Mutual fund directors and investment advisers digest

Final push—Are you regulatory ready for rule 2a-5 adoption?

Time is ticking—only about seven months remain until September 8, 2022, the compliance date for the SEC’s Good Faith Determinations of Fair Value rule 2a-5 and rule 31a-4. Many mutual fund directors and investment advisers are realizing there’s work yet to be done to meet compliance. Our latest digest focuses on the implementation challenges and presents tools and solutions to optimize investment risk management strategies.

Preparing for the rule 2a-5 compliance date

Through industry engagements, surveys, and polls, including our Deloitte Fair Valuation Survey 19th edition, we’ve identified three main implementation challenges to implementing the SEC’s fair value rules. In this digest, we focus on how mutual fund groups can address the challenges around completing a valuation risk assessment, valuation methodology testing and evaluation of pricing services, and the timing and extent of board oversight and reporting. In each of these areas, our technology-enabled solutions help mutual fund groups optimize implementation and enhance their valuation operating model and ongoing compliance efforts.

Are you regulatory ready for rule 2a-5?

Key implementation challenges and Deloitte’s solutions

Valuation risk assessment

The challenges we’ve identified in developing an appropriate valuation risk assessment include:

  • Defining relevant valuation risk factors and criteria
  • Disaggregating the valuation portfolio into risk buckets
  • Documenting specific valuation risks and associated attributes
  • Extracting risk attributes from existing valuation data, processes, and systems
  • Defining methods to quantify and report valuation uncertainty
  • Building technology solutions to mitigate regulatory risk

Deloitte’s technology-enabled solutions, including DNAV risk and Nport, help mutual fund directors and advisers to:

  • Design and execute a valuation risk assessment framework
  • Define valuation risk factors and criteria
  • Analyze portfolio composition and bifurcate into risk categories
  • Design and execute portfolio valuation uncertainty methodology
  • Integrate with board oversight and reporting
Valuation methodology testing and evaluation of pricing services

Many mutual fund companies continue to experience challenges in satisfying this requirement and in designing appropriate testing methods and programs for both vendor-priced investments and hard-to-value assets. The challenges encountered include:

  • Insufficient transactional information to run back-testing analysis and model testing
  • Lack of trade calibration methodology to align with end-of-day vendor prices
  • Insufficient pricing vendor support/relevant product and consistent cross-vendor back-testing methodology complicating comparative vendor-to-vendor analysis of testing outcomes
  • Significant investments in technology and technical resources to run computational analysis, model testing, and data visualization to mitigate regulatory risk
  • Insufficient level of details in legacy valuation methodology documentation
  • Lacking model development documentation and testing

Through deployment of tools, accelerators, and technology, Deloitte developed a suite of solutions including multi-vendor back-testing and price exception management to help clients accelerate their compliance program. Our offering includes:

  • Multi-vendor price back-testing
    1. Deploy private and public transactional data
    2. Standardized vendor price testing approach
  • Price exception management process enhancement
    1. Risk-based attribution of pricing movements
    2. Stale price management
  • NAV testing
    1. Apply alternative market data to derive independent NAV
    2. Hard-to-value asset price testing
    3. Develop independent price estimates using Deloitte’s valuation approach, models, and a set of independent inputs
  • Valuation methodology documentation enhancement

Board oversight and reporting

After Rule 2a-5 implementation, board reporting will be critical to allow boards to support their “active oversight” mandate and manage regulatory risk. Challenges facing mutual fund companies include:

  • Identifying and reporting material changes in the valuation and risk process
  • Integrating results derived from valuation control processes such as valuation methodology testing, price exception management, assessment of conflicts, etc.

Deloitte’s customized solutions can help companies:

  • Assess board reporting against rule requirements and industry-leading practices
  • Implement required board reporting enhancements including dashboards, KPIs, and other tailored solutions
  • Integrate valuation process-and-control outcomes into board reporting
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