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Report of the Mutual Fund Directors Forum: Practical Guidance for Fund Directors on Valuation Oversight

October 03, 2023
Client Alert

Proper valuation of a fund’s portfolio investments is critical to the calculation of a fund’s net asset value per share. While fund independent directors do not play a day-to-day role in the pricing of a fund’s individual investments, directors bear the ultimate responsibility for valuing those investments without a readily available market quotation. Under section 2(a)(41) of the Investment Company Act of 1940 (the “1940 Act”), such investments must be assigned a “fair value” as determined in good faith by a fund’s board of directors.

Rule 2a-5 under the 1940 Act (“Rule 2a-5” or the “Rule”) provides requirements for determining fair value in good faith, addresses valuation practices, and outlines the role of a fund’s board of directors with respect to the fair value process. Rule 2a-5 allows the board to designate a valuation designee to perform fair value determinations. In almost all cases, the valuation designee must be the fund’s investment adviser. When boards designate a valuation designee, the board’s role becomes one of oversight.

This report examines the valuation of a fund’s portfolio securities, requirements surrounding fund valuation procedures, the board’s responsibility in overseeing valuation, and the responsibilities of the valuation designee under Rule 2a-5. Beyond the specific requirements of Rule 2a-5, boards must determine how to perform their ongoing oversight, including considering how to organize themselves to oversee the valuation process; determining the frequency, type and format of board reporting; and developing a communication process with management.

The board, however, may avail itself of additional assistance for valuation oversight. The fund’s chief compliance officer (“CCO”), auditor, and the fund’s and/or independent directors’ legal counsel each have a unique perspective on the valuation process that can be helpful to fund directors.

Director oversight of valuation is a board responsibility and acts as a safeguard to protect a fund and its shareholders. This report provides an overview of the legal responsibilities of directors in carrying out these important duties and offers suggestions directors may find useful in doing so. Read full article here...

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Stradley Ronon and Mutual Fund Director’s Forum would like to thank the working group listed on page one of the paper for their contributions. Please contact David GrimJennifer Hillman and Joshua Borneman with any questions.


The working group would also like to thank Jocelyn Near, a Stradley Ronon senior law clerk, for her assistance in preparing this alert.

Looking Back and Forward at the SEC's Rule for Fair Value 

Join MFDF President Carolyn McPhillips, Stradley Ronon Partner David W. Grim and Stradley Ronon Associate Jennifer Hillman as they break down key parts of the paper in the latest episode of Stradley Ronon’s Talking Investment Management Podcast.

Now streaming on Spotify and Apple Music.


Tuesday, November 14 at 2 p.m. ET

For a live webcast presented by Stradley Ronon and Mutual Fund Director's Forum.
Join us as we delve deeper into the paper.

Invitation to follow in the coming weeks.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2023 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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