SEC Rule 2a-5, under the Investment Company Act of 1940, governs the fair valuation of portfolio securities held by registered investment companies, including mutual funds and certain exchange-traded funds. Its primary objective is to ensure that fund investors receive accurate and consistent valuations of their holdings, particularly for illiquid or hard-to-price assets. In the context of crypto, this rule applies to funds investing in digital assets, necessitating robust valuation procedures for these often volatile and nascent instruments.
Mechanism
The mechanism of SEC Rule 2a-5 delegates the fair value determination responsibility to the fund’s board of directors, which can then appoint a valuation designee, such as an investment adviser, to carry out the function. This designee must establish and apply fair value policies and procedures, including a rigorous oversight process. For crypto assets, this requires methods that consider factors like market depth, trading volumes across various venues, and the inherent characteristics of specific tokens or blockchain networks.
Methodology
Compliance with SEC Rule 2a-5 mandates a structured valuation methodology that incorporates observable market inputs when available, and utilizes models or other fair value techniques for less liquid assets. The strategic approach involves independent pricing sources, regular back-testing of valuation models, and comprehensive documentation of all valuation decisions. Funds with crypto exposure must adapt these principles, developing specialized protocols for assessing the fair value of digital assets within their portfolios.
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