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2021 fair valuation pricing survey

Opportunity on the horizon

In response to the COVID-19 pandemic and other recent events, valuation policies, board governance, operating models, and technology solutions are undergoing change and disruption. Fortunately, this change brings an opportunity to challenge the current valuation process and deliver better outcomes for all industry stakeholders.

A year of disruption and transition for valuation teams and talent

One of the most significant events in recent times is the COVID-19 pandemic. As our latest fair valuation pricing survey was conducted and completed, most fund personnel continued to work virtually. The quick transition of the valuation operating model to a remote environment created the need for fund groups to adopt some temporary controls and procedures, ramp up technology, and digitize the valuation process. Today, fund groups continue to balance plans to return to work and the implications of the Delta variant.

Should the valuation team come to the office five days a week? Operate on a hybrid model and commute two to three days a week? Or continue to operate on a fully remote basis? The latter back-to-work model has some desirable characteristics beyond the personal satisfaction of no commute. Valuation teams occasionally need to work late to wrap up the valuation process due to late pricing or data feeds. Working on a remote basis may make it easier to balance personal lives with their job responsibilities. Plus, workflow tools and other technology solutions continue to present opportunities to optimize the process.

New regulatory rules will require change

The most significant recent regulatory event affecting the valuation process was the US Securities and Exchange Commission’s (SEC) Rule 2a-5, Good Faith Determinations of Fair Value (the FV Rule). The SEC’s finalization of the FV Rule in 2020 marked more than 50 years since the SEC last adopted a major change in fair valuation guidance.

It comes as no surprise that 80% of FV survey participants indicated that the FV Rule will have the biggest impact on—and pose the largest challenge to—the valuation process in the next 12 months. FV survey participants are working specifically on developing a more formal risk assessment exercise concerning enhanced evaluation of fair valuation methodologies and third-party pricing providers, improving board reporting, and recordkeeping compliance requirements. Preparing for such change and creating opportunities in the valuation process is clearly top of mind in order to meet the compliance deadline of September 8, 2022.

As a first step, many fund groups have performed a gap assessment against their current policies and procedures to measure the impact of adopting the FV Rule. Among FV survey participants, 66% indicated they had thus far completed a gap assessment of their current valuation practices as compared with FV Rule requirements. Notably, this finding rises to 84% among larger fund groups with AUM of more than $100M. Less than 50% of FV survey participants with AUM of less than $10 billion have performed a gap analysis to date. Those that have performed an assessment identified the following as the aspects of the rule where the largest gaps exist:

Use of technology solutions is maturing and providing opportunities

We continue to see the maturing use of technology solutions in the fair valuation process and operating model. Working remotely accelerated this trend, and FV Rule opportunities lend themselves to further encourage automation and use of technology. The percentage of FV survey participants that recently adopted the technology solutions increased, with the biggest jumps in the adoption of data analytics and Excel tools. What’s clear is that the value proposition of innovating the valuation operating model through the use of technology in the remote work environment has become a strong trend.

Board governance remains in all stakeholder sights

The FV Rule further clarifies the responsibilities of a mutual fund board and may have been more prescriptive than many anticipated. As it pertains to valuation, mutual fund boards have increased expectations to perform their duties in the form of active oversight. As in years past, the FV survey provides trends in maturing practices when it comes to active oversight, including the initiation of “ad hoc meetings,” explicit valuation policies and procedures that highlight when mutual fund directors “must be involved” and/or “must be notified,” and risk-based reporting.

However, there were no significant changes in board processes year-over-year, likely in anticipation of making changes with adoption of the FV Rule.

Looking ahead

Fund groups have the opportunity now and through the FV Rule compliance date of September 8, 2022 to make changes. We believe forming a working group made up of many voices and functions may be the best way to optimize implementation of the FV Rule. Looking beyond the goal of regulatory compliance with the FV Rule to opportunities to strengthen the valuation operating model, technology tools will provide long-lasting efficiency and control. Along the valuation journey, frequent touchpoints and collaboration with the fund board will be necessary to avoid any expectation gaps and provide comfort that the board will be in a position to achieve active oversight and manage SEC risk.

Lastly, continue to keep an eye on the SEC and other industry organizations to look for interpretive guidance that will seek not only to manage implementation risk, but also reduce the amount of divergence in industry practice on day one.

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Deloitte’s fair valuation pricing survey

Participants representing 94 registered investment company fund groups completed Deloitte’s 19th annual fair valuation pricing survey. FV survey participants included small, midsized, and large fund groups. About 14% managed mainly equities, 9% managed mainly fixed-income securities, and the remaining managed a balanced array of strategies. The FV survey was conducted in summer 2021.

Past Surveys

While each year's survey report highlights significant year-to-year changes, readers can make their own comparisons by reviewing past surveys in full.

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