matters in no event later than five business days after the valuation
designee becomes aware. This will impose costs on valuation designees,
including costs of diverting or expending additional resources, to meet
the required timeline. In addition, the final rule's definition of
material matters may include matters for which some boards do not
currently receive reports, which could impose additional burdens on
valuation designees producing additional reports and on boards' time
and attention and related external costs. The requirement to provide
such timely follow-on reports as the board may reasonably determine are
appropriate may impose similar costs to the extent boards do not
receive such reporting already. Also, funds and valuation designees may
have a one-time cost associated with reviewing the requirements of the
final rule and conforming their practices to the requirements.
    Overall, as discussed previously, the changes to the reporting
requirements of the final rule reduce the burden and cost of required
prompt board reporting under the final rule compared to the
requirements of the proposed rule. Valuation designees will have
relatively reduced reporting burdens and the relatively reduced
reporting to the board will permit the board to more effectively and
more efficiently focus on its oversight role.
(c) Specification of Functions and Reasonable Segregation From
Portfolio Management
    The final rule, like the proposed rule, will require that the
valuation designee (a) specify the titles of the persons responsible
for determining the fair value of designated investments, including by
specifying the particular functions for which they are responsible, and
(b) reasonably segregate portfolio management from fair value
determinations.\568\ As discussed above, similar practices are common
among advisers performing fair value determinations.\569\
---------------------------------------------------------------------------

    \568\ See supra section II.B.3.
    \569\ See supra section III.B.2.e).
---------------------------------------------------------------------------

    To the extent that funds do not already specify functions as
required in the final rule, the final rule will impose additional
ongoing costs, such as reviewing and specifying functions in accordance
with the final rule. Specifically, the requirement to specify the
titles of the persons responsible for determining the fair value of the
designated investments, including by particular function and as related
to price challenges, may impose costs, including those related to
identifying clearly those responsible for price challenges to the
extent funds do not do so already. In addition, the final rule's
requirement for the valuation designee to segregate fair value
determinations from the portfolio management of the fund reasonably
will impose costs to the extent that such reasonable segregation
results in a decrease in quality or quantity of information provided by
portfolio managers or an increase in staffing to ensure compliance with
the final rule. Costs will vary, based in part on whether a fund
establishes new processes to institute this requirement, which could
include independent

reporting chains, oversight arrangements, or separate monitoring
systems and personnel. All funds subject to this requirement may have a
one-time cost associated with reviewing the requirements of the final
rule and ensuring that their practices conform to the requirements.
    Whenever the fund's adviser is designated to perform fair value
determinations, the requirement to segregate fair value determinations
from portfolio management reasonably may be more costly for smaller
advisers, and smaller internally managed funds, with limited resources
and personnel, than for larger ones. The reason is that smaller
advisers, and smaller internally managed funds, may lack the staff and
resources to segregate portfolio management personnel from those making
fair value determinations reasonably as efficiently as larger advisers,
and internally managed funds, or may only be able to meet this
requirement by hiring additional personnel. As such, the reasonable
segregation requirement of the final rule allows a fund to make
decisions about tradeoffs it faces (e.g., costs, benefits, risks) in
the context of the specific facts and circumstances of the fund.
    Finally, to the extent that the board designates the valuation
designees to perform the fair value determinations relating to any or
all of fund investments, the final rule will provide the valuation
designee--which has conflicting interests--a greater permissible role
in fair value determinations relative to current practices.\570\
Nevertheless, we believe that any impact from such conflicts may be
mitigated because the final rule contains explicit requirements related
to the identification, assessment, and management of any material
conflicts of interest of the valuation designee as well as the
requirement to reasonably segregate the valuation designee's fair value
determinations from portfolio management, and most funds currently have
in place policies to manage conflicts of interest of valuation
designees that may not be valuation specific.
---------------------------------------------------------------------------

    \570\ See supra section II.B.3 for a discussion related to
advisers' conflicts of interest.
---------------------------------------------------------------------------

    One commenter stated that the proposed rule lacked clarity as to
which individuals are required to be identified and stated that
``little appears to be gained by the mechanical exercise'' of naming
individuals and their titles, which may be generic, and identifying
with specificity their roles in the valuation function.\571\ As
discussed more extensively above, we disagree with the commenter
because this requirement in the final rule cannot be satisfied by
simply listing the generic titles of those involved in valuation.\572\
As a result, this requirement may result in costs, as described above,
but also benefits resulting from the improved oversight and
accountability which would not be provided by listing generic titles.
---------------------------------------------------------------------------

    \571\ See Sullivan Comment Letter.
    \572\ See supra footnote 288 and accompanying discussion.
---------------------------------------------------------------------------

3. Recordkeeping
    Rule 31a-4 will require that a fund or designated adviser maintain
appropriate documentation to support fair value determinations.\573\ As
discussed above, maintenance of such documentation is a common
practice.\574\ Some funds may not, however, maintain these records for
all investments. For example, a fund may not maintain records for which
the board relies on pricing services and investments with level 2
inputs as required under rule 31a-4.\575\
---------------------------------------------------------------------------

    \573\ See supra section II.C.
    \574\ See supra section III.B.2.h).
    \575\ See supra section III.B.2.h).
---------------------------------------------------------------------------

    Some commenters stated that the recordkeeping requirements
associated with rule 2a-5 as proposed would represent a significant
change from current practice and would entail additional costs.\576\
Funds will have a one-time cost associated with reviewing the
requirements of rule 31a-4 and ensuring that their practices conform to
the requirements. To the extent that funds do not already maintain
documentation to support fair value determinations that conforms to
rule 31a-4, it will impose additional ongoing costs, including costs
associated with updating documentation as practices change and evolve
and maintaining records for six years. Certain funds or advisers might
put in place recordkeeping practices to comply with rule 31a-4 that are
more costly than the funds' or advisers' current practices, while other
funds or advisers might set up recordkeeping practices as a result of
rule 31a-4 that will result in lower ongoing costs than the costs of
current practice. We continue to believe that funds' or advisers'
incremental ongoing costs associated with rule 31a-4 will, however, be
limited to the extent that, as discussed in section II.C above, funds
or advisers currently have in place recordkeeping practices associated
with fair value determinations that are similar to rule 31a-4's
requirements.\577\
---------------------------------------------------------------------------

    \576\ See, e.g., Baillie Gifford Comment Letter; Capital Group
Comment Letter; ICE Data Comment Letter; ICI Comment Letter; MFS
Comment Letter; SSGA Comment Letter; TRC Comment Letter; Vanguard
Comment Letter. See also supra footnotes 310 and 311 and
accompanying discussion.
    \577\ As discussed above, the final rule has been made less
prescriptive than the proposed rule, thus narrowing the gap between
practice and the requirements.
---------------------------------------------------------------------------

    Some commenters suggested that the time and resources required in
order to comply with the recordkeeping requirements would be higher
than stated in the proposal, but without providing estimates.\578\
While recordkeeping costs may be higher than estimated for some funds,
to the extent that a fund's current recordkeeping practices are similar
to the requirements of rule 31a-4, a fund will incur minimal additional
ongoing costs. Likewise, to the extent that a fund's recordkeeping
practices fail to meet the requirements of rule 31a-4, a fund will
incur higher ongoing costs.
---------------------------------------------------------------------------

    \578\ See John Hancock Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    Maintaining certain documentation to support fair value
determinations is an important element of the oversight framework that
rule 2a-5 establishes and thus contributes to the benefits described in
section III.C.3.\579\ To the extent that rule 31a-4's requirements are
in line with a fund's current practice, additional costs and benefits
are likely to be limited.
---------------------------------------------------------------------------

    \579\ See supra section III.C.3.
---------------------------------------------------------------------------

4. Readily Available Market Quotations
    The final rule defines a market quotation as readily available only
when that ``quotation is a quoted price (unadjusted) in active markets
for identical investments that the fund can access at the measurement
date, provided that a quotation will not be readily available if it is
not reliable.'' This definition will apply in all contexts under the
Investment Company Act and the rules thereunder, including rule 17a-
7.\580\
---------------------------------------------------------------------------

    \580\ See supra section II.D.
---------------------------------------------------------------------------

    To the extent that funds currently consider some or all investments
valued with level 2 inputs as investments with readily available market
quotations, funds will incur costs related to fair valuing these
investments. Specifically, if a fund currently treats certain
investments valued with level 2 inputs as having readily available
market quotations,\581\ the fund will likely experience additional
costs associated with the application of fair value practices and
requirements of the final rule to those investments, as discussed
above. For example, if such a fund currently views a level 2 input or
the product of level 2 inputs for some

securities as readily available market quotations, the fund will need
to subject those securities to the fair value process. Depending on the
fund's practices, this may merely mean documenting the due diligence it
already performs; however, if the fund does not perform due diligence,
then it will have to establish procedures to do so and document such
due diligence. These costs could be passed on to investors. To the
extent that the final rule reflects current industry practice (e.g.,
properly fair valuing such securities and board reporting), there will
be fewer, if any, additional costs or benefits arising from the
definition in the final rule. As mentioned above, funds will incur one-
time costs of reviewing the final rule and ensuring that practices
conform to the final rule.\582\
---------------------------------------------------------------------------

    \581\ See, e.g., Capital Group Comment Letter; IAA Comment
Letter.
    \582\ See supra section III.D.2.b) and section III.D.3.
---------------------------------------------------------------------------

    The final rule's definition of readily available market quotations
may also impose costs on funds that currently cross trade securities
not captured by the definition. The application of this definition may
result in funds that had previously viewed certain securities as having
readily available market quotations, and thus eligible for cross trades
under rule 17a-7, to re-evaluate practices for trading those securities
or change their practices for trading those securities. This re-
evaluation will impose costs on those funds and may result in those
funds having a more restricted set of securities being available for
cross trades than they had previously viewed as being available for
cross trades.
    Depending on the reasons for trading, cross trading may impact fund
investors both positively and negatively. First, cross trading allows
both trading funds to avoid commissions or other transaction costs that
would otherwise be borne in a market transaction. Second, cross trading
can allow a fund facing liquidity constraints to avoid depressed or
fire-sale prices when it is selling an asset for which market prices
would otherwise be depressed. However, since these transactions are not
market transactions and can be affected by conflicts of interest, rule
17a-7 requires securities to have readily available market quotations
to serve as an independent basis, and the ``prices'' at which cross
trades execute are set internally based on the requirements of rule
17a-7.The final rule, by defining readily available market quotations,
further mitigates the risk that one fund will ``subsidize'' another
fund through cross trading of assets with more subjective values.\583\
---------------------------------------------------------------------------

    \583\ See Alexander Eisele, Tamara Nefedova, Gianpaolo Parise, &
Kim Peijnenburg, Trading out of sight: An analysis of cross-trading
in mutual fund families, 135 J. Fin. Econ. 359 (2020) (``Eisele et
al. 2020''), which provides evidence of strategic reallocation of
performance among sibling funds; and Gerald Abdesaken, Conflicts of
interest in multi-fund management, 20 J. Asset Mgmt. 54 (2019)
(``Abdesaken 2019''), which provides evidence of conflicts of
interest among asset managers that simultaneously manage multiple
mutual funds.
---------------------------------------------------------------------------

    Funds may also bear the cost of going to market for trades that
otherwise would have been implemented via a cross trade if the
securities in question lack readily available market quotations. Such
costs include transaction costs (such as bid-ask spreads or
commissions) and search costs for hard-to-find securities. Based on the
estimates presented in Table 2, approximately 33% of fund assets are
fair valued with level 2 or level 3 inputs. However, we lack detailed
data on funds' engagement in cross trading in such securities to
estimate what fraction of this subset will be affected by the
definition of readily available market quotation.\584\ Likewise, we
lack detailed data to estimate the transactions and other costs that a
fund might incur if forced to go to the market for transactions that
otherwise would have been executed with a cross trade. The final rule
will have a larger effect on funds for which a larger percentage of
their investments does not have readily available market quotations
because those funds will be required to determine the fair value of a
larger percentage of their investments.
---------------------------------------------------------------------------

    \584\ Approximately 28% of funds reported relying on 17a-7 for
cross trades, but we cannot determine to what extent reliance on
17a-7 is limited to investments meeting the definition under the
final rule of having readily available market quotations. See supra
section III.B.3.
---------------------------------------------------------------------------

    As discussed above, commenters were concerned about requirements in
the proposed rule to maintain records of specific methodologies,
assumptions, and inputs for determining fair values, in particular for
investments valued with level 2 inputs.\585\ Commenters stated that the
definition of readily available market quotations would effectively
prompt funds to treat all investments valued with level 2 inputs as not
having readily available market quotations.\586\ Many suggested, in
particular, that applying the proposed recordkeeping provisions to
investments valued with level 2 inputs is not necessary and would
impose additional costs.\587\ To the extent that some funds currently
treat some investments relying on level 2 inputs as having readily
available market quotations, those funds will face higher costs
associated with determining the fair value of those investments in good
faith as required by the final rule. These costs could include
compliance costs (e.g., updating procedures for fair value
determinations) or devoting greater resources to conduct due diligence
of pricing services. As discussed above,\588\ commenters described
varying recordkeeping practices for investments relying on level 2
inputs, including documenting the due diligence and oversight of
pricing services and maintaining prices received from a pricing
service. To the extent that a fund's practices with respect to
investments relying on level 2 inputs conform to the final rules, a
fund will face few, if any, additional ongoing costs.
---------------------------------------------------------------------------

    \585\ See supra section II.C.
    \586\ See, e.g., AIMA Comment Letter; American Bankers
Association Comment Letter; American Funds Comment Letter; Baillie
Gifford Comment Letter; Capital Group Comment Letter; Dechert
Comment Letter; Guggenheim Comment Letter; IAA Comment Letter; ICE
Data Comment Letter; ICI Comment Letter; IDC Comment Letter; SIFMA
AMG Comment Letter; SSGA Comment Letter; TRC Comment Letter;
Vanguard Comment Letter.
    \587\ See, e.g., Capital Group Comment Letter; SIFMA AMG Comment
Letter.
    \588\ See supra section II.C and section III.B.2.h).
---------------------------------------------------------------------------

    One commenter also stated that ``challenges associated with the
proposed rule's definition of `readily available market quotations' ''
could discourage purchases of certain investments, particularly for
smaller firms.\589\ Another commenter expressed a similar concern about
the definition and the costs of the proposed rule's requirements for
establishing methodologies, inputs, and assumptions for prices provided
by pricing services.\590\ As discussed above, we agree that there will
be additional costs for funds that currently treat investments that
rely on level 2 inputs as having readily available market quotations.
While there is a potential risk that initial purchases of certain
investments may be discouraged, the commenter's concern with the
``rigidity of the proposed rule,'' which required the specification of
methodologies that would apply to new types of investments in which the
fund intended to invest, is mitigated by changes to rule 2a-5, which
does not include this requirement. Similarly, the other commenter's
concern with the proposed rule's requirement to establish
methodologies, inputs, and assumptions for prices provided by pricing
services is mitigated by changes to the final rule, which allows the
due diligence process

for pricing services to fulfill this requirement.
---------------------------------------------------------------------------

    \589\ See Guggenheim Comment Letter.
    \590\ See Dechert Comment Letter.
---------------------------------------------------------------------------

5. Rescission of Prior Commission Releases and Guidance
    The final rule, like the proposed rule, rescinds certain Commission
releases and guidance, including ASR 113, ASR 118, and prior guidance
on the oversight of pricing services contained in the 2014 Money Market
Fund Release.\591\ To the extent that funds' interpretations of such
Commission releases and guidance have led to funds' adoption of
practices that do not conform to the requirements of the final rule,
the final rule will impose additional initial and ongoing costs, but
come with additional ongoing benefits. Furthermore, as described in the
Proposing Release, some parts of the Commission releases and guidance
have been superseded or made obsolete.\592\ Similarly, one commenter
stated that rescinding ASR 113 and ASR 118 will avoid potentially
contradictory requirements \593\ and other commenters stated that U.S.
GAAP and related accounting rules play an informative role in the
valuation process.\594\ Because U.S. GAAP standards are commonly
understood and used in the industry in financial reporting, both the
additional one-time and ongoing costs of conforming to these standards
and the final rule, rather than relying on Commission releases and
guidance, should be limited. Finally, we believe that rescinding the
auditing guidance included in ASR 118 will have little or no impact on
funds or valuation designees because a fund board or valuation designee
could request that its auditor continue current practice to verify 100%
of the values of the fund's investments if it determines that this
approach is preferable.
---------------------------------------------------------------------------

    \591\ See supra section II.E.
    \592\ See Proposing Release, supra footnote 2, at n.150 and
accompanying discussion.
    \593\ See KPMG Comment Letter.
    \594\ See ABA Comment Letter; E&Y Comment Letter.
---------------------------------------------------------------------------

    The final rule provides a minimum, consistent framework for fair
value and standard of baseline practices across funds to help ensure
that boards fulfill their oversight roles appropriately, and these will
encourage funds to adopt best practices to support more rigorous fair
value determinations. The rescission of prior Commission releases and
guidance obviates a fund's need to analyze and interpret those releases
and guidance, thus reducing compliance costs.\595\ As discussed above,
some commenters opposed rescission of ASR 113 and ASR 118 stating that
certain specific fair values are not covered in the relevant accounting
standards and that certain content within those releases should be
reissued or restated by the Commission, but we continue to believe that
in light of the existing framework in U.S. GAAP, and upon adoption of
rule 2a-5 in this document, these specific valuation matters do not
require the specific incremental guidance included in the ASRs.\596\
Lower costs of compliance for funds resulting from relying on the final
rule rather than various guidance ultimately could benefit fund
investors to the extent that any cost savings would be passed down to
them in the form of lower fund operating expenses.
---------------------------------------------------------------------------

    \595\ Academic literature provides evidence consistent with the
idea that uncertainty has negative effects on investment and growth.
See, e.g., Nicholas Bloom, Stephen Bond, & John Van Reenen,
Uncertainty and Investment Dynamics, 74 Rev. Econ. Stud. 391 (2007);
Nicholas Bloom, The Impact of Uncertainty Shocks, 77 Econometrica
623 (2009); Scott R. Baker, Nicholas Bloom, & Steven J. Davis,
Measuring Economic Policy Uncertainty, 131 Q.J. Econ. 1593 (2016).
    \596\ See supra section II.E.
---------------------------------------------------------------------------

6. Cost Estimates
    Rules 2a-5 and 31a-4 will affect all funds with investments that do
not have readily available market quotations, their boards of
directors, the advisers of most funds, and the depositors or trustees
of UITs, though not all of those funds will have to materially change
their practices to comply with the final rule. The effects of these
rules depend on the extent to which funds' current practices differ
from their requirements. Our staff estimates that the one-time
incremental costs necessary to ensure compliance with these rules range
from $100,000 to $600,000 per fund, depending on the current fair value
practices of the fund.\597\ These estimated costs are attributable to
the following activities: (i) Reviewing the rules' requirements; (ii)
developing new (or modifying existing) fair value policies and
procedures,\598\ reporting,\599\ recordkeeping,\600\ valuation risk
assessment,\601\ fair value methodology,\602\ testing,\603\ and pricing
service oversight \604\ practices to align with the requirements of the
rules; (iii) implementing those policies and procedures, reporting,
recordkeeping, valuation risk assessment, fair value methodology,
testing, and pricing oversight practices and integrating them into the
rest of the funds' activities; (iv) preparing new training materials
and administering training sessions for staff in affected areas; and
(v) independent board members consulting their independent counsel on
whether the valuation designee should be designated to perform fair
value determinations and how to set up appropriate policies and
procedures, reporting, and recordkeeping requirements.
---------------------------------------------------------------------------

    \597\ The one-time cost estimates used in the economic analysis
may differ from the cost estimates in section IV below because (i)
the cost estimates in the economic analysis capture all costs
associated with the final rule, while the cost estimates in section
IV capture only costs related to information collection burdens and
(ii) the cost estimates in the economic analysis capture incremental
costs associated with the final rule, while the cost estimates in
section IV capture total costs. Hence, the cost estimates in section
IV below serve as an upper bound of costs related to information
collection burdens for funds that do not have in place currently any
practices that are similar to the final rule's requirements.
    \598\ The final rule does not specify a requirement for policies
and procedures beyond that in the compliance rule, but the final
rule may affect the content of policies and procedures required for
documentation of fair value determinations under the compliance
rule. See supra section II.A.5, section III.B.2, and section
I.A.1.e.
    \599\ See supra section II.B.2, section III.B.2.g), and section
III.D.2.b).
    \600\ See supra section II.C, section III.B.2.h), and section
III.D.3.
    \601\ See supra section II.A.1, section III.B.2.b), and section
III.D.1.a).
    \602\ See supra section II.A.2, section III.B.2.c), and section
III.D.1.b).
    \603\ See supra section II.A.3, section III.B.2.d), and section
I.A.1.c.
    \604\ See supra section II.A.4, section III.B.2.f), and section
I.A.1.d.
---------------------------------------------------------------------------

    Many commenters agreed that the requirements of the proposed rule
would impose such costs \605\ and some commenters stated that our
estimates understated the costs described in the proposed rule.\606\
However, such commenters did not provide specific estimates or data to
inform more accurate cost estimates. As described above, the
requirements of these rules will be less prescriptive and burdensome
than the requirements of the proposed rule. Nonetheless, our estimates
have not changed because these estimates are for the one-time costs
described here. Such costs are unlikely to vary as a result of the
differences between the requirements of the proposed rule and those of
rules 2a-5 and 31a-4 as adopted. We expect that the one-time
incremental cost necessary to ensure compliance with the rules depends
on each fund's current fair

value practices and the amount and valuation complexity of fund
investments that must be fair valued. In particular, the one-time costs
will be closer to the lower end of the range for funds whose current
practices are more similar to the requirements of the rules and funds
with fewer and easier-to-value fund investments. Further, the one-time
costs will be closer to the lower end of the range for funds that
belong to fund complexes because certain aspects of the one-time costs
are fixed costs that could be spread across multiple funds in the case
of fund complexes.
---------------------------------------------------------------------------

    \605\ See, e.g., Dechert Comment Letter; Guggenheim Trustees
Comment Letter; ICI Comment Letter; IDC Comment Letter; Invesco
Comment Letter; John Hancock Comment Letter; NYSSCPA Comment Letter;
Scheidt Comment Letter 2; Stradley Comment Letter.
    \606\ See, e.g., Guggenheim Comment Letter; ICI Comment Letter;
John Hancock Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we estimate that 9,804 funds will be affected
by the rules, and thus incur one-time costs associated with the
rules.\607\ We estimate that 70% of one-time costs are attributable to
funds reviewing and updating their current practices and related
policies and procedures to comply with the final rule's requirements;
15% of one-time costs are attributable to funds reviewing and updating
current recordkeeping processes to align with rule 31a-4's
requirements; and the remaining 15% of one-time costs are attributable
to funds reviewing and updating the current board reporting processes
to comply with the final rule's requirements. Hence, we estimate the
aggregate one-time costs of the final rule to range between $980.4
million and $5.9 billion.\608\
---------------------------------------------------------------------------

    \607\ See supra footnote 509.
    \608\ $980.4 million = 9,804 affected funds x $100,000. $5.9
billion = 9,804 affected funds x $600,000. See supra footnote 509.
---------------------------------------------------------------------------

    Section IV below presents estimates of ``collection of
information''-related burdens \609\ associated with rule 2a-5's board
reporting and rule 31a-4's recordkeeping requirements and with the
requirement, to comply with rule 38a-1 after our adoption of rule 2a-5,
to adopt and implement written policies and procedures reasonably
designed to prevent violations of the requirements of rule 2a-5. Our
estimates of one-time costs in the economic analysis above subsume the
estimates of initial burdens in section IV, as the former cover costs
associated with a broader set of activities, as described above, that
do not all relate to the collection of information. In addition, some
funds with investments valued using non-level 1 inputs may incur
ongoing costs, in addition to the one-time costs described above,
associated with the rules' requirements. However, we believe that the
level of ongoing costs associated with the requirements of the rules
are generally similar to that associated with existing practices of
funds with investments valued without readily available market
quotations. As a result, the estimate of ongoing industry burdens of
$504,973,451 per year \610\ in section IV represents an upper bound on
the incremental ongoing costs for funds affected by the rules.
---------------------------------------------------------------------------

    \609\ See infra footnote 637 and associated text.
    \610\ The ongoing burden associated with board reporting is
based on 20 hours x $368 (senior programmer) + 1.5 hours x $4,770
(combined rate for 4 directors) + 0.44 hours x $368 (compliance
attorney) + an external burden of $3,180 = $17,859 for each affected
fund, implying a total ongoing industry burden of $17,859 x 9,335
affected funds = $166,709,616. See infra section IV.B. The ongoing
burden associated with recordkeeping is based on 35 hours x $63
(general clerk) + 35 hours x $96 (senior computer operator) + 35
hours x $368 (compliance attorney) = $18,445 for each affected fund,
implying a total ongoing industry burden of $18,445 x 9,335 affected
funds = $172,184,075. See infra section IV.B. The ongoing burden
associated with rule 38a-1 is based on 5 hours x $329 (senior
manager) + 5 hours x $466 (assistant general counsel) + 2 hours x
$530 (chief compliance officer) + 1 hour x $365 (compliance
attorney) + 2 hours x $4,770 (Board of Directors as a whole),
implying a total ongoing industry burden of $16,940 x 9,804 affected
funds = $166,079,760. See infra section IV.B. Therefore, the total
ongoing industry burden associated with the final rule is
$166,709,616 + $172,184,075 + $166,079,760 = $504,973,451.
---------------------------------------------------------------------------

7. Other Cost Considerations and Comments on Costs
    Many commenters stated that costs would likely be higher than we
estimated in the Proposing Release without quantifying those higher
costs. In addition, some commenters presented a number of other costs--
also without quantification--that were not included in our estimates in
the Proposing Release. For example, one commenter stated that the
proposed reporting requirements could even lead to increased self-
imposed costs becoming industry standards.\611\ As discussed above, to
the extent that funds' reporting practices already conform to the
requirements of the final rule, additional costs will be limited.
Likewise, we believe it is unlikely that funds will engage in
additional reporting that is not necessary for compliance with the
final rule. A few commenters suggested the proposed rule would result
in increased liability of funds, boards, and advisers in fulfilling
their fair value responsibilities.\612\ It is possible funds, boards,
and advisers may incur liability in connection with their fair value
responsibilities under the final rule, but they already may incur
liability in this regard under the law.
---------------------------------------------------------------------------

    \611\ See Dechert Comment Letter.
    \612\ See ICI Comment Letter; American Funds Trustees Comment
Letter; Capital Group Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

E. Effects on Efficiency, Competition, and Capital Formation

    Rules 2a-5 and 31a-4 may also have effects on efficiency,
competition, and capital formation. Under the final rule, boards may
designate a valuation designee to perform fair value determinations and
may oversee the valuation designee's fair value determinations instead
of determining fair value themselves, which could free board resources
tied to valuation and redirect them to oversight or other matters. As a
result, to the extent that boards currently determine fair value of
investments themselves, the final rule could lead to more efficient use
of boards' resources and therefore improve funds' governance of
determinations of fair value in good faith for the benefit of
investors.\613\ Conversely, to the extent that fund boards do not
currently determine fair value themselves and instead rely on an
adviser to compute fair value in line with the requirements of the
final rule, such boards are not likely to benefit from more efficient
use of their resources. The final rule also could improve the
efficiency of fund operations because it will explicitly allow boards
more flexibility to oversee the valuation designees' fair value
determination, whether the fund boards currently make fair value
determinations themselves or not.
---------------------------------------------------------------------------

    \613\ As discussed above, some commenters disagreed that this
would free up board resources. See, e.g., Russell Comment Letter;
Fidelity Comment Letter; MFS Comment Letter; John Hancock Comment
Letter. The final rule does not impose requirements on the board
that go beyond its present obligations, but does impose various
specific requirements that are not currently expressly required.
However, the final rule does provide an express mechanism such that
a board is permitted to designate a valuation designee to perform
actual determinations of fair value on a daily basis, thus avoiding
a board's involvement in the day-to-day activities of fair value
determination, while maintaining its critical oversight role.
---------------------------------------------------------------------------

    As discussed above, for UITs, a UIT's trustee or depositor must
conduct fair value determinations under the final rule.\614\ To the
extent that the assistance of other parties (such as evaluators) is
necessary, trustees or depositors can seek that assistance consistent
with the guidance above regarding obtaining the assistance of others.
Thus, for UITs, the final rule explicitly places the responsibility on
a UIT's trustee or depositor, as specified in the trust indenture of
the UIT, to fulfill the requirements of the final rule to ensure
appropriate oversight of the fair value determination process.
---------------------------------------------------------------------------

    \614\ See section II.B. See also footnotes 174, 176, and 177 and
accompanying discussion.
---------------------------------------------------------------------------

    As discussed above, the final rule mandates oversight of a
valuation

designee, which could ultimately improve the efficiency and reduce the
bias of funds' valuations. Similarly, the requirements for UITs to
provide oversight of the fair value determination process could improve
the efficiency and reduce the bias of UITs' valuations. The final rule
could improve the efficiency of valuations because it may create a more
rigorous valuation framework and could help mitigate any conflicts of
interest of the valuation designees or, in the case of UITs, the
trustee or depositor, which ultimately could result in less biased
valuations. A potential increase in asset valuation efficiency could
improve boards' monitoring of funds' and of valuation designees'
performance and could benefit capital formation because less biased
valuations permit the allocation of resources to more efficient use. As
mentioned by a commenter, ``[b]etter standards improve the transparency
and stability of financial markets, contribute to the growth of
stronger economies and lead to improved confidence for investors and
users of valuation services.'' \615\ Similarly, another commenter noted
that ``more accurate and neutral information'' could lead to positive
economic consequences and improved decision-making.\616\ Nevertheless,
we believe that any such effects likely will be limited to the extent
that funds currently have in place fair value practices that are
generally similar to the requirements of the rules and that boards
oversee the valuation designee's and any pricing service's role in fair
value calculations. Similarly, we believe that any such effects likely
will be small to the extent that UITs currently have in place fair
value practices that are generally similar to the requirements of the
final rule and that UITs' trustee or depositor oversees the fair value
process and any pricing service's role in fair value calculations.
---------------------------------------------------------------------------

    \615\ See IVSC Comment Letter.
    \616\ See Davidson Comment Letter.
---------------------------------------------------------------------------

    As discussed above, the final rule includes a definition of readily
available market quotations and this definition may affect the ability
of funds to cross trade certain investments.\617\ Any such reduction in
cross trades may have some implications for efficiency, competition,
and capital formation. Any reduction in the extent of cross trades, to
the extent that such trades are executed in the market, may affect
market efficiency by contributing to price discovery for such
investments that otherwise would not have gone to market. In this
regard, transactions that are brought to market rather than being
transacted internally will contribute to an increase in more efficient
capital allocation and foster capital formation by subjecting more
investments to price discovery.
---------------------------------------------------------------------------

    \617\ See supra section III.D.4.
---------------------------------------------------------------------------

    One commenter stated that the requirements of the proposed rule for
all investments without readily available market quotations could
discourage the purchase of certain securities, particularly for smaller
and mid-sized firms and could ``impair the ability of such firms to
offer funds that invest in fixed income securities, resulting in fewer
investment options for mutual fund investors.'' \618\ To the extent
that the final rule increases compliance burdens with respect to
securities valued with level 2 or level 3 inputs, the final rule could
provide incremental disincentives to purchase these securities,
particularly by smaller and mid-sized funds. To the extent that these
disincentives affect smaller and mid-sized funds more than other funds,
the requirements of the final rule may affect the competitive landscape
(e.g., by resulting in fewer investment options for investors).
However, it is our understanding that the requirements of the final
rule align with current practice of fair value determinations of
investments without readily available market quotations.
---------------------------------------------------------------------------

    \618\ See Guggenheim Comment Letter. The commenter's concern was
focused on investments that rely on prices provided by pricing
services, particularly those which ``frequently use Level 2
inputs.''
---------------------------------------------------------------------------

    Overall, we do not believe that the rules will have any material
effects on competition because the effects of the rules likely will be
limited to the extent that the rules are similar to current practices.
Even though costs could be more burdensome for smaller fund complexes,
we believe that these costs will not significantly affect competition
in the fund industry because few funds will incur costs at the higher
end of the cost range estimate (i.e., between $100,000 and $600,000).
Furthermore, the extent to which the costs of the requirements of the
final rule are relatively more burdensome for a fund is likely to be
correlated to the fund's current lack of appropriate oversight of the
fair value process. As the requirements of the final rule establish a
framework for appropriate oversight of the fair value process, this may
improve the competitive landscape in the fund industry. Any decrease in
the ability of certain funds' engagement in cross trades due to the
definition of readily available market quotations and the requirement
to fair value all investments that are valued using level 2 inputs
should affect all such funds and not result in any change in the
competitive landscape in this regard; at most it would level the
playing field among funds and thus contribute to a fairer competitive
landscape. Thus, we continue to believe that the rules will not
negatively affect competition in the fund industry, though it may have
unfavorable effects on funds and valuation designees currently lacking
an effective framework for appropriate oversight of their fair value
processes.
    In addition, the requirement of the final rule reasonably to
segregate fair value determinations from portfolio management likely
will more significantly affect those smaller valuation designees or
funds that lack the staff and resources necessary to effect such
segregation as efficiently as larger advisers or larger funds. For
example, such funds or valuation designees that lack the staff or
resources to effect such segregation may hire additional personnel to
ensure (or to assure a board) that they can reasonably segregate the
fair value process from portfolio management. Similarly, the
requirement to segregate determinations of fair value from portfolio
management may present a barrier to entry to smaller advisers. This
barrier may be realized through boards' unwillingness to hire advisers
that cannot ensure such segregation to the boards' satisfaction. To the
extent that boards may be unwilling to hire advisers who cannot
reasonably segregate these functions, small advisers without the
resources to provide such segregation will face a competitive
disadvantage. Nevertheless, we do not believe that this requirement of
the final rule will have a material effect on competition in the fund
adviser industry because many smaller advisers to funds and internally
managed funds currently have in place processes to address the
potential conflicts of interest whenever portfolio management personnel
provide input to valuation. To the extent that boards currently
consider such risks and the need to segregate such functions in their
selection of advisers--including small advisers--as we understand is
current practice, the requirement is unlikely to affect competition in
the fund adviser industry.
    Another commenter suggested that one of the valuation risk factors
discussed above--``reliance on service providers that have more limited
expertise in relevant asset classes''--could ``deter competition in the
market for pricing services.'' \619\ We do not believe evaluation of
valuation risks will prevent funds from engaging a pricing service with
limited experience,

but rather funds will assess the risks associated with such an
engagement and manage them accordingly (for example, through more
frequent backtesting of such pricing service's valuation information
until it gains more experience).
---------------------------------------------------------------------------

    \619\ See IHS Markit Comment Letter.
---------------------------------------------------------------------------

    As described above, the requirements of rule 2a-5 are similar to
current practices \620\ and establish a certain minimum, consistent
framework for determinations of fair value in good faith under the
final rule.\621\ Likewise, rule 31a-4 is based upon current practices
and is designed to help implement this framework. Rule 2a-5's framework
includes elements providing for effective oversight. Effective
corporate governance is a key piece of investor protection \622\ at the
same that it can provide for increased efficiency, competition, and
capital formation. Boards practicing good governance can mitigate the
agency problem that exists between the ``agents'' (e.g., advisers) and
the ``principals'' (e.g., funds). In the area of fair value
determinations in good faith, governance can reduce the information
asymmetry that exists between fund advisers or portfolio managers and
investors.
---------------------------------------------------------------------------

    \620\ See supra section III.B.2.
    \621\ See supra section III.C.3 and sections III.D.1 to III.D.4.
    \622\ See, e.g., Rafael La Porta, Florencio Lopez-de-Silanes,
Andrei Schleifer, & Robert Vishny, Investor Protection and Corporate
Governance, 58 J. Fin. Econ. 3 (2000).
---------------------------------------------------------------------------

    As described above,\623\ we expect that the requirements of the
rules will contribute to less biased valuations, which has benefits for
fund managers and investors alike. Fund managers are better able to
manage their portfolios to tailor their portfolios to specific risk-
reward profiles or benchmarks as described in their investment policy
statement \624\ and to ensure that their portfolios comply with the
fund's risk appetite statement. However, advisers may have an incentive
to ``improperly value fund assets in order to increase fees, improve or
smooth returns, or comply with the fund's investment policies and
restrictions,'' \625\ and fund boards are ``uniquely positioned to
engage in oversight of the affiliated service provider generally and
with respect to the conflicts of interest potentially arising in
connection with the fair valuation process.'' \626\ Improper and biased
valuations may also distort other behavior.\627\ The requirements of
the final rule are designed to mitigate any such distortions.
---------------------------------------------------------------------------

    \623\ See supra footnote 510 and accompanying discussion.
    \624\ See Elements of an Investment Policy Statement for
Institutional Investors, CFA Institute (2010).
    \625\ See Proposing Release, supra footnote 2, at n.911 and
accompanying text.
    \626\ Russell Comment Letter; see also Better Markets Comment
Letter; CFA Institute Comment Letter; SIFMA AMG Comment Letter.
    \627\ See, e.g., CFA Institute Comment Letter; Fidelity Comment
Letter; JPMAM Comment Letter; MFS Comment Letter; SIFMA AMG Comment
Letter; Stradley Comment Letter.
---------------------------------------------------------------------------

    Properly valuing a fund's investments is also a critical component
of the accounting and financial reporting for investment companies.
Appropriate and unbiased valuations should thus provide investors with
greater confidence in the accuracy of the value of fund investments,
the performance of funds, and the level of risk of fund investments.
This should allow investors to evaluate more effectively how a given
fund fits their investment objectives, risk appetite, and ability to
bear risk.
    Taken together, appropriate and unbiased valuation fosters price
discovery. Price discovery, in turn, ensures that investments and
resources are directed to their most efficient use, both by investors
and funds themselves. Efficiency and improved accounting and financial
reporting resulting from appropriate and unbiased valuation should
promote capital formation by increasing the quality and reliability of
information in capital markets.\628\ Similarly, appropriate and
unbiased valuation induces greater competition as the performance of
funds and their advisers becomes more reliably assessable. While
appropriate and unbiased valuation contribute to investor protection,
efficiency, competition, and capital formation, the extent to which the
requirements of the rules will increase these contributions may be
limited by the extent to which funds' current practices are similar to
the rules. As discussed above, the costs of the rules will likewise be
limited to the extent to which funds' current practices are similar to
the rules.
---------------------------------------------------------------------------

    \628\ See, e.g., Andrea Polo, Fair Value and Corporate
Governance, 6 Corp. Ownership & Control 382 (2008).
---------------------------------------------------------------------------

F. Reasonable Alternatives

1. Designation to Officers of Internally Managed Fund Not Permitted
    We considered not permitting internally managed funds to designate
officers to perform the fair value functions required by the final
rule, but allowing such funds to seek individual exemptive applications
to allow designation of their officers. This would give the Commission
the opportunity to design protections that are more tailored to the
kinds and magnitude of conflicts involved in internally managed funds
and the kinds of assets in which those funds invest. We believe,
however, that the costs to these funds involved in applying for
individual exemptive relief could be passed on to investors in these
funds. Furthermore, officers of internally managed funds do, in fact,
have a fiduciary duty, and play a similar or the same role as other
valuation designees. Thus, treating officers of internally managed
funds differently or preferentially would be inconsistent with the goal
of ensuring appropriate oversight and governance of the fair value
process (regardless of the parties involved) that the final rule seeks.
Further, we believe that the final rule's oversight and other
requirements provide minimum and baseline standards that we believe
should be part of any good faith fair value determination for
internally managed funds. We do not believe that individually-granted
exemptive relief would provide funds or their shareholders
substantially more protections in the fair value process, as compared
to those included in the final rule, to justify the costs of requiring
exemptive applications. For these reasons, we are not adopting this
alternative.
2. Safe Harbor
    Some commenters suggested that the proposed rule be formulated as a
safe harbor.\629\ These commenters perceived the proposed rule as
prescriptive and indicated that such rules are more appropriate for a
safe harbor. Commenters argued that for those not availing themselves
of the safe harbor, practices would evolve and adapt in response to
market developments and permit heterogeneity of practices that are
appropriate for the idiosyncrasies of market participants. However, for
those funds that choose not to use the safe harbor, the guidelines
would be less clear, and perhaps only as clear the current regulatory
framework. Any lack of certainty would likely entail higher compliance
costs and possible investor protection costs. Funds not relying on the
safe harbor would likely have to divert more resources to ensuring
compliance and may fall short of

providing appropriate oversight and governance of the fair value
process as compared to the final rule. Recasting rule 2a-5 as a safe
harbor would not provide a minimum baseline framework, as boards that
chose not to avail themselves of the safe harbor might take an approach
to the process of making fair value determinations that does not result
in investors receiving as rigorous valuations as under the final rule.
Valuation is a core responsibility of the board under the Act and
critical for investor protection. Consequently, we believe not defining
minimum and baseline standards could harm investors if funds took
approaches that lacked consistency or certain aspects of these basic
standards.
---------------------------------------------------------------------------

    \629\ See supra section II; see also American Bankers
Association Comment Letter; American Funds Trustees Comment Letter;
Dechert Comment Letter; Fidelity Trustees Comment Letter; Guggenheim
Comment Letter; ICI Comment Letter; Stradley Comment Letter;
Vanguard Comment Letter; Comment Letter of Mark Loughridge, Lead
Independent Director, Board of Trustees of the Vanguard Funds (July
21, 2020).
---------------------------------------------------------------------------

3. Three-Tiered Approach
    Some commenters suggested that instead of a binary approach where
securities that are valued based on level 2 and level 3 inputs are
subject to fair value determinations, we instead adopt a three-tier
approach similar to U.S. GAAP's level 1, level 2, and level 3 input
classifications and have rules 2a-5 and 31a-4 further distinguish the
fair value determination process between securities in level 2 or
between level 2 and level 3.\630\ We are not adopting this alternative
because, as discussed previously, we believe that the Act establishes a
binary framework with securities either being valued based on their
readily available market quotations, or for all other investments,
being fair valued in good faith. However, the final rule establishes a
framework that allows boards or valuation designees to tailor their
fair value determination process to the investments held by the fund,
and allows for a variety of different methodologies to be applied. As
described above, the requirements of rule 31a-4 for investments fair
valued with level 2 inputs does allow for different levels of
recordkeeping that correspond with the risk and nature of the
investments that are being fair valued. The recordkeeping and reporting
requirements of rules 2a-5 and 31a-4 are designed to be flexible, and
thus funds may distinguish between level 2 and level 3 securities as
part of their recordkeeping and reporting processes. Accordingly, we
believe that the final rule permits boards and valuation designees
sufficient flexibility to design their fair value determination process
as appropriate for the investments held by the fund.
---------------------------------------------------------------------------

    \630\ See, e.g., SSGA Comment Letter.
---------------------------------------------------------------------------

4. More Principles-Based Approach
    The final rule mandates the performance of certain prescribed
functions to determine the fair value of fund investments in good
faith. As suggested by many commenters, we considered an alternative
with a more principles-based approach that would not specify the types
of fair value functions that must be performed, but instead would only
state that funds should have in place practices, policies and
procedures, reporting, and recordkeeping that would allow fair values
to be determined in good faith by the board of directors or the
valuation designee. For example, funds would have greater discretion to
apply more or less rigorous valuation requirements on fair value
determinations of investments that rely on level 2 inputs, including
treating certain such investments as having readily available market
quotations, depending on what the fund deemed to be appropriate.\631\
---------------------------------------------------------------------------

    \631\ See supra section III.B.2.c) and section III.F.3.
---------------------------------------------------------------------------

    The benefits of such an approach would be that funds would have
more flexibility in what their policies and procedures, reporting, and
recordkeeping cover. To the extent this alternative would reduce
certainty for funds, it could increase compliance costs to the
detriment of fund investors. Further, a less prescriptive approach
would not adequately ensure that the board provides sufficient
oversight over the valuation designee's fair value determinations.\632\
In addition, if certain funds within a fund complex were to use the
additional flexibility afforded by a more principles-based approach to
set up practices, policies and procedures, reporting, and recordkeeping
arrangements that are different from one another, such flexibility
could increase the cost of board oversight. This could occur because a
board that is shared across funds within a fund complex may not be able
to apply a similar framework across the various funds it oversees or
because a board believes that the principles-based requirements could
be satisfied with respect to a particular fund only using different
practices, policies and procedures, reporting, and recordkeeping
arrangements. However, such flexibility would provide funds and boards
themselves the option to evaluate the tradeoffs among, for example,
non-uniform arrangements across funds, more tailored and effective
reporting, corresponding increased costs of board oversight, and
corresponding increased costs of compliance. Thus each fund could make
a choice that is more aligned with its goals and constraints, including
regulatory constraints, than under a less principles-based arrangement.
---------------------------------------------------------------------------

    \632\ We acknowledge that under the final rule, funds could face
some uncertainty regarding how to comply with the final rule's
requirements. Nevertheless, we believe that a more principles-based
approach than the final rule would increase further any uncertainty
regarding how to comply with the requirements of section 2(a)(41) of
the Act without any additional benefit of ensuring appropriate
oversight of the fair value process.
---------------------------------------------------------------------------

    A more principles-based approach would not mandate a minimum,
consistent framework for fair value and standard of baseline practices
across funds, which we believe is inherent in any good faith fair value
determination process. For these reasons, we are not adopting this
alternative.
5. Designation of the Performance of Fair Value Determinations to
Service Providers Other Than Advisers, Officers, Trustees, or
Depositors
    Under the final rule, the board may designate the adviser of the
fund, or an officer or officers of an internally managed fund, to
perform fair value determinations. For UITs, trustees or depositors of
a UIT or other entities appointed by existing UITs will perform fair
value determinations. The valuation designee carries out all of the
functions required under the final rule. As an alternative, we
considered allowing the board to designate sub-advisers or service
providers other than the adviser or an officer or officers, and
providing for parties other than trustees or depositors of a UIT, such
as a pricing service, to perform fair value determinations. Such an
approach would provide additional flexibility to the board. As noted by
commenters, pricing service providers currently provide evaluated
prices extensively to funds, many of which use these prices as fair
values for the purposes of the Act.\633\ This could also help in a
situation where the adviser's conflicts and a pricing service's
comparative expertise make designation of the adviser less desirable
and designation of the pricing service more beneficial. Likewise, the
board might also choose to designate to a party such as a pricing
service because the board assesses that the conflicts of interest with
the pricing service are less extensive, less problematic, or more
feasibly managed than those with an adviser or officers of the fund.
---------------------------------------------------------------------------

    \633\ See supra footnote 417 and accompanying discussion.
---------------------------------------------------------------------------

    Nevertheless, such an approach potentially could limit a board's
ability to oversee effectively the service provider that performs the
fair value

determinations to the extent that the board does not have the same
level of visibility, access to information, and control over the
actions of service providers other than the valuation designee as
provided in the final rule. Further, even though service providers may
have a contractual obligation to perform valuation services for the
fund, those service providers may not owe the same fiduciary duty to
the fund that an adviser would, and thus their obligation to serve the
fund's best interests may be more limited than the adviser's. We also
believe, as discussed above, that it is important for the valuation
designee to have a direct relationship with the fund's board and have
comprehensive and direct knowledge of the fund.\634\ Although the final
rule allows some persons besides advisers to perform fair value
determinations (e.g., officers of internally managed funds and trustees
and depositors of UITs) who also generally have a fiduciary duty, we
believe that retaining responsibility with a more closely associated
person is more likely to increase accountability than a third-party
service provider. Hence, such an alternative approach could compromise
the integrity of the fair values by increasing the likelihood of
conflicts with the adviser.
---------------------------------------------------------------------------

    \634\ See supra footnotes 157-158 and accompanying text.
---------------------------------------------------------------------------

    While some pricing services are also registered investment
advisers, such pricing services would not necessarily owe the same
fiduciary duties to a fund if they are not the investment adviser for
the fund, and may have conflicts of interest that are more difficult to
mitigate to the extent that the role of fair value determination and
portfolio management are integrated. Further, in cases where a single
pricing service cannot perform fair value determinations for all
assets, the process and oversight could become extremely burdensome for
funds and their boards. Finally, nothing in the final rule prevents
other service providers, such as pricing services, from continuing to
provide significant input and assistance, much as they do today, on
fair value determinations. However, retaining direct responsibility
with an adviser or more closely affiliated designee is more likely to
increase accountability and oversight over these other service
providers.
6. Not Permit Boards To Designate a Valuation Designee
    As discussed in more detail above, unlike the current regulatory
framework, the final rule permits fund boards to designate the
performance of fair value determinations to a valuation designee. In
addition, relative to the current regulatory framework, rules 2a-5 and
31a-4 will mandate more specific fair value practices, reporting, and
recordkeeping. As an alternative to these rule, we considered not
permitting fund boards to designate a valuation designee to perform
fair value determinations for the fund but instead only requiring funds
to adopt the practices, reporting, and recordkeeping as described in
the final rule. We also considered requiring boards periodically to
ratify the fair value determinations calculated by the fund's valuation
designee using a methodology determined by the board. Such an approach
could prescribe minimum requirements with respect to valuation
practices, reporting, and recordkeeping. Nevertheless, such an approach
would not allow funds the flexibility to leverage the fair value
expertise of the valuation designee and assign a role to the fund's
board that is more in line with the board's experience and expertise.
Consequently, we believe that such an approach would not result in more
efficient use of boards' time and more efficient fund operations, and
would not result in improvements in fund governance, nor would it
ultimately benefit fund investors.

IV. Paperwork Reduction Act

A. Introduction

    Certain provisions of rules 2a-5 and 31a-4 contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\635\ We are submitting the collections
of information to the Office of Management and Budget (``OMB'') for
review in accordance with the PRA.\636\ The title for the existing
collection of information is ``Investment Company Act Rule 38a-1, 17
CFR 270.38a-1, Compliance procedures and practices of registered
investment companies'' (OMB Control No. 3235-0586). We are also
submitting a new collection of information for rules 2a-5 and 31a-4.
The titles for the new collections of information will be ``Rule 2a-5
under the Investment Company Act of 1940, Fair Value'' and ``Rule 31a-4
under the Investment Company Act of 1940, Records of Fair Value
Determinations.'' An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid control number.
---------------------------------------------------------------------------

    \635\ 44 U.S.C. 3501 through 3520.
    \636\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    We discuss below the collection of information burdens associated
with new rules 2a-5, 31a-4, and their impact on the burdens of rule
38a-1.\637\ Rule 2a-5 will provide requirements for determining fair
value in good faith for purposes of section 2(a)(41) and rule 2a-4
thereunder and rule 31a-4 will provide the recordkeeping requirements
associated with this rule.
---------------------------------------------------------------------------

    \637\ The Commission's estimates of the relevant wage rates in
the tables below are based on salary information for the securities
industry compiled by the Securities Industry and Financial Markets
Association's Office Salaries in the Securities Industry 2013. The
estimated wage figures are modified by Commission staff to account
for an 1,800-hour work-year and inflation, and multiplied by 5.35
for professional staff and 2.93 for clerical staff to account for
bonuses, firm size, employee benefits, overhead, and adjusted to
account for the effects of inflation. See Securities Industry and
Financial Markets Association, Report on Management & Professional
Earnings in the Securities Industry 2013 (``SIFMA Report'').
---------------------------------------------------------------------------

B. Rule 2a-5

    Rule 2a-5 will provide requirements for determining fair value in
good faith for purposes of section 2(a)(41) and rule 2a-4 thereunder.
This determination will involve assessing and managing material risks
associated with fair value determinations; selecting, applying, and
testing fair value methodologies; and evaluating any pricing services
used. The final rule will permit a fund's board of directors to
designate the performance of fair value determinations relating to any
or all fund investments to a valuation designee, which will carry out
all of these requirements, subject to board oversight and certain
reporting and other requirements designed to facilitate the board's
ability effectively to oversee the valuation designee's fair value
determinations. As relevant here, the final rule will require, if the
board designates performance of fair value determinations to a
valuation designee, that the valuation designee report to the board in
both periodic and as needed reports on a per-fund basis.\638\
---------------------------------------------------------------------------

    \638\ Rule 2a-5(b).
---------------------------------------------------------------------------

    The respondents to rule 2a-5 will be registered investment
companies and BDCs.\639\ We estimate that 9,804 funds will be affected
by rule 2a-5, of which 9,335 are not UITs.\640\ Compliance with rule
2a-5 will be mandatory for any fund that will need to determine fair
value under the Act. To the extent that records will be required to be
created and maintained under the final rule are provided to the
Commission in connection with examinations or investigations, such
information will be

kept confidential subject to the provisions of applicable law.
---------------------------------------------------------------------------

    \639\ See Rule 2a-5(e)(1) (defining ``fund'').
    \640\ See supra footnotes 508-509 and accompanying text.
---------------------------------------------------------------------------

    Table 3 below summarizes the PRA initial and ongoing burden
estimates associated with the board reporting requirements under the
final rule, as well as the proposed burden estimates. Some commenters
argued that the burden estimates as proposed for this requirement were
too low, arguing in particular that the cost to produce the items that
would have been required on a quarterly basis as part of the proposed
periodic reporting requirements would be in excess of what we had
assumed due to burdens of both creating these reports and of reviewing
them on the part of the board.\641\ While we have clarified that
certain reporting that commenters thought was suggested in the proposed
rule will not be required in the final rule and made other changes to
address these concerns,\642\ we are nonetheless increasing our
estimates for the final rule in consideration of these comments. We
also have corrected certain estimates, specifically to include an
initial burden as we believe the final rule will impose some start-up
burdens and to update the wage rates for relevant personnel. We have
also updated the estimated number of respondents based upon updated
data.\643\ Lastly, we increased the estimated amount of external cost
burden to include costs relating to both legal and accounting services
as the proposed estimate only estimated external costs relating to
legal expenses.
---------------------------------------------------------------------------

    \641\ See Sullivan Comment Letter; TRP Comment Letter; SIFMA AMG
Comment Letter; American Trustees Comment Letter; see also Capital
Group Comment Letter; Guggenheim Trustees Comment Letter.
    \642\ See supra section II.B.2.
    \643\ See supra footnotes 508-509 and accompanying text.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TR06JA21.001

BILLING CODE 8011-01-C

C. Rule 31a-4

    Rule 31a-4 contains the recordkeeping requirements associated with
rule 2a-5. Specifically, registered investment companies and BDCs, or
their advisers, will be required to maintain appropriate documentation
to support fair value determinations made pursuant to rule 2a-5.\644\
Further, if the board of the fund designates performance of fair value
determinations to a valuation designee under the final rule, the fund
or adviser will need to maintain certain additional records relating to
that designation.\645\ The respondents to rule 31a-4 will be registered
investment companies and BDCs.\646\ We estimate that 9,804 funds will
be affected by rule 31a-4.\647\ Compliance with rule 31a-4 will be
mandatory for any fund that will need to determine fair value under the
Act. To the extent that records that will be required to be created and
maintained under this rule are provided to the Commission in connection
with examinations or investigations, such information will be kept
confidential subject to the provisions of applicable law.
---------------------------------------------------------------------------

    \644\ Rule 31a-4(a).
    \645\ Rule 31a-4(b).
    \646\ See Rule 2a-5(e)(1) (defining ``fund'').
    \647\ See supra footnotes 508-509 and accompanying text.
---------------------------------------------------------------------------

    Table 4 below summarizes the PRA initial and ongoing burden
estimates associated with the rule, as well as the proposed burden
estimates. Some commenters argued that the burden estimates as proposed
for this requirement were too low.\648\ Specifically, these commenters
stated that the proposed requirement to maintain documentation to
support fair value determinations, including information regarding the
specific methodologies applied and the assumptions and inputs
considered when making fair value determinations, would result in the
valuation designee needing to obtain significant amounts of data that
it would not otherwise obtain and retain it when it utilizes a pricing
service,\649\ and would require funds or valuation designees to hire
additional personnel to be able to comply.\650\ While we have clarified
that certain recordkeeping that commenters thought was suggested in the
proposed rule will not be required in rule 31a-4 as adopted and made
other changes to address these concerns,\651\ we are nonetheless
significantly increasing our estimates for this rule in consideration
of these comments. We have also updated the estimated number of
respondents based upon updated data.\652\ We also further revised
certain estimates, specifically to include the likely involvement of a
compliance attorney in the formulation of policies and procedures
relating to this requirement and to update the wage rates for relevant
personnel.
---------------------------------------------------------------------------

    \648\ See, e.g., ICI Comment Letter; Fidelity Comment Letter;
Vanguard Comment Letter; Guggenheim Comment Letter; Guggenheim
Trustees Comment Letter. But see Davidson Comment Letter (suggesting
that the Commission provided ample reason to believe that the costs
of compliance would be on the smaller side).
    \649\ See, e.g., ICI Comment Letter; IDC Comment Letter; SSGA
Comment Letter; Fidelity Comment Letter; TRP Comment Letter; John
Hancock Comment Letter; ICE Data Comment Letter (noting that pricing
services would need to increase fees to compensate for the demands
for records under the proposed regime).
    \650\ See Guggenheim Trustees Letter; Guggenheim Comment Letter.
    \651\ See supra section II.C.
    \652\ See supra footnotes 508-509 and accompanying text.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

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[GRAPHIC] [TIFF OMITTED] TR06JA21.003

BILLING CODE 8011-01-C

D. Rule 38a-1

    As discussed above, after our adoption of rules 2a-5 and 31a-4,
rule 38a-1 will require the adoption and implementation of written
policies and procedures reasonably designed to prevent violations of
the requirements of the rules.\653\ To comply with rule 38a-1, these
policies and procedures must be tailored to rules 2a-5 and 31a-4's
requirements to ensure that a board or valuation designee, as
applicable, determines the fair value of fund investments in compliance
with the rules. In our most recent PRA submission for rule 38a-1, we
estimated for rule 38a-1 a total hour burden of 235,720 hours, at a
time cost of $86,784,720, and no external burdens.\654\
---------------------------------------------------------------------------

    \653\ See supra section II.A.5.
    \654\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2020.
---------------------------------------------------------------------------

    The table below summarizes the PRA initial and ongoing burden
estimates associated with the new fair value policies and procedures.
BILLING CODE 4011-01-P

[GRAPHIC] [TIFF OMITTED] TR06JA21.004

BILLING CODE 4011-01-C

V. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory
Flexibility Analysis (``FRFA'') in accordance with section 604 of the
Regulatory Flexibility Act (``RFA'').\655\ It relates to new rules 2a-5
and 31a-4. An Initial Regulatory Flexibility Analysis (``IRFA'') was
prepared in accordance with the RFA and included in the Proposing
Release.\656\
---------------------------------------------------------------------------

    \655\ 5 U.S.C. 604.
    \656\ See Proposing Release, supra footnote 2, at section V.

---------------------------------------------------------------------------

A. Need for the Rules

    The Commission is adopting new rule 2a-5 in order to address
practices and the role of the board of directors with respect to the
fair value of the investments of the fund. The Commission is also
adopting rule 31a-4 to address the recordkeeping requirements
associated with rule 2a-5. Under section 2(a)(41), the board must
determine in good faith the fair value of fund assets for which no
market quotations are readily available. Rule 2a-5 is designed to
specify how a board or valuation designee, as applicable, must make
good faith determinations of fair value as well as when the board can
designate the performance of these determinations to a valuation
designee, while still ensuring that fund investments are valued in a
way consistent with the Investment Company Act.\657\
---------------------------------------------------------------------------

    \657\ Under the final rule, the valuation designee must be a
fund's adviser or, if the fund is internally managed, an officer of
the fund. The trustee or depositor of a UIT (or in the case of
existing UITs another entity designated to do so in the UIT's
documentation), which does not have a board, will perform fair value
determinations.
---------------------------------------------------------------------------

    Rule 2a-5 will provide requirements for determining fair value in
good faith for purposes of section 2(a)(41) of the Act and rule 2a-4
thereunder. This determination will be required to involve: Assessing
and managing material risks associated with fair value determinations;
selecting, applying, and testing fair value methodologies; evaluating
any pricing services used; and maintaining certain records required by
rule 31a-4.\658\ The rules will permit a fund's board of directors to
designate the performance of these requirements to a valuation designee
for some or all of the fund's investments, subject to board oversight
and certain reporting, recordkeeping, and other requirements designed
to facilitate the board's ability effectively to oversee the valuation
designee's fair value determinations.\659\ Rule 2a-5 will also define
when market quotations are readily available under section 2(a)(41) of
the Act. Lastly, rule 2a-5 will have the trustee or depositor of a UIT
(or in the case of existing UITs another entity designated to do so in
the UIT's documentation) carry out the requirements of the rules. The
requirements of rule 2a-5 associated with the fair value as determined
in good faith and readily available market quotations are designed to
create a minimum, consistent framework for fair value and standard of
baseline practices across funds, and reflects our understanding of
current market practices.\660\ The requirements of rule 2a-5 associated
with the designation of the performance of responsibilities to a
valuation designee are designed to ensure that the board effectively
oversees such valuation designee, including receiving sufficient
information to do so.\661\ The recordkeeping requirements of rule 31a-4
are designed to help ensure compliance with the other
requirements.\662\
---------------------------------------------------------------------------

    \658\ As a result of the adoption of rule 2a-5, under rule 38a-1
funds or the adviser must adopt and implement policies and
procedures reasonably designed to comply with rule 2a-5.
    \659\ For internally managed funds, the board may designate an
officer or officers of the fund to perform fair value
determinations.
    \660\ See supra sections I, II.A, and II.D.
    \661\ See supra section II.B.
    \662\ See supra sections II.A.5 II.C.
---------------------------------------------------------------------------

    All of these requirements are discussed in detail in section II of
this release. The costs and burdens of these requirements on small
funds are discussed below as well as above in our Economic Analysis and
Paperwork Reduction Act Analysis, which discuss the applicable costs
and burdens on all funds.\663\
---------------------------------------------------------------------------

    \663\ See supra section III and IV. These sections also discuss
the professional skills that we believe compliance with the rules
will entail.
---------------------------------------------------------------------------

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on every aspect of
the IRFA, including the number of small entities that would be affected
by the proposed rule, the existence or nature of the potential impact
of the proposal on small entities discussed in the analysis, and how to
quantify the impact of the proposed rule. We also requested comment on
the proposed compliance burdens and the effect these burdens would have
on smaller entities.
    Although we did not receive comments specifically addressing the
IRFA, some commenters noted the impact of certain aspects of proposed
rule 2a-5 on smaller funds. For example, one commenter suggested that
we allow funds to assign fair value determinations to entities other
than the adviser, such as the fund's administrator, to make it easier
for smaller funds to comply with the proposed rule.\664\ Another
commenter argued that we should adopt a more principles-based approach
that would be less burdensome on smaller funds.\665\ Additionally, a
few commenters stated that the proposed quarterly reporting requirement
would be unnecessarily burdensome, including for smaller funds, because
many of the valuation issues described in the Proposing Release are
unlikely to change on a quarterly basis.\666\ Furthermore, with regard
to the requirement that certain valuation issues be reported promptly
to the fund's board, one commenter suggested that we allow one of the
independent directors on the board to receive these reports to make the
requirement less burdensome for small funds.\667\ Finally, one
commenter suggested that the recordkeeping requirements of the proposed
rule 2a-5 was duplicative with the section 31 rules.\668\ After
considering the comments we received, we are adopting the rules, with
certain modifications from the proposal intended to address many of the
challenges commenters identified.
---------------------------------------------------------------------------

    \664\ IDC Comment Letter.
    \665\ ABA Comment Letter.
    \666\ Sullivan Comment Letter. See also ICI Comment Letter.
    \667\ Murphy Comment Letter.
    \668\ NYC Bar Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we believe that it is important to establish a
minimum and consistent framework for fair value practices across funds,
including for small funds.\669\ Therefore, rule 2a-5 establishes
requirements for engaging in fair value determinations that are broadly
applicable to all funds, including small funds, and that we believe
should be part of any good faith fair value determination. However, we
have made certain modifications to the requirements of the proposed
rule to enhance flexibility and ease certain unnecessary burdens. For
example, we have made certain changes to the proposed quarterly
reporting requirements designed to enhance flexibility of reporting to
match boards' needs better and to minimize the chance that boards
receive reporting that is too detailed or repetitive to facilitate
appropriate oversight.\670\ Additionally, in a change from the
proposal, which would have permitted boards to assign only to an
adviser of the fund, rule 2a-5 will permit boards to designate the
fund's adviser to perform fair value determinations or, if the fund is
internally managed, an officer of the fund. Furthermore, rule 2a-5
clarifies, in response to commenters,\671\ that the board or the
valuation designee can seek the assistance of other parties that
provide services that are essential for fair value determination, such
as a pricing service or the fund

administrator, among others. Finally, new rule 31a-4 contains the
recordkeeping requirements associated with rule 2a-5. We believe that
these modifications will make it less burdensome for small funds to
comply with the rules, while still maintaining the integrity of the
fair value process across all funds.
---------------------------------------------------------------------------

    \669\ See supra text accompanying footnote 13.
    \670\ See supra section II.B.2 (noting that the final rule will
require a quarterly summary or description of material fair value
matters that occurred in the prior quarter while the annual report
will include an assessment of the adequacy and effectiveness of the
valuation designee's process for determining the fair value of
designated investments).
    \671\ Sullivan Comment Letter.
---------------------------------------------------------------------------

C. Small Entities Subject to the Rule

    For purposes of Commission rulemaking in connection with the
Regulatory Flexibility Act, an investment company is a small entity if,
together with other investment companies in the same group of related
investment companies, it has net assets of $50 million or less as of
the end of its most recent fiscal year (a ``small fund'').\672\
Commission staff estimates that, as of June 2020, approximately 40
registered open-end mutual funds,\673\ 8 registered ETFs, 26 registered
closed-end funds,\674\ 2 UITs, and 12 BDCs \675\ (collectively, 88
funds) are small entities.\676\
---------------------------------------------------------------------------

    \672\ See 17 CFR 270.0-10(a) [rule 0-10(a) under the Investment
Company Act].
    \673\ None of these registered open-end funds are internally
managed.
    \674\ 7 of these registered closed-end funds are internally
managed.
    \675\ 3 of these BDCs are internally managed.
    \676\ This estimate is derived an analysis of data obtained from
Morningstar Direct as well as data reported to the Commission for
the period ending June 2020.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

    The rules will require fair value determinations under the Act to
be made according to a specific process for affected funds, including
those that are small entities. This process will include a requirement
to maintain certain records to support fair value determinations.\677\
The rules will permit fund boards to designate the valuation designee
to perform fair value determinations if the valuation designee, in
addition to the above, makes certain reports to the fund's board
regarding the fair value process in writing. Funds will also be
required to keep certain additional records in such circumstances. We
therefore believe that there are two principal reporting,
recordkeeping, or other compliance requirements associated with the
rules: (1) Recordkeeping requirements and (2) board reporting
requirements.
---------------------------------------------------------------------------

    \677\ As discussed above, after our adoption of rule 2a-5,
pursuant to rule 38a-1 funds should adopt and implement written fair
value policies and procedures reasonably designed to prevent
violations of rule 2a-5. See supra section II.A.5.
---------------------------------------------------------------------------

1. Recordkeeping
    The recordkeeping requirements of rule 31a-4 are designed to help
ensure compliance with rule 2a-5's requirements and aid in oversight.
Rule 31a-4 will require the fund to keep appropriate documentation to
support fair value determinations for at least six years from the time
the determination was made, the first two years in an easily accessible
place.\678\ Further, should the board designate the valuation designee
to perform fair value determinations, the fund must keep, in addition
to the records above, copies of the reports and other information
provided to the board for at least six years after the end of the
fiscal year in which the documents were made, the first two years in an
easily accessible place and a specified list of the investments or
investment types whose fair value determination has been designated to
the valuation designee, in each case for at least six years after the
end of the fiscal year in which the determinations were provided to the
board or the investments or investment types were designated to the
valuation designee, the first two years in an accessible place.\679\
---------------------------------------------------------------------------

    \678\ Rule 31a-4(a). Rule 38a-1 also will require funds to keep
a copy of the fair value policies and procedures that are in effect,
or were in effect at any time within the past five years, in an
easily accessible place.
    \679\ Rule 31a-4(b).
---------------------------------------------------------------------------

    These requirements will impose burdens on all funds, including
those that are small entities. The specifics of these burdens are
discussed in the Economic Analysis and Paperwork Reduction Act sections
above.\680\ There are different factors that would affect whether a
smaller fund incurs costs relating to this requirement that are on the
higher or lower end of the estimated range. For example, we would
expect that smaller funds--and more specifically, smaller funds that
are not part of a fund complex--may not have recordkeeping systems that
meet all the elements that are required under this rule. Also, while
larger funds or funds that are part of a large fund complex may incur
higher costs related to these requirements in absolute terms relative
to a smaller fund or a fund that is part of a smaller fund complex, a
smaller fund may find it more costly, per dollar managed, to comply
with the requirements because it will not be able to benefit from a
larger fund complex's economies of scale.\681\
---------------------------------------------------------------------------

    \680\ See supra section III.C.3. This section and section IV
also discuss the professional skills that we believe compliance with
this aspect of the proposal would entail.
    \681\ See supra section III.E.
---------------------------------------------------------------------------

2. Board Reporting
    The requirement for board reporting by the valuation designee is
designed to ensure that the board can exercise sufficient oversight
over the fair value process. The final rule will require two general
types of reports, periodic reports and prompt reports. Periodic reports
rule will require the valuation designee to make both annual and
quarterly written reports to the board. The quarterly reports must
include any specific reports or materials boards request related to the
fair value of designated investments or the valuation designee's
process for fair valuing fund investments. In addition, the final rule
requires a quarterly summary or description of material fair value
matters that occurred in the prior quarter, including some specific
summaries and descriptions. The final rule will also require an annual
assessment of the adequacy and effectiveness of the valuation
designee's process for determining the fair value of designated
investments. The prompt reporting requirement will require the
valuation designee to provide a written notification of the occurrence
of matters associated with the valuation designee's process that
materially affect the fair value of the designated portfolio of
investments (defined as ``material matters'') within a time period
determined by the board, but in no event later than five business days
after the valuation designee becomes aware of the material matter.
Material matters in this instance include an assessment of a
significant deficiency or material weakness in the design or
effectiveness of the valuation designee's fair value determination
process or of material errors in the calculation of net asset value.
The valuation designee must also provide such timely follow-on reports
as the board may reasonably determine appropriate.\682\
---------------------------------------------------------------------------

    \682\ See supra section II.B.2.
---------------------------------------------------------------------------

    These requirements will impose burdens on all funds, including
those that are small entities. The specifics of these burdens are
discussed in the Economic Analysis and Paperwork Reduction Act sections
above.\683\ There are different factors that will affect whether a
smaller fund incurs costs related to this requirement that are on the
higher or lower end of the estimated range. For example, smaller
funds--and more specifically, smaller funds that are not part of a fund
complex--may not have an advisory agreement that has a reporting
mechanism that meets all the elements that will be required under the

final rule. Also, while larger funds or funds that are part of a large
fund complex may incur higher costs, via increased advisory fees for
valuation designees to take on this responsibility on behalf of such
funds, related to this requirement in absolute terms relative to a
smaller fund or a fund that is part of a smaller fund complex, a
smaller fund may find it more costly, per dollar managed, to comply
with the final requirement because it will not be able to benefit from
a larger fund complex's economies of scale.\684\
---------------------------------------------------------------------------

    \683\ See supra section III.C.3 and section IV.
    \684\ See supra section III.C.1.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs the Commission to consider significant alternatives
that would accomplish our stated objective, while minimizing any
significant economic impact on small entities. We considered the
following alternatives for small entities in relation to our proposal:
(1) Exempting funds that are small entities from the proposed
reporting, recordkeeping, and other compliance requirements, to account
for resources available to small entities; (2) establishing different
reporting, recordkeeping, and other compliance requirements or
frequency, to account for resources available to small entities; (3)
clarifying, consolidating, or simplifying the requirements under the
proposal for small entities; and (4) using performance rather than
design standards.
    We do not believe that exempting small funds from the provisions in
the rules would permit us to achieve our stated objectives, principally
to protect investors from improper valuations. Further, the board
reporting and additional recordkeeping provisions of the rules only
affect fund boards that designate a valuation designee to perform fair
value determinations, and, therefore, the rules will require funds to
comply with these specific requirements only if the boards designated
responsibilities to a valuation designee. However, we expect that most
funds holding securities that must be fair valued will do so.
Therefore, if a board to a small entity does not do this and instead
performs its statutory function directly, then the small entity would
not be subject to these provisions of the rules.
    We estimate that 72% of all funds will be subject to the rules in
making fair value determinations.\685\ This estimate indicates that
some funds, including some small funds, will be unaffected by the
rules. However, for small funds that are affected by the rules,
providing an exemption for them could subject investors in small funds
to a higher degree of risk than investors in large funds that will be
required to comply with the elements of the rules.
---------------------------------------------------------------------------

    \685\ See supra footnote 508 and accompanying text.
---------------------------------------------------------------------------

    As discussed throughout this release, we believe that the rules
will result in investor protection benefits, and these benefits should
apply to investors in smaller funds as well as investors in larger
funds. We therefore do not believe it would be appropriate to exempt
small funds from the rules' requirements, or to establish different
requirements applicable to funds of different sizes under these
provisions to account for resources available to small entities. We
believe that all of the elements of the rules should work together to
produce the anticipated investor protection benefits, and therefore do
not believe it is appropriate to except smaller funds because we
believe this would limit the benefits to investors in such funds.
    We also do not believe that it would be appropriate to subject
small funds to different reporting, recordkeeping, and other compliance
requirements or frequency. Similar to the concerns discussed above, if
the rules included different requirements for small funds, it could
raise investor protection concerns for investors in small funds in that
small funds face the same conflicts of interest that can lead to
mispricing and otherwise harm investors that larger funds do.
    We do not believe that clarifying, consolidating, or simplifying
the requirements under the rules for small funds, beyond that already
adopted for all funds, would permit us to achieve our stated
objectives. Again, this approach would raise investor protection
concerns for investors in small funds. We believe, as outlined above in
the discussion of the rules and the guidance contained in this release,
that the requirements of the rules are, to some extent, current
industry practice under existing rules, with some changes from current
practice. As a result, we think that the rules could result in a
reduction in the current burdens experienced by small entities to the
extent that they are subject to the rules.
    The costs associated with rules 2a-5 and 31a-4 will vary depending
on a fund's particular circumstances, and thus the rules could result
in different burdens on funds' resources. In particular, we expect that
a fund that does not have reporting or recordkeeping practices similar
to those that will required by the rules would need to modify those
practices. Thus, to the extent a fund that is a small entity already
has a fair value process that is consistent with the requirements of
the rules, we believe it will incur relatively low costs to comply with
it. However, we believe that it is appropriate to correlate the costs
associated with the rules with the fund's actual fair value process,
and not necessarily with the fund's size in light of our investor
protection objectives.
    Finally, with respect to the use of performance rather than design
standards, the rules generally use design standards for all funds
subject to the rules, regardless of size. We believe that providing
funds with the flexibility permitted in the rules with respect to
designing specific fair value process is appropriate because of the
fact-specific nature of making fair value determinations.

VI. Update to Codification of Financial Reporting Policies

    The Commission amends the ``Codification of Financial Reporting
Policies'' announced in Financial Reporting Release No. 1 (April 15,
1982) [47 FR 21028 (May 17, 1982]) as follows:
    1. By removing and reserving Section 404.03.
    2. By removing and reserving Section 404.04.
    3. By amending Section 404.05.c.2. as follows:
    a. By removing the last paragraph under the subject heading ``Fair
Value for Thinly Traded Securities.''
    b. By removing the subject heading ``Use of Pricing Services'' and
the paragraphs included below that subject heading.
    The Codification is a separate publication of the Commission. It
will not be published in the Federal Register or Code of Federal
Regulations. For more information on the Codification of Financial
Reporting Policies, contact the Commission's Public Reference Room at
(202) 551-5450.

Statutory Authority

    The Commission is adopting rules 2a-5 and 31a-4 under the authority
set forth in sections 2(a), 6(c), 31(a), 31(c), 38(a), 59, and 64(a) of
the Investment Company Act of 1940 [15 U.S.C. 80a-2(a), 80a-6(c), 80a-
30(a), 80a-31(c), 80a-37(a), 80a-58, and 80a-63(a)].

List of Subjects

17 CFR Part 210

    Accountants, Accounting, Banks, Banking, Employee benefit plans,
Holding companies, Insurance companies, Investment companies, Oil and
gas exploration, Reporting and

recordkeeping requirements, Securities, Utilities.

17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements,
Securities.

Text of Rule Amendments

    For the reasons set out in the preamble, we are amending title 17,
chapter II of the Code of Federal Regulation as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to read as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n,
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30,
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c),
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.

0
2. Amend Sec.  210.6-03 by revising paragraph (d) to read as follows:

Sec.  210.6-03   Special rules of general application to registered
investment companies and business development companies.

* * * * *
    (d) Valuation of investments. The balance sheets of registered
investment companies, other than issuers of face-amount certificates,
and business development companies, shall reflect all investments at
value, with the aggregate cost of each category of investment reported
under Sec.  210.6-04 subsection 1, 2, 3, and 9 or the aggregate cost of
each category of investment reported under Sec.  210.6-05 subsection 1
shown parenthetically. State in a note the methods used in determining
the value of investments. As required by section 28(b) of the
Investment Company Act of 1940 (15 U.S.C. 80a-28(b)), qualified assets
of face-amount certificate companies shall be valued in accordance with
certain provisions of the Code of the District of Columbia.
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
3. The general authority citation for part 270 continues to read as
follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
* * * * *

0
4. Add Sec.  270.2a-5 to read as follows:

Sec.  270.2a-5   Fair value determination and readily available market
quotations.

    (a) Fair value determination. For purposes of section 2(a)(41) of
the Act (15 U.S.C. 80a-2(a)(41)) and Sec.  270.2a-4, determining fair
value in good faith with respect to a fund requires:
    (1) Assess and manage risks. Periodically assessing any material
risks associated with the determination of the fair value of fund
investments (``valuation risks''), including material conflicts of
interest, and managing those identified valuation risks;
    (2) Establish and apply fair value methodologies. Performing each
of the following, taking into account the fund's valuation risks:
    (i) Selecting and applying in a consistent manner an appropriate
methodology or methodologies for determining (and calculating) the fair
value of fund investments, provided that a selected methodology may be
changed if a different methodology is equally or more representative of
the fair value of fund investments, including specifying the key inputs
and assumptions specific to each asset class or portfolio holding;
    (ii) Periodically reviewing the appropriateness and accuracy of the
methodologies selected and making any necessary changes or adjustments
thereto; and
    (iii) Monitoring for circumstances that may necessitate the use of
fair value;
    (3) Test fair value methodologies. Testing the appropriateness and
accuracy of the fair value methodologies that have been selected,
including identifying the testing methods to be used and the minimum
frequency with which such testing methods are to be used; and
    (4) Evaluate pricing services. Overseeing pricing service
providers, if used, including establishing the process for approving,
monitoring, and evaluating each pricing service provider and initiating
price challenges as appropriate.
    (b) Performance of fair value determinations. The board of the fund
must determine fair value in good faith for any or all fund investments
by carrying out the functions required in paragraph (a) of this
section. The board may choose to designate the valuation designee to
perform the fair value determination relating to any or all fund
investments, which shall carry out all of the functions required in
paragraph (a) of this section, subject to the requirements of this
paragraph (b).
    (1) Oversight and reporting. The board oversees the valuation
designee, and the valuation designee reports to the fund's board, in
writing, including such information as may be reasonably necessary for
the board to evaluate the matters covered in the report, as follows:
    (i) Periodic reporting. (A) At least quarterly:
    (1) Any reports or materials requested by the board related to the
fair value of designated investments or the valuation designee's
process for fair valuing fund investments; and
    (2) A summary or description of material fair value matters that
occurred in the prior quarter, including:
    (i) Any material changes in the assessment and management of
valuation risks required under paragraph (a)(1) of this section,
including any material changes in conflicts of interest of the
valuation designee (and any other service provider);
    (ii) Any material changes to, or material deviations from, the fair
value methodologies established under paragraph (a)(2) of this section;
and
    (iii) Any material changes to the valuation designee's process for
selecting and overseeing pricing services, as well as any material
events related to the valuation designee's oversight of pricing
services; and
    (B) At least annually, an assessment of the adequacy and
effectiveness of the valuation designee's process for determining the
fair value of the designated portfolio of investments, including, at a
minimum:
    (1) A summary of the results of the testing of fair value
methodologies required under paragraph (a)(3) of this section; and
    (2) An assessment of the adequacy of resources allocated to the
process for determining the fair value of designated investments,
including any material changes to the roles or functions of the persons
responsible for determining fair value under paragraph (b)(2) of this
section; and
    (ii) Prompt board notification and reporting. The valuation
designee notifies the board of the occurrence of matters that
materially affect the fair value of the designated portfolio of
investments, including a significant deficiency or material weakness in
the design or effectiveness of the valuation designee's fair value
determination process, or material errors in the calculation of net
asset value, (any such matter or error, a ``material matter'') within a
time period determined by the

board (but in no event later than five business days after the
valuation designee becomes aware of the material matter), with such
timely follow-on reporting as the board may determine appropriate; and
    (2) Specify responsibilities. The valuation designee specifies the
titles of the persons responsible for determining the fair value of the
designated investments, including by specifying the particular
functions for which they are responsible, and reasonably segregates
fair value determinations from the portfolio management of the fund
such that the portfolio manager(s) may not determine, or effectively
determine by exerting substantial influence on, the fair values
ascribed to portfolio investments.
    (c) Readily available market quotations. For purposes of section
2(a)(41) of the Act (15 U.S.C. 80a-2(a)(41)), a market quotation is
readily available only when that quotation is a quoted price
(unadjusted) in active markets for identical investments that the fund
can access at the measurement date, provided that a quotation will not
be readily available if it is not reliable.
    (d) Unit investment trusts. If the fund is a unit investment trust,
and the initial deposit of portfolio securities into the unit
investment trust occurs after March 8, 2021, the fund's trustee or
depositor must carry out the requirements of paragraph (a) of this
section. If the initial deposit of portfolio securities into the unit
investment trust occurred before March 8, 2021, and an entity other
than the fund's trustee or depositor has been designated to carry out
the fair value determination, that entity must carry out the
requirements of paragraph (a) of this section.
    (e) Definitions. For purposes of this section:
    (1) Fund means a registered investment company or business
development company.
    (2) Fair value means the value of a portfolio investment for which
market quotations are not readily available under paragraph (c) of this
section.
    (3) Board means either the fund's entire board of directors or a
designated committee of such board composed of a majority of directors
who are not interested persons of the fund.
    (4) Valuation designee means the investment adviser, other than a
sub-adviser, of a fund or, if the fund does not have an investment
adviser, an officer or officers of the fund.

0
5. Add Sec.  270.31a-4 to read as follows:

Sec.  270.31a-4   Records to be maintained and preserved by registered
investment companies relating to fair value determinations.

    (a) Appropriate documentation. Every registered investment company
shall maintain appropriate documentation to support fair value
determinations made pursuant to Sec.  270.2a-5 for at least six years
from the time that the determination was made, the first two years in
an easily accessible place.
    (b) Records when designating. If the board of a registered
investment company has designated performance of fair value
determinations to a valuation designee under Sec.  270.2a-5(b), in
addition to the records required in paragraph (a) of this section, the
registered investment company must maintain copies of:
    (1) The reports and other information provided to the board as
required under Sec.  270.2a-5(b)(1) for at least six years after the
end of the fiscal year in which the documents were provided to the
board, the first two years in an easily accessible place; and
    (2) A specified list of the investments or investment types whose
fair value determination has been designated to the valuation designee
to perform pursuant to Sec.  270.2a-5(b) for a period beginning with
the designation and ending at least six years after the end of the
fiscal year in which the designation was terminated, in an easily
accessible place until two years after such termination.
    (c) Party to maintain. If the board of a registered investment
company has designated performance of fair value determinations to its
investment adviser under Sec.  270.2a-5(b), such investment adviser
shall maintain the records required by this section. If the investment
adviser is not so designated, the fund shall maintain such records.

    By the Commission.

    Dated: December 3, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-26971 Filed 1-5-21; 8:45 am]
BILLING CODE 8011-01-P