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Analysis

2022 Fair Valuation Pricing Survey

Finding new paths forward

In the last year, emerging COVID-19 variants and Russia’s invasion of Ukraine have had an impact on those responsible for valuing investments and/or overseeing the valuation process. Fund groups also had to plan for SEC Rule 2a-5. As these and other events emerged, the need for clear and concise communication between fund directors and management was critical. Learn more in the 20th edition of our Fair Valuation survey.

Rule 2a-5 dominates the agenda

If there was just one overall headline for the 20th edition of the Deloitte Fair Valuation Pricing Survey, it is the Security and Exchange Commission’s (SEC) Rule 2a-5 (“Rule 2a-5” or the “Rule”). Although the SEC’s adopting release of Rule 2a-5 noted the SEC’s expectation “that the requirements of the final rule align with the current practice of fair value determinations of investments without readily available market quotations,” the SEC’s own estimates that the cost of implementing Rule 2a-5 and its companion rule, rule 31a-4, might be $100,000 or more per fund clearly foreshadowed that the Rule would take effort.

The 20th edition of the FV survey results affirmed that more than 90% of those completing the FV survey indicated that the Rule resulted in their fund group allocating a significant or moderate amount of time, effort, and/or expense on implementation in the backdrop of severe market volatility, uncertain work requirements, and geopolitical events and conflicts. Specifically, 38% of FV survey participants described the efforts they spent on implementing the Rule as “significant,” while another 55% described the efforts as “moderate.”

Explore the 20th annual fair valuation pricing survey

The evolution of board oversight under Rule 2a-5

Perhaps the founding tenet of the Rule explicitly permitted boards to appoint the investment adviser as its valuation designee in carrying out responsibilities under the Act, and 92% said that they will do that. This allowed the industry to solidify. The delegation model that existed in practice, as just 10% of FV survey participants indicated that more responsibilities have been delegated by the board or one of its committees to non-board members or its valuation designee—whereas 88% indicated that the responsibilities remained the same. This suggests that the board oversight model, as it existed before Rule 2a-5, has primarily been affirmed. However, the Rule is clear that boards, under the valuation designee model, must practice active oversight based on risk, as outlined in the Rule’s adopting release.

How Rule 2a-5 will catalyze technology advancement

FV survey participants have been using various technologies to improve the efficiency and effectiveness of the valuation oversight operating model. Innovation continued again this year, as 65% of FV survey participants indicated that they made technological advancements relative to valuation in at least some areas; 28% of FV survey participants indicated that some of these changes were the direct result of Rule 2a-5. While not limited to large fund groups, 75% of FV survey participants with more than $500 billion in assets under management made technology changes as a result of Rule 2a-5. Some FV survey participants noted improvements in data warehousing and a variety of reporting activities.

 

Looking ahead

The industry mostly embraced the SEC’s first significant valuation guidance in more than 50 years. It confirmed a long-standing industry practice of delegating the day-to-day execution of valuation policies and procedures to management via the option to delegate to a valuation designee. It also clarified many responsibilities that mutual fund directors and the valuation designee must comply with if such an election is made. What’s not to like? Well, the risk may be in the prescriptive nature of the Rule.

While 20 editions of the FV survey have shown constant attention, improvement, time, and governance over valuation policies and procedures, as well as the valuation operating model, pivoting to the Rule may dampen the collaborative and innovative relationship that we have noted in the FV survey between management and the mutual fund directors. Will this be lost? Will all eyes be on complying with Rule 2a-5? Will the SEC’s goal of active oversight get lost in the required prompt, quarterly, and annual reporting that the Rule requires? Will a trend emerge that personnel of the investment adviser have all of the risks covered and will report to the board when something has gone wrong? Maybe September 2022 is too early to worry about such things. Still, we have all experienced prescriptive compliance checklists that seemed robust but failed to surface an important issue of fact, resulting in a significant action not being taken. Fund groups must stay diligent and maintain the discipline to work with fund directors to keep clear, concise, and robust communications in place regardless of whether a report is due. Such collaboration and getting the right decision-maker at the table when price uncertainty arises have been hallmarks of the valuation operating model and should never be taken for granted.

About the 2022 Fair Valuation survey

Participants representing 89 registered investment company fund groups completed it. FV survey participants included small, midsize, and large fund groups. Thirty-four percent of them had more than 100 funds within the fund group, and 22% had less than 15 funds. About 11% of them managed mainly equities, 7% managed mainly fixed-income securities, and the remainder managed a balanced array of strategies. Forty-nine percent of the fund groups had five or fewer valuation full-time equivalents supporting the valuation function, and 30% had 5-10 full-time equivalents. Percentages reported are generally based on the number of survey participants responding to the specific question, unless otherwise noted.

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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