On April 23, 2015, the staff of the Division of Investment Management of the SEC issued “Valuation Guidance Frequently Asked Questions,” addressing the guidance applicable to all funds that appeared in the release adopting money market fund rule amendments issued in July 2014 (the “Adopting Release”). In the Adopting Release, the SEC reminded fund directors that they have a non-delegable statutory duty to determine the fair value of portfolio securities when market prices are not readily available, but reaffirmed that directors may appoint others, such as the fund’s investment adviser or a valuation committee, to assist them in the determination of fair value, and to make the actual calculations pursuant to fair value methodologies approved by the directors.
The first Q&A states the staff’s belief that the guidance provided in the Adopting Release was “not intended to change the general nature of the board’s responsibility to oversee the process of determining whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value for a fund’s portfolio security or limit a board’s ability to appropriately appoint others to assist in its duties.” The staff cites the discussion in the Adopting Release as to a board’s decision to use evaluated prices from a pricing service, noting the SEC’s recommendation that a fund’s board “may want to consider the inputs, methods, models, and assumptions used by the pricing service to determine its evaluated prices, and how those inputs, methods, models, and assumptions are affected (if at all) as market conditions change…[and] assess, among other things, the quality of the evaluated prices provided by the service and the extent to which the service determines its evaluated prices as close as possible to the time as of which the fund calculates its NAV.” Notwithstanding the non- delegable fair valuation responsibility of the board, the staff states its belief that, “subject to adequate oversight,” a fund’s board may delegate specific responsibilities with respect to implementing the fund’s valuation policies and procedures, such as its due diligence review of pricing services (including the considerations recommended in the Adopting Release). The board must still be able to satisfy itself that all appropriate factors have been considered that are relevant to the fair value of the fund’s portfolio securities and to the methodology employed in determining the fair value of those securities.
The second Q&A states the staff’s belief that funds using amortized cost to value their portfolio securities do not need to calculate their shadow prices daily; however, the staff takes the position that a fund should have policies and procedures in place to allow the fund to reasonably conclude that a portfolio security’s amortized cost (when used) is approximately the same as the security’s fair value using market-based factors. A fund’s procedures could include a description of the market-based factors it considers in making a fair value determination (e.g., existing credit, interest rate, liquidity, and issuer-specific conditions), as well as how such factors are reviewed and monitored for each valuation determination.
The valuation guidance FAQs, which the staff noted it expects to update from time to time, are available at: http://www.sec.gov/divisions/investment/guidance/valuation-guidance-frequently-asked- questions.shtml