Listen to the recording starting at minute 27:48  of the Valuations Webinar

RAJAN CHIARI: For every firm, rule 2a-5 poses, maybe I’ll call it, different considerations. Rule 2a-5 was pushed out by the SEC and finalized last year—a really big valuation initiative geared especially for boards but with lots of other things associated with it in order to establish a new expectation on 40 Act fund values investments in good faith; anything other than an exchange traded price essentially so a much bigger framework. Because there’s a lot of time, you got over a year until the rule goes into effect. The first step for most is really doing some sort of gap analysis, trying to identify what’s in the role versus current practices, both for interacting with the board for valuation, for oversight, a variety of different factors, and really actually back to my favorite subject, for the U.S. GAAP. One thing that the rule 2a-5 does is it does not set accounting standards or rescind accounting standards that the Securities and Exchange Commission might have put forth before and really points to ASDA 20 as sort of what funds should do. I think what’s interesting though is that while most people follow GAAP, there may be certain things in their practice or policies that may not be sensitive to that and sort of the desire to be able to demonstrate to a regulator that they’ve truly understood the concepts in the ASDA 20 and have really followed it closely—that’s an interesting sort of nuance. I think that’s a good first step that a lot of folks are encountering. There are other things that will be challenges. There’s a lot of focus on risk assessment at a more granular level than probably historically existed. Many fund groups have always had a lot of good procedures in place to monitor valuations and to make sure they’re getting the best valuations they can. They probably haven’t always written them out clearly and distinctly so that they can monitor the listing of all those valuation risks that do exist, and to be sort of granular to the types of investments that have been historically more generic. They haven’t maybe always focused on conflicts of interest. I think that becomes a little bit more of a documentation exercise; to be able to demonstrate the thought process and the procedures that are in line with addressing those risks but it’s always possible someone will find that there’s risk that they haven’t identified before or really haven’t addressed, and that would be new. I do think that’s a change and maybe a little bit of a challenge, but I think that’s a second step. I do think oversight of pricing service providers is an interesting and nuanced requirement in the standard and, while again, groups have done that historically—have conducted much in the way of oversight, the rule itself does list several considerations that fund groups should go through, including evaluating the quality of the pricing information. This gets the heart of a lot of our discussion today. Also understanding how close that information is to the time that you’re essentially striking now for the close of the market, so those considerations, while again, inherently probably considered before maybe not as explicit. And I do think there’s some work there that groups are thinking through as it relates to their oversight models—that’s really on the 40 Act side. The private side is exempt from the rule, but I think the SEC staff would likely encourage folks to consider aspects of the rule, not because you have to follow it, but because there may be some practices in there that would be called good practices for private funds to consider. I know I’ve heard the staffs make that comment on one or two occasions; so, I think that’s a message for the private fund community but the 40 Act community is the one that really has to adopt it.

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