BBD partner John Braun recently offered his gatekeeper perspective on the evolution of fair value and the SEC's proposed Rule 2a-5 in a Viewpoints column for Fund Board Views.
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Exchange traded funds (“ETFs”) have risen in popularity among asset managers and investors in recent years for several reasons, not the least of which is the tax efficient nature of the vehicles. Despite this benefit, many active managers have been reluctant to enter the ETF space. Of primary concern to active managers is the requirement for ETFs to publish their portfolios, or “baskets,” daily. This transparency effectively allows others a look under the hood, which could lead to front running, which is the practice where traders buy ahead of large orders from ETFs and short sell ahead of large sell orders. This could result in ETFs paying more to purchase securities in the market and receiving less to sell securities. Another potential negative result of this transparency is the possibility of another provider effectively cloning an existing transparent ETF and offering it with a lower expense ratio.
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Many funds employ expense limitation agreements aimed at limiting the expense exposure for shareholders. Generally, an expense limitation agreement is based on the fund’s expense ratio (expenses / net assets) and computed each day so that on any single day a fund’s shareholders will not experience an expense ratio in excess of that specified in the expense limitation agreement with the fund’s advisor. These agreements effectively act as an enticement for potential shareholders to invest in a developing fund by offering a guaranteed maximum expense exposure. Absent this type of agreement, the developing shareholder base would likely be subjected to higher expenses as the fund attempts to build assets.
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The Public Company Accounting Oversight Board (“PCAOB”) was established to oversee the audits of public companies in order to protect investors. The PCAOB inspects registered firms on a periodic basis to review samples of firms’ issuer audits and their system of quality control. Recently, the PCAOB implemented revisions to the format of their inspection report in order to make the content more informative and useful to the public.
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In April, the SEC released proposed Rule 2a-5 under the Investment Company Act of 1940. The proposed Rule is the next step in an ongoing effort to address valuation practices more comprehensively for registered investment companies and business development companies.
Rule 2a-5 will create a significant shift in the roles and interaction of Boards and investment advisors related to fair value determinations. Everyone involved in the management and oversight of registered funds will be impacted by these developments.
In BBD's latest Webcast, John Braun and Cory Stewart teamed up with Cillian Lynch from Stradley Ronan and Brad Swenson from SS&C ALPS for a lively discussion about The Next Evolution of Fair Value: The SEC's Proposed Rule 2a-5.
The Webcast included considerations from the auditor, legal and administrator perspectives.
To view a replay, click the link below.
The Next Evolution of Fair Value: The SEC's Proposed Rule 2a-5
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On May 1, 2019, the SEC proposed amendments intended to:
- Improve the financial information reported to investors about acquired and disposed businesses
- Facilitate more timely access to capital
- Reduce the complexity and costs to prepare the disclosures
The release of the GIPS 2020 Standards is the most significant overhaul of the GIPS Standards in almost a decade. Below are significant provisions of the 2020 standards that could impact how firms calculate and present performance to their current and prospective clients.
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An Auditor’s Perspective for Boards of Directors/Trustees
In April, the SEC released proposed Rule 2a-5 under the Investment Company Act of 1940, which addresses valuation practices and the relative role of the Board for registered investment companies and business development companies. The proposal looks to be another “catch-up” by the SEC to account for the growing complexity of valuations and the evolution of developments that have taken place with respect to accounting and auditing regulations.
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