New SEC Fair Pricing Rule Needs Careful Review

coverage and clarity
“When it comes to validation and pricing, coverage is an extremely important factor,” Shetty said, noting that the rule covers different asset classes across fixed income and derivatives. In order to comply with SEC regulations, valuation officers and fund directors are expected to focus on a number of aspects, including a price provider’s process and methodology used to value various asset classes, detailed methodology descriptions for individual security types and sub-types, and detailed information on the different sources used to rate different asset and sub-asset classes, he said, adding that the comprehensive coverage would bring transparency to the fund’s board.

Another key differentiator is a vendor’s approach to data input and output, Kirk said. For input data, “access to high-quality and timely datasets used to fuel the independent pricing process is critical,” he said. And for output data, it’s important to provide additional details about pricing, specifically “not just a price, but additional metrics that help.” [funds] build a better picture of the context around that price and give them the ability to leverage some of those transparency metrics.”

Fund directors, advisors and evaluators would also tend to take a closer look at how technology and innovation are facilitating data access, transparency and delivery to ensure SEC compliance, Shetty said. “The methodology has to be adapted individually for each asset class. For example, the methodology used to price securitized securities is not the same as that used to price municipal bonds.” Fund executives need to ask themselves, “Does the provider have models that are specific to each asset class and what are the platforms and features for each Asset class seamlessly integrated from a customer service perspective?”

To provide timely pricing information, Kirk said, vendors must maintain a well-designed system that allows data to be delivered to the right recipient at the fund company at the right time. “Like at the end of the day in New York when they want to tag their books,” he said.

understand data
Data analysis is another essential aspect in determining fair pricing for all providers and made even more important by the new regulation. “Alongside pricing platforms and models, we have now seen the aggressive use of technology to accurately collect and analyze data for pricing purposes. Over the past several decades, the available market color for pricing fixed income securities has increased significantly, making timeliness in utilizing and leveraging the data for pricing critical,” said Shetty. “That is, is historical market color weighted the same as current market color?”

Easy access to fund clients, advisors and fund board valuation officers is also a key requirement. Providers spend time creating support portals tailored to the needs of their customers. “When it comes to delivery, funds may have preferred delivery mechanisms to consume price data, be it via flat files or APIs,” Shetty said.

“We have gathered relevant information [SEC Rule] 2a-5 and noted that the majority of the information that funds must comply under the rule is already available through our service. To make documentation access more seamless, the buy-side is looking for vendors that create web-based portals that host all relevant information in one place. We built one of these portals so customers can regularly download the necessary information to provide to their boards,” he added.

price war
For fund directors, advisors or valuation officers, the importance of highly responsive client support cannot be overstated, especially when values ​​are disputed, Kirk said. “Responsiveness to price challenges is a factor that funds need to consider. The processes vendors have in place to address pricing challenges and [conduct] Deep dives and the support and reporting provided will help them evaluate this aspect.”

The SEC rule mandates a communicated process whereby valuation assumptions, data, inputs and analysis must be transparent and documented. “When clients desire a deeper dive after a price challenge, we walk the client through our security pricing process in detail,” said Shetty. “Through deep dives, clients gain insights into input data sourcing, quality control processes, pricing methodology and workflows, all related to a specific underlying security.”

Another aspect of fund pricing that the SEC rule is intended to address and that affects all investors is the potential conflict of interest of fund managers who have significant influence over asset determination. “The intent of the rule here is that [market participants] know to what extent a paying customer can influence the price quality or price changes of certain instruments. [The SEC] is asking for pricing services to make it clear that they can control these aspects,” Shetty said.

Given that many funds hold global assets, a price provider’s ability to have both an international presence and expertise in local markets can also be important. To that end, it helps if a pricing service “provides timely access to local people who are experts in their field. [And] If there are questions from customers in that region, they have on-site support during local time,” Kirk said.

A one stop shop
The Sept. 8 compliance date for SEC Rule 2a-5 has prompted a number of small and mid-sized asset owners and fund managers to scramble to find multiple providers that can meet the complex requirements of the fair value regulation, he said shetty “We have seen that the larger customers are already multi-sourcing. They had a primary, secondary and in some cases tertiary provider to assist them in their pricing process to find anomalies in transactions or to get a better picture of where the market is pricing securities.”

With the compliance deadline approaching, vendors are working urgently and closely with clients, and assessment officers meet compliance with ease and rigor. “Whether it’s providing access to methodological guides, price challenge statistics and more transparency on the inputs used via a portal, or presenting them to a fund board to support their oversight and governance [an] independent pricing service – all of these aspects help fund directors to meet their commitments,” Kirk said.

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