SEC Passes New Rule 2a-5 Regarding Fair Valuation Tuesday, December 15, 2020 On Dec. 3, 2020, the Securities and Exchange Commission (SEC) announced it adopted a new Rule 2a-5 under the Investment Company Act of 1940 (Act). It had been over 50 years since the SEC had last comprehensively addressed valuation rules with respect to the fair value of investments held by registered investment companies (funds). The new rule is intended to address valuation practices and the role of the board of directors with respect to the good faith fair valuation of the investments of a fund. The good faith determination of a security’s fair value under the new rule will involve (i) assessing and managing material risks associated with fair value determinations; (ii) selecting, applying, and testing fair value methodologies; and (iii) overseeing and evaluating any pricing services used. The new rule allows a fund’s board of directors to designate certain parties to perform the fair value determinations for some or all of the fund’s investments. This designation will be subject to board oversight and certain reporting and other requirements designed to allow the board to effectively oversee the designee’s fair value determinations. The new rule also defines when market quotations are readily available under the Act, provides recordkeeping requirements for the fair value determinations, and rescinds previously issued guidance on the role of the board of directors in determining fair value and the accounting and auditing of fund investments. While the new rule applies only to registered investment companies, some of the concepts may be considered for use by private funds. The new rule is effective 60 days after it is published in the Federal Register.