protection and Corporate Governance, 58 J. Fin. 

Econ. 3 (2000). 

623See supra footnote 510 and accompanying 

discussion. 

624See Elements of an Investment Policy 

Statement for Institutional Investors, CFA Institute 

(2010). 

625See Proposing Release, supra footnote 2, at 

n.911 and accompanying text. 

626Russell Comment Letter; see also Better 

Markets Comment Letter; CFA Institute Comment 

Letter; SIFMA AMG Comment Letter. 

627See, e.g., CFA Institute Comment Letter; 

Fidelity Comment Letter; JPMAM Comment Letter; 

MFS Comment Letter; SIFMA AMG Comment 

Letter; Stradley Comment Letter. 

628See, e.g., Andrea Polo, Fair Value and 

Corporate Governance, 6 Corp. Ownership & 

Control 382 (2008). 

629See supra section II; see also American 

Bankers Association Comment Letter; American 

Funds Trustees Comment Letter; Dechert Comment 

Letter; Fidelity Trustees Comment Letter; 

Guggenheim Comment Letter; ICI Comment Letter; 

Stradley Comment Letter; Vanguard Comment 

Letter; Comment Letter of Mark Loughridge, Lead 

Independent Director, Board of Trustees of the 

Vanguard Funds (July 21, 2020). 

but rather funds will assess the risks 

associated with such an engagement and 

manage them accordingly (for example, 

through more frequent backtesting of 

such pricing service’s valuation 

information until it gains more 

experience). 

As described above, the requirements 

of rule 2a–5 are similar to current 

practices 620 and establish a certain 

minimum, consistent framework for 

determinations of fair value in good 

faith under the final rule.621 Likewise, 

rule 31a–4 is based upon current 

practices and is designed to help 

implement this framework. Rule 2a–5’s 

framework includes elements providing 

for effective oversight. Effective 

corporate governance is a key piece of 

investor protection 622 at the same that 

it can provide for increased efficiency, 

competition, and capital formation. 

Boards practicing good governance can 

mitigate the agency problem that exists 

between the ‘‘agents’’ (e.g., advisers) and 

the ‘‘principals’’ (e.g., funds). In the area 

of fair value determinations in good 

faith, governance can reduce the 

information asymmetry that exists 

between fund advisers or portfolio 

managers and investors. 

As described above,623 we expect that 

the requirements of the rules will 

contribute to less biased valuations, 

which has benefits for fund managers 

and investors alike. Fund managers are 

better able to manage their portfolios to 

tailor their portfolios to specific riskreward profiles or benchmarks as 

described in their investment policy 

statement 624 and to ensure that their 

portfolios comply with the fund’s risk 

appetite statement. However, advisers 

may have an incentive to ‘‘improperly 

value fund assets in order to increase 

fees, improve or smooth returns, or 

comply with the fund’s investment 

policies and restrictions,’’ 625 and fund 

boards are ‘‘uniquely positioned to 

engage in oversight of the affiliated 

service provider generally and with 

respect to the conflicts of interest 

potentially arising in connection with 

the fair valuation process.’’ 626 Improper 

and biased valuations may also distort 

other behavior.627 The requirements of 

the final rule are designed to mitigate 

any such distortions. 

Properly valuing a fund’s investments 

is also a critical component of the 

accounting and financial reporting for 

investment companies. Appropriate and 

unbiased valuations should thus 

provide investors with greater 

confidence in the accuracy of the value 

of fund investments, the performance of 

funds, and the level of risk of fund 

investments. This should allow 

investors to evaluate more effectively 

how a given fund fits their investment 

objectives, risk appetite, and ability to 

bear risk. 

Taken together, appropriate and 

unbiased valuation fosters price 

discovery. Price discovery, in turn, 

ensures that investments and resources 

are directed to their most efficient use, 

both by investors and funds themselves. 

Efficiency and improved accounting and 

financial reporting resulting from 

appropriate and unbiased valuation 

should promote capital formation by 

increasing the quality and reliability of 

information in capital markets.628

Similarly, appropriate and unbiased 

valuation induces greater competition as 

the performance of funds and their 

advisers becomes more reliably 

assessable. While appropriate and 

unbiased valuation contribute to 

investor protection, efficiency, 

competition, and capital formation, the 

extent to which the requirements of the 

rules will increase these contributions 

may be limited by the extent to which 

funds’ current practices are similar to 

the rules. As discussed above, the costs 

of the rules will likewise be limited to 

the extent to which funds’ current 

practices are similar to the rules. 

F. Reasonable Alternatives 

1. Designation to Officers of Internally 

Managed Fund Not Permitted 

We considered not permitting 

internally managed funds to designate 

officers to perform the fair value 

functions required by the final rule, but 

allowing such funds to seek individual 

exemptive applications to allow 

designation of their officers. This would 

give the Commission the opportunity to 

design protections that are more tailored 

to the kinds and magnitude of conflicts 

involved in internally managed funds 

and the kinds of assets in which those 

funds invest. We believe, however, that 

the costs to these funds involved in 

applying for individual exemptive relief 

could be passed on to investors in these 

funds. Furthermore, officers of 

internally managed funds do, in fact, 

have a fiduciary duty, and play a similar 

or the same role as other valuation 

designees. Thus, treating officers of 

internally managed funds differently or 

preferentially would be inconsistent 

with the goal of ensuring appropriate 

oversight and governance of the fair 

value process (regardless of the parties 

involved) that the final rule seeks. 

Further, we believe that the final rule’s 

oversight and other requirements 

provide minimum and baseline 

standards that we believe should be part 

of any good faith fair value 

determination for internally managed 

funds. We do not believe that 

individually-granted exemptive relief 

would provide funds or their 

shareholders substantially more 

protections in the fair value process, as 

compared to those included in the final 

rule, to justify the costs of requiring 

exemptive applications. For these 

reasons, we are not adopting this 

alternative. 

2. Safe Harbor 

Some commenters suggested that the 

proposed rule be formulated as a safe 

harbor.629 These commenters perceived 

the proposed rule as prescriptive and 

indicated that such rules are more 

appropriate for a safe harbor. 

Commenters argued that for those not 

availing themselves of the safe harbor, 

practices would evolve and adapt in 

response to market developments and 

permit heterogeneity of practices that 

are appropriate for the idiosyncrasies of 

market participants. However, for those 

funds that choose not to use the safe 

harbor, the guidelines would be less 

clear, and perhaps only as clear the 

current regulatory framework. Any lack 

of certainty would likely entail higher 

compliance costs and possible investor 

protection costs. Funds not relying on 

the safe harbor would likely have to 

divert more resources to ensuring 

compliance and may fall short of 


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630See, e.g., SSGA Comment Letter. 

631See supra section III.B.2.c) and section III.F.3. 

632We acknowledge that under the final rule, 

funds could face some uncertainty regarding how 

to comply with the final rule’s requirements. 

Nevertheless, we believe that a more principlesbased approach than the final rule would increase 

further any uncertainty regarding how to comply 

with the requirements of section 2(a)(41) of the Act 

without any additional benefit of ensuring 

appropriate oversight of the fair value process. 

633See supra footnote 417 and accompanying 

discussion. 

providing appropriate oversight and 

governance of the fair value process as 

compared to the final rule. Recasting 

rule 2a–5 as a safe harbor would not 

provide a minimum baseline 

framework, as boards that chose not to 

avail themselves of the safe harbor 

might take an approach to the process 

of making fair value determinations that 

does not result in investors receiving as 

rigorous valuations as under the final 

rule. Valuation is a core responsibility 

of the board under the Act and critical 

for investor protection. Consequently, 

we believe not defining minimum and 

baseline standards could harm investors 

if funds took approaches that lacked 

consistency or certain aspects of these 

basic standards. 

3. Three-Tiered Approach 

Some commenters suggested that 

instead of a binary approach where 

securities that are valued based on level 

2 and level 3 inputs are subject to fair 

value determinations, we instead adopt 

a three-tier approach similar to U.S. 

GAAP’s level 1, level 2, and level 3 

input classifications and have rules 2a– 

5 and 31a–4 further distinguish the fair 

value determination process between 

securities in level 2 or between level 2 

and level 3.630 We are not adopting this 

alternative because, as discussed 

previously, we believe that the Act 

establishes a binary framework with 

securities either being valued based on 

their readily available market 

quotations, or for all other investments, 

being fair valued in good faith. 

However, the final rule establishes a 

framework that allows boards or 

valuation designees to tailor their fair 

value determination process to the 

investments held by the fund, and 

allows for a variety of different 

methodologies to be applied. As 

described above, the requirements of 

rule 31a–4 for investments fair valued 

with level 2 inputs does allow for 

different levels of recordkeeping that 

correspond with the risk and nature of 

the investments that are being fair 

valued. The recordkeeping and 

reporting requirements of rules 2a–5 

and 31a–4 are designed to be flexible, 

and thus funds may distinguish between 

level 2 and level 3 securities as part of 

their recordkeeping and reporting 

processes. Accordingly, we believe that 

the final rule permits boards and 

valuation designees sufficient flexibility 

to design their fair value determination 

process as appropriate for the 

investments held by the fund. 

4. More Principles-Based Approach 

The final rule mandates the 

performance of certain prescribed 

functions to determine the fair value of 

fund investments in good faith. As 

suggested by many commenters, we 

considered an alternative with a more 

principles-based approach that would 

not specify the types of fair value 

functions that must be performed, but 

instead would only state that funds 

should have in place practices, policies 

and procedures, reporting, and 

recordkeeping that would allow fair 

values to be determined in good faith by 

the board of directors or the valuation 

designee. For example, funds would 

have greater discretion to apply more or 

less rigorous valuation requirements on 

fair value determinations of investments 

that rely on level 2 inputs, including 

treating certain such investments as 

having readily available market 

quotations, depending on what the fund 

deemed to be appropriate.631

The benefits of such an approach 

would be that funds would have more 

flexibility in what their policies and 

procedures, reporting, and 

recordkeeping cover. To the extent this 

alternative would reduce certainty for 

funds, it could increase compliance 

costs to the detriment of fund investors. 

Further, a less prescriptive approach 

would not adequately ensure that the 

board provides sufficient oversight over 

the valuation designee’s fair value 

determinations.632 In addition, if certain 

funds within a fund complex were to 

use the additional flexibility afforded by 

a more principles-based approach to set 

up practices, policies and procedures, 

reporting, and recordkeeping 

arrangements that are different from one 

another, such flexibility could increase 

the cost of board oversight. This could 

occur because a board that is shared 

across funds within a fund complex 

may not be able to apply a similar 

framework across the various funds it 

oversees or because a board believes 

that the principles-based requirements 

could be satisfied with respect to a 

particular fund only using different 

practices, policies and procedures, 

reporting, and recordkeeping 

arrangements. However, such flexibility 

would provide funds and boards 

themselves the option to evaluate the 

tradeoffs among, for example, nonuniform arrangements across funds, 

more tailored and effective reporting, 

corresponding increased costs of board 

oversight, and corresponding increased 

costs of compliance. Thus each fund 

could make a choice that is more 

aligned with its goals and constraints, 

including regulatory constraints, than 

under a less principles-based 

arrangement. 

A more principles-based approach 

would not mandate a minimum, 

consistent framework for fair value and 

standard of baseline practices across 

funds, which we believe is inherent in 

any good faith fair value determination 

process. For these reasons, we are not 

adopting this alternative. 

5. Designation of the Performance of 

Fair Value Determinations to Service 

Providers Other Than Advisers, 

Officers, Trustees, or Depositors 

Under the final rule, the board may 

designate the adviser of the fund, or an 

officer or officers of an internally 

managed fund, to perform fair value 

determinations. For UITs, trustees or 

depositors of a UIT or other entities 

appointed by existing UITs will perform 

fair value determinations. The valuation 

designee carries out all of the functions 

required under the final rule. As an 

alternative, we considered allowing the 

board to designate sub-advisers or 

service providers other than the adviser 

or an officer or officers, and providing 

for parties other than trustees or 

depositors of a UIT, such as a pricing 

service, to perform fair value 

determinations. Such an approach 

would provide additional flexibility to 

the board. As noted by commenters, 

pricing service providers currently 

provide evaluated prices extensively to 

funds, many of which use these prices 

as fair values for the purposes of the 

Act.633 This could also help in a 

situation where the adviser’s conflicts 

and a pricing service’s comparative 

expertise make designation of the 

adviser less desirable and designation of 

the pricing service more beneficial. 

Likewise, the board might also choose to 

designate to a party such as a pricing 

service because the board assesses that 

the conflicts of interest with the pricing 

service are less extensive, less 

problematic, or more feasibly managed 

than those with an adviser or officers of 

the fund. 

Nevertheless, such an approach 

potentially could limit a board’s ability 

to oversee effectively the service 

provider that performs the fair value 


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634See supra footnotes 157–158 and 

accompanying text. 

635 44 U.S.C. 3501 through 3520. 

636 44 U.S.C. 3507(d); 5 CFR 1320.11. 

637The Commission’s estimates of the relevant 

wage rates in the tables below are based on salary 

information for the securities industry compiled by 

the Securities Industry and Financial Markets 

Association’s Office Salaries in the Securities 

Industry 2013. The estimated wage figures are 

modified by Commission staff to account for an 

1,800-hour work-year and inflation, and multiplied 

by 5.35 for professional staff and 2.93 for clerical 

staff to account for bonuses, firm size, employee 

benefits, overhead, and adjusted to account for the 

effects of inflation. See Securities Industry and 

Financial Markets Association, Report on 

Management & Professional Earnings in the 

Securities Industry 2013 (‘‘SIFMA Report’’). 

638Rule 2a–5(b). 

639See Rule 2a–5(e)(1) (defining ‘‘fund’’). 

640See supra footnotes 508–509 and 

accompanying text. 

determinations to the extent that the 

board does not have the same level of 

visibility, access to information, and 

control over the actions of service 

providers other than the valuation 

designee as provided in the final rule. 

Further, even though service providers 

may have a contractual obligation to 

perform valuation services for the fund, 

those service providers may not owe the 

same fiduciary duty to the fund that an 

adviser would, and thus their obligation 

to serve the fund’s best interests may be 

more limited than the adviser’s. We also 

believe, as discussed above, that it is 

important for the valuation designee to 

have a direct relationship with the 

fund’s board and have comprehensive 

and direct knowledge of the fund.634

Although the final rule allows some 

persons besides advisers to perform fair 

value determinations (e.g., officers of 

internally managed funds and trustees 

and depositors of UITs) who also 

generally have a fiduciary duty, we 

believe that retaining responsibility 

with a more closely associated person is 

more likely to increase accountability 

than a third-party service provider. 

Hence, such an alternative approach 

could compromise the integrity of the 

fair values by increasing the likelihood 

of conflicts with the adviser. 

While some pricing services are also 

registered investment advisers, such 

pricing services would not necessarily 

owe the same fiduciary duties to a fund 

if they are not the investment adviser for 

the fund, and may have conflicts of 

interest that are more difficult to 

mitigate to the extent that the role of fair 

value determination and portfolio 

management are integrated. Further, in 

cases where a single pricing service 

cannot perform fair value 

determinations for all assets, the process 

and oversight could become extremely 

burdensome for funds and their boards. 

Finally, nothing in the final rule 

prevents other service providers, such 

as pricing services, from continuing to 

provide significant input and assistance, 

much as they do today, on fair value 

determinations. However, retaining 

direct responsibility with an adviser or 

more closely affiliated designee is more 

likely to increase accountability and 

oversight over these other service 

providers. 

6. Not Permit Boards To Designate a 

Valuation Designee 

As discussed in more detail above, 

unlike the current regulatory 

framework, the final rule permits fund 

boards to designate the performance of 

fair value determinations to a valuation 

designee. In addition, relative to the 

current regulatory framework, rules 2a– 

5 and 31a–4 will mandate more specific 

fair value practices, reporting, and 

recordkeeping. As an alternative to 

these rule, we considered not permitting 

fund boards to designate a valuation 

designee to perform fair value 

determinations for the fund but instead 

only requiring funds to adopt the 

practices, reporting, and recordkeeping 

as described in the final rule. We also 

considered requiring boards 

periodically to ratify the fair value 

determinations calculated by the fund’s 

valuation designee using a methodology 

determined by the board. Such an 

approach could prescribe minimum 

requirements with respect to valuation 

practices, reporting, and recordkeeping. 

Nevertheless, such an approach would 

not allow funds the flexibility to 

leverage the fair value expertise of the 

valuation designee and assign a role to 

the fund’s board that is more in line 

with the board’s experience and 

expertise. Consequently, we believe that 

such an approach would not result in 

more efficient use of boards’ time and 

more efficient fund operations, and 

would not result in improvements in 

fund governance, nor would it 

ultimately benefit fund investors. 

IV. Paperwork Reduction Act 

A. Introduction 

Certain provisions of rules 2a–5 and 

31a–4 contain ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995 (‘‘PRA’’).635 We are 

submitting the collections of 

information to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA.636

The title for the existing collection of 

information is ‘‘Investment Company 

Act Rule 38a–1, 17 CFR 270.38a–1, 

Compliance procedures and practices of 

registered investment companies’’ (OMB 

Control No. 3235–0586). We are also 

submitting a new collection of 

information for rules 2a–5 and 31a–4. 

The titles for the new collections of 

information will be ‘‘Rule 2a–5 under 

the Investment Company Act of 1940, 

Fair Value’’ and ‘‘Rule 31a–4 under the 

Investment Company Act of 1940, 

Records of Fair Value Determinations.’’ 

An agency may not conduct or sponsor, 

and a person is not required to respond 

to, a collection of information unless it 

displays a currently valid control 

number. 

We discuss below the collection of 

information burdens associated with 

new rules 2a–5, 31a–4, and their impact 

on the burdens of rule 38a–1.637 Rule 

2a–5 will provide requirements for 

determining fair value in good faith for 

purposes of section 2(a)(41) and rule 2a– 

4 thereunder and rule 31a–4 will 

provide the recordkeeping requirements 

associated with this rule. 

B. Rule 2a–5 

Rule 2a–5 will provide requirements 

for determining fair value in good faith 

for purposes of section 2(a)(41) and rule 

2a–4 thereunder. This determination 

will involve assessing and managing 

material risks associated with fair value 

determinations; selecting, applying, and 

testing fair value methodologies; and 

evaluating any pricing services used. 

The final rule will permit a fund’s board 

of directors to designate the 

performance of fair value 

determinations relating to any or all 

fund investments to a valuation 

designee, which will carry out all of 

these requirements, subject to board 

oversight and certain reporting and 

other requirements designed to facilitate 

the board’s ability effectively to oversee 

the valuation designee’s fair value 

determinations. As relevant here, the 

final rule will require, if the board 

designates performance of fair value 

determinations to a valuation designee, 

that the valuation designee report to the 

board in both periodic and as needed 

reports on a per-fund basis.638

The respondents to rule 2a–5 will be 

registered investment companies and 

BDCs.639 We estimate that 9,804 funds 

will be affected by rule 2a–5, of which 

9,335 are not UITs.640 Compliance with 

rule 2a–5 will be mandatory for any 

fund that will need to determine fair 

value under the Act. To the extent that 

records will be required to be created 

and maintained under the final rule are 

provided to the Commission in 

connection with examinations or 

investigations, such information will be 


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641See Sullivan Comment Letter; TRP Comment 

Letter; SIFMA AMG Comment Letter; American 

Trustees Comment Letter; see also Capital Group 

Comment Letter; Guggenheim Trustees Comment 

Letter. 642See supra section II.B.2. 

643See supra footnotes 508–509 and 

accompanying text. 

kept confidential subject to the 

provisions of applicable law. 

Table 3 below summarizes the PRA 

initial and ongoing burden estimates 

associated with the board reporting 

requirements under the final rule, as 

well as the proposed burden estimates. 

Some commenters argued that the 

burden estimates as proposed for this 

requirement were too low, arguing in 

particular that the cost to produce the 

items that would have been required on 

a quarterly basis as part of the proposed 

periodic reporting requirements would 

be in excess of what we had assumed 

due to burdens of both creating these 

reports and of reviewing them on the 

part of the board.641 While we have 

clarified that certain reporting that 

commenters thought was suggested in 

the proposed rule will not be required 

in the final rule and made other changes 

to address these concerns,642 we are 

nonetheless increasing our estimates for 

the final rule in consideration of these 

comments. We also have corrected 

certain estimates, specifically to include 

an initial burden as we believe the final 

rule will impose some start-up burdens 

and to update the wage rates for relevant 

personnel. We have also updated the 

estimated number of respondents based 

upon updated data.643 Lastly, we 

increased the estimated amount of 

external cost burden to include costs 

relating to both legal and accounting 

services as the proposed estimate only 

estimated external costs relating to legal 

expenses. 

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644Rule 31a–4(a). 

645Rule 31a–4(b). 

646See Rule 2a–5(e)(1) (defining ‘‘fund’’). 

647See supra footnotes 508–509 and 

accompanying text. 

648See, e.g., ICI Comment Letter; Fidelity 

Comment Letter; Vanguard Comment Letter; 

Guggenheim Comment Letter; Guggenheim Trustees 

Comment Letter. But see Davidson Comment Letter 

(suggesting that the Commission provided ample 

reason to believe that the costs of compliance 

would be on the smaller side). 

649See, e.g., ICI Comment Letter; IDC Comment 

Letter; SSGA Comment Letter; Fidelity Comment 

Letter; TRP Comment Letter; John Hancock 

Comment Letter; ICE Data Comment Letter (noting 

that pricing services would need to increase fees to 

compensate for the demands for records under the 

proposed regime). 

650See Guggenheim Trustees Letter; Guggenheim 

Comment Letter. 

651See supra section II.C. 

652See supra footnotes 508–509 and 

accompanying text. 

BILLING CODE 8011–01–C 

C. Rule 31a–4 

Rule 31a–4 contains the 

recordkeeping requirements associated 

with rule 2a–5. Specifically, registered 

investment companies and BDCs, or 

their advisers, will be required to 

maintain appropriate documentation to 

support fair value determinations made 

pursuant to rule 2a–5.644 Further, if the 

board of the fund designates 

performance of fair value 

determinations to a valuation designee 

under the final rule, the fund or adviser 

will need to maintain certain additional 

records relating to that designation.645

The respondents to rule 31a–4 will be 

registered investment companies and 

BDCs.646 We estimate that 9,804 funds 

will be affected by rule 31a–4.647

Compliance with rule 31a–4 will be 

mandatory for any fund that will need 

to determine fair value under the Act. 

To the extent that records that will be 

required to be created and maintained 

under this rule are provided to the 

Commission in connection with 

examinations or investigations, such 

information will be kept confidential 

subject to the provisions of applicable 

law. 

Table 4 below summarizes the PRA 

initial and ongoing burden estimates 

associated with the rule, as well as the 

proposed burden estimates. Some 

commenters argued that the burden 

estimates as proposed for this 

requirement were too low.648

Specifically, these commenters stated 

that the proposed requirement to 

maintain documentation to support fair 

value determinations, including 

information regarding the specific 

methodologies applied and the 

assumptions and inputs considered 

when making fair value determinations, 

would result in the valuation designee 

needing to obtain significant amounts of 

data that it would not otherwise obtain 

and retain it when it utilizes a pricing 

service,649 and would require funds or 

valuation designees to hire additional 

personnel to be able to comply.650

While we have clarified that certain 

recordkeeping that commenters thought 

was suggested in the proposed rule will 

not be required in rule 31a–4 as adopted 

and made other changes to address 

these concerns,651 we are nonetheless 

significantly increasing our estimates for 

this rule in consideration of these 

comments. We have also updated the 

estimated number of respondents based 

upon updated data.652 We also further 

revised certain estimates, specifically to 

include the likely involvement of a 

compliance attorney in the formulation 

of policies and procedures relating to 

this requirement and to update the wage 

rates for relevant personnel. 

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653See supra section II.A.5. 654This estimate is based on the last time the 

rule’s information collection was submitted for PRA 

renewal in 2020. 

BILLING CODE 8011–01–C 

D. Rule 38a–1 

As discussed above, after our 

adoption of rules 2a–5 and 31a–4, rule 

38a–1 will require the adoption and 

implementation of written policies and 

procedures reasonably designed to 

prevent violations of the requirements 

of the rules.653 To comply with rule 

38a–1, these policies and procedures 

must be tailored to rules 2a–5 and 31a– 

4’s requirements to ensure that a board 

or valuation designee, as applicable, 

determines the fair value of fund 

investments in compliance with the 

rules. In our most recent PRA 

submission for rule 38a–1, we estimated 

for rule 38a–1 a total hour burden of 

235,720 hours, at a time cost of 

$86,784,720, and no external 

burdens.654

The table below summarizes the PRA 

initial and ongoing burden estimates 

associated with the new fair value 

policies and procedures. 

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655 5 U.S.C. 604. 

656See Proposing Release, supra footnote 2, at 

section V. 

BILLING CODE 4011–01–C 

V. Final Regulatory Flexibility Analysis 

The Commission has prepared the 

following Final Regulatory Flexibility 

Analysis (‘‘FRFA’’) in accordance with 

section 604 of the Regulatory Flexibility 

Act (‘‘RFA’’).655 It relates to new rules 

2a–5 and 31a–4. An Initial Regulatory 

Flexibility Analysis (‘‘IRFA’’) was 

prepared in accordance with the RFA 

and included in the Proposing 

Release.656


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657Under the final rule, the valuation designee 

must be a fund’s adviser or, if the fund is internally 

managed, an officer of the fund. The trustee or 

depositor of a UIT (or in the case of existing UITs 

another entity designated to do so in the UIT’s 

documentation), which does not have a board, will 

perform fair value determinations. 

658As a result of the adoption of rule 2a–5, under 

rule 38a–1 funds or the adviser must adopt and 

implement policies and procedures reasonably 

designed to comply with rule 2a–5. 

659For internally managed funds, the board may 

designate an officer or officers of the fund to 

perform fair value determinations. 

660See supra sections I, II.A, and II.D. 

661See supra section II.B. 

662See supra sections II.A.5 II.C. 

663See supra section III and IV. These sections 

also discuss the professional skills that we believe 

compliance with the rules will entail. 

664 IDC Comment Letter. 

665ABA Comment Letter. 

666Sullivan Comment Letter. See also ICI 

Comment Letter. 667Murphy Comment Letter. 668NYC Bar Comment Letter. 669See supra text accompanying footnote 13. 670See supra section II.B.2 (noting that the final 

rule will require a quarterly summary or description 

of material fair value matters that occurred in the 

prior quarter while the annual report will include 

an assessment of the adequacy and effectiveness of 

the valuation designee’s process for determining the 

fair value of designated investments). 

671Sullivan Comment Letter. 

A. Need for the Rules 

The Commission is adopting new rule 

2a–5 in order to address practices and 

the role of the board of directors with 

respect to the fair value of the 

investments of the fund. The 

Commission is also adopting rule 31a– 

4 to address the recordkeeping 

requirements associated with rule 2a–5. 

Under section 2(a)(41), the board must 

determine in good faith the fair value of 

fund assets for which no market 

quotations are readily available. Rule 

2a–5 is designed to specify how a board 

or valuation designee, as applicable, 

must make good faith determinations of 

fair value as well as when the board can 

designate the performance of these 

determinations to a valuation designee, 

while still ensuring that fund 

investments are valued in a way 

consistent with the Investment 

Company Act.657

Rule 2a–5 will provide requirements 

for determining fair value in good faith 

for purposes of section 2(a)(41) of the 

Act and rule 2a–4 thereunder. This 

determination will be required to 

involve: Assessing and managing 

material risks associated with fair value 

determinations; selecting, applying, and 

testing fair value methodologies; 

evaluating any pricing services used; 

and maintaining certain records 

required by rule 31a–4.658 The rules will 

permit a fund’s board of directors to 

designate the performance of these 

requirements to a valuation designee for 

some or all of the fund’s investments, 

subject to board oversight and certain 

reporting, recordkeeping, and other 

requirements designed to facilitate the 

board’s ability effectively to oversee the 

valuation designee’s fair value 

determinations.659 Rule 2a–5 will also 

define when market quotations are 

readily available under section 2(a)(41) 

of the Act. Lastly, rule 2a–5 will have 

the trustee or depositor of a UIT (or in 

the case of existing UITs another entity 

designated to do so in the UIT’s 

documentation) carry out the 

requirements of the rules. The 

requirements of rule 2a–5 associated 

with the fair value as determined in 

good faith and readily available market 

quotations are designed to create a 

minimum, consistent framework for fair 

value and standard of baseline practices 

across funds, and reflects our 

understanding of current market 

practices.660 The requirements of rule 

2a–5 associated with the designation of 

the performance of responsibilities to a 

valuation designee are designed to 

ensure that the board effectively 

oversees such valuation designee, 

including receiving sufficient 

information to do so.661 The 

recordkeeping requirements of rule 31a– 

4 are designed to help ensure 

compliance with the other 

requirements.662

All of these requirements are 

discussed in detail in section II of this 

release. The costs and burdens of these 

requirements on small funds are 

discussed below as well as above in our 

Economic Analysis and Paperwork 

Reduction Act Analysis, which discuss 

the applicable costs and burdens on all 

funds.663

B. Significant Issues Raised by Public 

Comments 

In the Proposing Release, we 

requested comment on every aspect of 

the IRFA, including the number of small 

entities that would be affected by the 

proposed rule, the existence or nature of 

the potential impact of the proposal on 

small entities discussed in the analysis, 

and how to quantify the impact of the 

proposed rule. We also requested 

comment on the proposed compliance 

burdens and the effect these burdens 

would have on smaller entities. 

Although we did not receive 

comments specifically addressing the 

IRFA, some commenters noted the 

impact of certain aspects of proposed 

rule 2a–5 on smaller funds. For 

example, one commenter suggested that 

we allow funds to assign fair value 

determinations to entities other than the 

adviser, such as the fund’s 

administrator, to make it easier for 

smaller funds to comply with the 

proposed rule.664 Another commenter 

argued that we should adopt a more 

principles-based approach that would 

be less burdensome on smaller funds.665

Additionally, a few commenters stated 

that the proposed quarterly reporting 

requirement would be unnecessarily 

burdensome, including for smaller 

funds, because many of the valuation 

issues described in the Proposing 

Release are unlikely to change on a 

quarterly basis.666 Furthermore, with 

regard to the requirement that certain 

valuation issues be reported promptly to 

the fund’s board, one commenter 

suggested that we allow one of the 

independent directors on the board to 

receive these reports to make the 

requirement less burdensome for small 

funds.667 Finally, one commenter 

suggested that the recordkeeping 

requirements of the proposed rule 2a–5 

was duplicative with the section 31 

rules.668 After considering the 

comments we received, we are adopting 

the rules, with certain modifications 

from the proposal intended to address 

many of the challenges commenters 

identified. 

As discussed above, we believe that it 

is important to establish a minimum 

and consistent framework for fair value 

practices across funds, including for 

small funds.669 Therefore, rule 2a–5 

establishes requirements for engaging in 

fair value determinations that are 

broadly applicable to all funds, 

including small funds, and that we 

believe should be part of any good faith 

fair value determination. However, we 

have made certain modifications to the 

requirements of the proposed rule to 

enhance flexibility and ease certain 

unnecessary burdens. For example, we 

have made certain changes to the 

proposed quarterly reporting 

requirements designed to enhance 

flexibility of reporting to match boards’ 

needs better and to minimize the chance 

that boards receive reporting that is too 

detailed or repetitive to facilitate 

appropriate oversight.670 Additionally, 

in a change from the proposal, which 

would have permitted boards to assign 

only to an adviser of the fund, rule 2a– 

5 will permit boards to designate the 

fund’s adviser to perform fair value 

determinations or, if the fund is 

internally managed, an officer of the 

fund. Furthermore, rule 2a–5 clarifies, 

in response to commenters,671 that the 

board or the valuation designee can seek 

the assistance of other parties that 

provide services that are essential for 

fair value determination, such as a 

pricing service or the fund 


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672See 17 CFR 270.0–10(a) [rule 0–10(a) under 

the Investment Company Act]. 

673None of these registered open-end funds are 

internally managed. 

674 7 of these registered closed-end funds are 

internally managed. 

675 3 of these BDCs are internally managed. 

676This estimate is derived an analysis of data 

obtained from Morningstar Direct as well as data 

reported to the Commission for the period ending 

June 2020. 

677As discussed above, after our adoption of rule 

2a–5, pursuant to rule 38a–1 funds should adopt 

and implement written fair value policies and 

procedures reasonably designed to prevent 

violations of rule 2a–5. See supra section II.A.5. 

678Rule 31a–4(a). Rule 38a–1 also will require 

funds to keep a copy of the fair value policies and 

procedures that are in effect, or were in effect at any 

time within the past five years, in an easily 

accessible place. 

679Rule 31a–4(b). 

680See supra section III.C.3. This section and 

section IV also discuss the professional skills that 

we believe compliance with this aspect of the 

proposal would entail. 

681See supra section III.E. 

682See supra section II.B.2. 

683See supra section III.C.3 and section IV. 

administrator, among others. Finally, 

new rule 31a–4 contains the 

recordkeeping requirements associated 

with rule 2a–5. We believe that these 

modifications will make it less 

burdensome for small funds to comply 

with the rules, while still maintaining 

the integrity of the fair value process 

across all funds. 

C. Small Entities Subject to the Rule 

For purposes of Commission 

rulemaking in connection with the 

Regulatory Flexibility Act, an 

investment company is a small entity if, 

together with other investment 

companies in the same group of related 

investment companies, it has net assets 

of $50 million or less as of the end of 

its most recent fiscal year (a ‘‘small 

fund’’).672 Commission staff estimates 

that, as of June 2020, approximately 40 

registered open-end mutual funds,673 8 

registered ETFs, 26 registered closedend funds,674 2 UITs, and 12 BDCs 675

(collectively, 88 funds) are small 

entities.676

D. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The rules will require fair value 

determinations under the Act to be 

made according to a specific process for 

affected funds, including those that are 

small entities. This process will include 

a requirement to maintain certain 

records to support fair value 

determinations.677 The rules will permit 

fund boards to designate the valuation 

designee to perform fair value 

determinations if the valuation 

designee, in addition to the above, 

makes certain reports to the fund’s 

board regarding the fair value process in 

writing. Funds will also be required to 

keep certain additional records in such 

circumstances. We therefore believe that 

there are two principal reporting, 

recordkeeping, or other compliance 

requirements associated with the rules: 

(1) Recordkeeping requirements and (2) 

board reporting requirements. 

1. Recordkeeping 

The recordkeeping requirements of 

rule 31a–4 are designed to help ensure 

compliance with rule 2a–5’s 

requirements and aid in oversight. Rule 

31a–4 will require the fund to keep 

appropriate documentation to support 

fair value determinations for at least six 

years from the time the determination 

was made, the first two years in an 

easily accessible place.678 Further, 

should the board designate the 

valuation designee to perform fair value 

determinations, the fund must keep, in 

addition to the records above, copies of 

the reports and other information 

provided to the board for at least six 

years after the end of the fiscal year in 

which the documents were made, the 

first two years in an easily accessible 

place and a specified list of the 

investments or investment types whose 

fair value determination has been 

designated to the valuation designee, in 

each case for at least six years after the 

end of the fiscal year in which the 

determinations were provided to the 

board or the investments or investment 

types were designated to the valuation 

designee, the first two years in an 

accessible place.679

These requirements will impose 

burdens on all funds, including those 

that are small entities. The specifics of 

these burdens are discussed in the 

Economic Analysis and Paperwork 

Reduction Act sections above.680 There 

are different factors that would affect 

whether a smaller fund incurs costs 

relating to this requirement that are on 

the higher or lower end of the estimated 

range. For example, we would expect 

that smaller funds—and more 

specifically, smaller funds that are not 

part of a fund complex—may not have 

recordkeeping systems that meet all the 

elements that are required under this 

rule. Also, while larger funds or funds 

that are part of a large fund complex 

may incur higher costs related to these 

requirements in absolute terms relative 

to a smaller fund or a fund that is part 

of a smaller fund complex, a smaller 

fund may find it more costly, per dollar 

managed, to comply with the 

requirements because it will not be able 

to benefit from a larger fund complex’s 

economies of scale.681

2. Board Reporting 

The requirement for board reporting 

by the valuation designee is designed to 

ensure that the board can exercise 

sufficient oversight over the fair value 

process. The final rule will require two 

general types of reports, periodic reports 

and prompt reports. Periodic reports 

rule will require the valuation designee 

to make both annual and quarterly 

written reports to the board. The 

quarterly reports must include any 

specific reports or materials boards 

request related to the fair value of 

designated investments or the valuation 

designee’s process for fair valuing fund 

investments. In addition, the final rule 

requires a quarterly summary or 

description of material fair value 

matters that occurred in the prior 

quarter, including some specific 

summaries and descriptions. The final 

rule will also require an annual 

assessment of the adequacy and 

effectiveness of the valuation designee’s 

process for determining the fair value of 

designated investments. The prompt 

reporting requirement will require the 

valuation designee to provide a written 

notification of the occurrence of matters 

associated with the valuation designee’s 

process that materially affect the fair 

value of the designated portfolio of 

investments (defined as ‘‘material 

matters’’) within a time period 

determined by the board, but in no 

event later than five business days after 

the valuation designee becomes aware 

of the material matter. Material matters 

in this instance include an assessment 

of a significant deficiency or material 

weakness in the design or effectiveness 

of the valuation designee’s fair value 

determination process or of material 

errors in the calculation of net asset 

value. The valuation designee must also 

provide such timely follow-on reports as 

the board may reasonably determine 

appropriate.682

These requirements will impose 

burdens on all funds, including those 

that are small entities. The specifics of 

these burdens are discussed in the 

Economic Analysis and Paperwork 

Reduction Act sections above.683 There 

are different factors that will affect 

whether a smaller fund incurs costs 

related to this requirement that are on 

the higher or lower end of the estimated 

range. For example, smaller funds—and 

more specifically, smaller funds that are 

not part of a fund complex—may not 

have an advisory agreement that has a 

reporting mechanism that meets all the 

elements that will be required under the 


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684See supra section III.C.1. 

685See supra footnote 508 and accompanying 

text. 

final rule. Also, while larger funds or 

funds that are part of a large fund 

complex may incur higher costs, via 

increased advisory fees for valuation 

designees to take on this responsibility 

on behalf of such funds, related to this 

requirement in absolute terms relative to 

a smaller fund or a fund that is part of 

a smaller fund complex, a smaller fund 

may find it more costly, per dollar 

managed, to comply with the final 

requirement because it will not be able 

to benefit from a larger fund complex’s 

economies of scale.684

E. Agency Action To Minimize Effect on 

Small Entities 

The RFA directs the Commission to 

consider significant alternatives that 

would accomplish our stated objective, 

while minimizing any significant 

economic impact on small entities. We 

considered the following alternatives for 

small entities in relation to our 

proposal: (1) Exempting funds that are 

small entities from the proposed 

reporting, recordkeeping, and other 

compliance requirements, to account for 

resources available to small entities; (2) 

establishing different reporting, 

recordkeeping, and other compliance 

requirements or frequency, to account 

for resources available to small entities; 

(3) clarifying, consolidating, or 

simplifying the requirements under the 

proposal for small entities; and (4) using 

performance rather than design 

standards. 

We do not believe that exempting 

small funds from the provisions in the 

rules would permit us to achieve our 

stated objectives, principally to protect 

investors from improper valuations. 

Further, the board reporting and 

additional recordkeeping provisions of 

the rules only affect fund boards that 

designate a valuation designee to 

perform fair value determinations, and, 

therefore, the rules will require funds to 

comply with these specific requirements 

only if the boards designated 

responsibilities to a valuation designee. 

However, we expect that most funds 

holding securities that must be fair 

valued will do so. Therefore, if a board 

to a small entity does not do this and 

instead performs its statutory function 

directly, then the small entity would not 

be subject to these provisions of the 

rules. 

We estimate that 72% of all funds will 

be subject to the rules in making fair 

value determinations.685 This estimate 

indicates that some funds, including 

some small funds, will be unaffected by 

the rules. However, for small funds that 

are affected by the rules, providing an 

exemption for them could subject 

investors in small funds to a higher 

degree of risk than investors in large 

funds that will be required to comply 

with the elements of the rules. 

As discussed throughout this release, 

we believe that the rules will result in 

investor protection benefits, and these 

benefits should apply to investors in 

smaller funds as well as investors in 

larger funds. We therefore do not 

believe it would be appropriate to 

exempt small funds from the rules’ 

requirements, or to establish different 

requirements applicable to funds of 

different sizes under these provisions to 

account for resources available to small 

entities. We believe that all of the 

elements of the rules should work 

together to produce the anticipated 

investor protection benefits, and 

therefore do not believe it is appropriate 

to except smaller funds because we 

believe this would limit the benefits to 

investors in such funds. 

We also do not believe that it would 

be appropriate to subject small funds to 

different reporting, recordkeeping, and 

other compliance requirements or 

frequency. Similar to the concerns 

discussed above, if the rules included 

different requirements for small funds, 

it could raise investor protection 

concerns for investors in small funds in 

that small funds face the same conflicts 

of interest that can lead to mispricing 

and otherwise harm investors that larger 

funds do. 

We do not believe that clarifying, 

consolidating, or simplifying the 

requirements under the rules for small 

funds, beyond that already adopted for 

all funds, would permit us to achieve 

our stated objectives. Again, this 

approach would raise investor 

protection concerns for investors in 

small funds. We believe, as outlined 

above in the discussion of the rules and 

the guidance contained in this release, 

that the requirements of the rules are, to 

some extent, current industry practice 

under existing rules, with some changes 

from current practice. As a result, we 

think that the rules could result in a 

reduction in the current burdens 

experienced by small entities to the 

extent that they are subject to the rules. 

The costs associated with rules 2a–5 

and 31a–4 will vary depending on a 

fund’s particular circumstances, and 

thus the rules could result in different 

burdens on funds’ resources. In 

particular, we expect that a fund that 

does not have reporting or 

recordkeeping practices similar to those 

that will required by the rules would 

need to modify those practices. Thus, to 

the extent a fund that is a small entity 

already has a fair value process that is 

consistent with the requirements of the 

rules, we believe it will incur relatively 

low costs to comply with it. However, 

we believe that it is appropriate to 

correlate the costs associated with the 

rules with the fund’s actual fair value 

process, and not necessarily with the 

fund’s size in light of our investor 

protection objectives. 

Finally, with respect to the use of 

performance rather than design 

standards, the rules generally use design 

standards for all funds subject to the 

rules, regardless of size. We believe that 

providing funds with the flexibility 

permitted in the rules with respect to 

designing specific fair value process is 

appropriate because of the fact-specific 

nature of making fair value 

determinations. 

VI. Update to Codification of Financial 

Reporting Policies 

The Commission amends the 

‘‘Codification of Financial Reporting 

Policies’’ announced in Financial 

Reporting Release No. 1 (April 15, 1982) 

[47 FR 21028 (May 17, 1982]) as follows: 

1. By removing and reserving Section 

404.03. 

2. By removing and reserving Section 

404.04. 

3. By amending Section 404.05.c.2. as 

follows: 

a. By removing the last paragraph 

under the subject heading ‘‘Fair Value 

for Thinly Traded Securities.’’ 

b. By removing the subject heading 

‘‘Use of Pricing Services’’ and the 

paragraphs included below that subject 

heading. 

The Codification is a separate 

publication of the Commission. It will 

not be published in the Federal Register 

or Code of Federal Regulations. For 

more information on the Codification of 

Financial Reporting Policies, contact the 

Commission’s Public Reference Room at 

(202) 551–5450. 

Statutory Authority 

The Commission is adopting rules 2a– 

5 and 31a–4 under the authority set 

forth in sections 2(a), 6(c), 31(a), 31(c), 

38(a), 59, and 64(a) of the Investment 

Company Act of 1940 [15 U.S.C. 80a– 

2(a), 80a–6(c), 80a–30(a), 80a–31(c), 

80a–37(a), 80a–58, and 80a–63(a)]. 

List of Subjects 

17 CFR Part 210 

Accountants, Accounting, Banks, 

Banking, Employee benefit plans, 

Holding companies, Insurance 

companies, Investment companies, Oil 

and gas exploration, Reporting and 


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recordkeeping requirements, Securities, 

Utilities. 

17 CFR Part 270 

Investment companies, Reporting and 

recordkeeping requirements, Securities. 

Text of Rule Amendments 

For the reasons set out in the 

preamble, we are amending title 17, 

chapter II of the Code of Federal 

Regulation as follows: 

PART 210—FORM AND CONTENT OF 

AND REQUIREMENTS FOR FINANCIAL 

STATEMENTS, SECURITIES ACT OF 

1933, SECURITIES EXCHANGE ACT 

OF 1934, INVESTMENT COMPANY ACT 

OF 1940, INVESTMENT ADVISERS ACT 

OF 1940, AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975 

■ 1. The authority citation for part 210 

continues to read as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 

77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77nn(25), 77nn(26), 78c, 78j–1, 78l, 78m, 

78n, 78o(d), 78q, 78u–5, 78w, 78ll, 78mm, 

80a–8, 80a–20, 80a–29, 80a–30, 80a–31, 80a– 

37(a), 80b–3, 80b–11, 7202 and 7262, and 

sec. 102(c), Pub. L. 112–106, 126 Stat. 310 

(2012), unless otherwise noted. 

■ 2. Amend § 210.6–03 by revising 

paragraph (d) to read as follows: 

§ 210.6–03 Special rules of general 

application to registered investment 

companies and business development 

companies. 

* * * * * 

(d) Valuation of investments. The 

balance sheets of registered investment 

companies, other than issuers of faceamount certificates, and business 

development companies, shall reflect all 

investments at value, with the aggregate 

cost of each category of investment 

reported under § 210.6–04 subsection 1, 

2, 3, and 9 or the aggregate cost of each 

category of investment reported under 

§ 210.6–05 subsection 1 shown 

parenthetically. State in a note the 

methods used in determining the value 

of investments. As required by section 

28(b) of the Investment Company Act of 

1940 (15 U.S.C. 80a–28(b)), qualified 

assets of face-amount certificate 

companies shall be valued in 

accordance with certain provisions of 

the Code of the District of Columbia. 

* * * * * 

PART 270—RULES AND 

REGULATIONS, INVESTMENT 

COMPANY ACT OF 1940 

■ 3. The general authority citation for 

part 270 continues to read as follows: 

Authority: 15 U.S.C. 80a–1 et seq., 80a– 

34(d), 80a–37, 80a–39, and Pub. L. 111–203, 

sec. 939A, 124 Stat. 1376 (2010), unless 

otherwise noted. 

* * * * * 

■ 4. Add § 270.2a–5 to read as follows: 

§ 270.2a–5 Fair value determination and 

readily available market quotations. 

(a) Fair value determination. For 

purposes of section 2(a)(41) of the Act 

(15 U.S.C. 80a–2(a)(41)) and § 270.2a–4, 

determining fair value in good faith 

with respect to a fund requires: 

(1) Assess and manage risks. 

Periodically assessing any material risks 

associated with the determination of the 

fair value of fund investments 

(‘‘valuation risks’’), including material 

conflicts of interest, and managing those 

identified valuation risks; 

(2) Establish and apply fair value 

methodologies. Performing each of the 

following, taking into account the fund’s 

valuation risks: 

(i) Selecting and applying in a 

consistent manner an appropriate 

methodology or methodologies for 

determining (and calculating) the fair 

value of fund investments, provided 

that a selected methodology may be 

changed if a different methodology is 

equally or more representative of the 

fair value of fund investments, 

including specifying the key inputs and 

assumptions specific to each asset class 

or portfolio holding; 

(ii) Periodically reviewing the 

appropriateness and accuracy of the 

methodologies selected and making any 

necessary changes or adjustments 

thereto; and 

(iii) Monitoring for circumstances that 

may necessitate the use of fair value; 

(3) Test fair value methodologies. 

Testing the appropriateness and 

accuracy of the fair value methodologies 

that have been selected, including 

identifying the testing methods to be 

used and the minimum frequency with 

which such testing methods are to be 

used; and 

(4) Evaluate pricing services. 

Overseeing pricing service providers, if 

used, including establishing the process 

for approving, monitoring, and 

evaluating each pricing service provider 

and initiating price challenges as 

appropriate. 

(b) Performance of fair value 

determinations. The board of the fund 

must determine fair value in good faith 

for any or all fund investments by 

carrying out the functions required in 

paragraph (a) of this section. The board 

may choose to designate the valuation 

designee to perform the fair value 

determination relating to any or all fund 

investments, which shall carry out all of 

the functions required in paragraph (a) 

of this section, subject to the 

requirements of this paragraph (b). 

(1) Oversight and reporting. The board 

oversees the valuation designee, and the 

valuation designee reports to the fund’s 

board, in writing, including such 

information as may be reasonably 

necessary for the board to evaluate the 

matters covered in the report, as 

follows: 

(i) Periodic reporting. (A) At least 

quarterly: 

(1) Any reports or materials requested 

by the board related to the fair value of 

designated investments or the valuation 

designee’s process for fair valuing fund 

investments; and 

(2) A summary or description of 

material fair value matters that occurred 

in the prior quarter, including: 

(i) Any material changes in the 

assessment and management of 

valuation risks required under 

paragraph (a)(1) of this section, 

including any material changes in 

conflicts of interest of the valuation 

designee (and any other service 

provider); 

(ii) Any material changes to, or 

material deviations from, the fair value 

methodologies established under 

paragraph (a)(2) of this section; and 

(iii) Any material changes to the 

valuation designee’s process for 

selecting and overseeing pricing 

services, as well as any material events 

related to the valuation designee’s 

oversight of pricing services; and 

(B) At least annually, an assessment of 

the adequacy and effectiveness of the 

valuation designee’s process for 

determining the fair value of the 

designated portfolio of investments, 

including, at a minimum: 

(1) A summary of the results of the 

testing of fair value methodologies 

required under paragraph (a)(3) of this 

section; and 

(2) An assessment of the adequacy of 

resources allocated to the process for 

determining the fair value of designated 

investments, including any material 

changes to the roles or functions of the 

persons responsible for determining fair 

value under paragraph (b)(2) of this 

section; and 

(ii) Prompt board notification and 

reporting. The valuation designee 

notifies the board of the occurrence of 

matters that materially affect the fair 

value of the designated portfolio of 

investments, including a significant 

deficiency or material weakness in the 

design or effectiveness of the valuation 

designee’s fair value determination 

process, or material errors in the 

calculation of net asset value, (any such 

matter or error, a ‘‘material matter’’) 

within a time period determined by the 


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board (but in no event later than five 

business days after the valuation 

designee becomes aware of the material 

matter), with such timely follow-on 

reporting as the board may determine 

appropriate; and 

(2) Specify responsibilities. The 

valuation designee specifies the titles of 

the persons responsible for determining 

the fair value of the designated 

investments, including by specifying the 

particular functions for which they are 

responsible, and reasonably segregates 

fair value determinations from the 

portfolio management of the fund such 

that the portfolio manager(s) may not 

determine, or effectively determine by 

exerting substantial influence on, the 

fair values ascribed to portfolio 

investments. 

(c) Readily available market 

quotations. For purposes of section 

2(a)(41) of the Act (15 U.S.C. 80a– 

2(a)(41)), a market quotation is readily 

available only when that quotation is a 

quoted price (unadjusted) in active 

markets for identical investments that 

the fund can access at the measurement 

date, provided that a quotation will not 

be readily available if it is not reliable. 

(d) Unit investment trusts. If the fund 

is a unit investment trust, and the initial 

deposit of portfolio securities into the 

unit investment trust occurs after March 

8, 2021, the fund’s trustee or depositor 

must carry out the requirements of 

paragraph (a) of this section. If the 

initial deposit of portfolio securities into 

the unit investment trust occurred 

before March 8, 2021, and an entity 

other than the fund’s trustee or 

depositor has been designated to carry 

out the fair value determination, that 

entity must carry out the requirements 

of paragraph (a) of this section. 

(e) Definitions. For purposes of this 

section: 

(1) Fund means a registered 

investment company or business 

development company. 

(2) Fair value means the value of a 

portfolio investment for which market 

quotations are not readily available 

under paragraph (c) of this section. 

(3) Board means either the fund’s 

entire board of directors or a designated 

committee of such board composed of a 

majority of directors who are not 

interested persons of the fund. 

(4) Valuation designee means the 

investment adviser, other than a subadviser, of a fund or, if the fund does 

not have an investment adviser, an 

officer or officers of the fund. 

■ 5. Add § 270.31a–4 to read as follows: 

§ 270.31a–4 Records to be maintained and 

preserved by registered investment 

companies relating to fair value 

determinations. 

(a) Appropriate documentation. Every 

registered investment company shall 

maintain appropriate documentation to 

support fair value determinations made 

pursuant to § 270.2a–5 for at least six 

years from the time that the 

determination was made, the first two 

years in an easily accessible place. 

(b) Records when designating. If the 

board of a registered investment 

company has designated performance of 

fair value determinations to a valuation 

designee under § 270.2a–5(b), in 

addition to the records required in 

paragraph (a) of this section, the 

registered investment company must 

maintain copies of: 

(1) The reports and other information 

provided to the board as required under 

§ 270.2a–5(b)(1) for at least six years 

after the end of the fiscal year in which 

the documents were provided to the 

board, the first two years in an easily 

accessible place; and 

(2) A specified list of the investments 

or investment types whose fair value 

determination has been designated to 

the valuation designee to perform 

pursuant to § 270.2a–5(b) for a period 

beginning with the designation and 

ending at least six years after the end of 

the fiscal year in which the designation 

was terminated, in an easily accessible 

place until two years after such 

termination. 

(c) Party to maintain. If the board of 

a registered investment company has 

designated performance of fair value 

determinations to its investment adviser 

under § 270.2a–5(b), such investment 

adviser shall maintain the records 

required by this section. If the 

investment adviser is not so designated, 

the fund shall maintain such records. 

By the Commission. 

Dated: December 3, 2020. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2020–26971 Filed 1–5–21; 8:45 am] 

BILLING CODE 8011–01–P 


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