ABA Letter to SEC re: Proposed Rule: Good Faith Determinations of Fair Value

Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Ladies and Gentlemen:

The American Bankers Association (ABA) appreciates the opportunity to provide comments to the Securities and Exchange Commission (SEC) on a proposed regulation (Proposed Rule 2a-5 or Proposal) that would provide requirements for determining fair value in good faith with respect to a registered investment company or business development company (“fund”) for purposes of section 2(a)(41) of the Investment Company Act of 1940, as amended (Investment Company Act). This determination would involve (i) assessing and managing material risks associated with fair value determinations, (ii) selecting, applying, and testing fair value methodologies, (iii) supervising and evaluating any pricing services that are used, (iv) adopting and implementing policies and procedures, and (v) maintaining certain records. Proposed Rule 2a-5 further would authorize a fund’s board of directors to assign, or delegate, the fair value determination to an investment adviser (adviser) of the fund, which would then carry out one or more of these functions, subject to board oversight and reporting obligations.

Our membership includes banks that advise these funds, and therefore, would be directly impacted by the Proposal. Moreover, collective investment funds (CIFs) that are sponsored, advised, managed, and priced by a number of our bank members may invest in registered investment companies subject to the Proposal. Since the Proposal, if finalized, would be the first federal agency rule governing fair value determinations and responsibilities, we further believe that other federal agencies would look to the Proposed Rule 2a-5 as an authoritative source in contemplating or preparing regulatory and/or supervisory guidance on fair value determinations and fair valuation practices. The Office of the Comptroller of the Currency (OCC), for example, looks to SEC Rule 2a-7 (governing money market funds) for guidance when determining appropriate regulatory requirements for the valuation of short-term investment funds (STIFs), which are sponsored, advised, and managed by national banks. The Department of Labor (DOL) informally consults with SEC staff when considering issues that include the fair value determinations of retirement plan assets.

We commend the SEC for updating and formalizing its supervisory guidance on fair value determinations. We believe Proposed Rule 2a-5 would provide clarity and transparency and would assist affected institutions on regulatory expectations regarding good-faith fair value determinations. The Proposal further represents an important recognition of current industry practices, including the critical role of advisers in the fair value determination process. In particular, the Proposal would alert banks serving as fund advisers and sub-advisers on the parameters of their responsibilities on fair valuation activity while allowing for some flexibility for fund board’s and advisers to implement the specifics of delegated fair valuation responsibilities, depending on the nature and mix of fund investments. Guidance in the form of an SEC regulation also would provide elevated recognition to the necessity and importance of fair value practices in both institutional and retail investing. We therefore support adoption of the Proposal, with recommendations for additional modifications as described below.

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