2.5% and 5% of outstanding shares. These features allow tender offer funds to remain fully invested if circumstances warrant. The valuation of tender offer fund portfolio assets is governed by Rule 2a-5 under the 1940 Act and, for financial reporting purposes, by ASC 820 (Fair Value Measurement). Rule 2a-5, adopted by the SEC in December 2020, establishes the standard for determining the fair value of fund investments. It permits boards to designate a fund’s investment adviser as the “valuation designee,” which then becomes responsible for performing fair value determinations subject to board oversight. 8 ASC 820 establishes a three-level hierarchy for classifying fair value measurements based on the observability of the inputs used to value an asset: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices) and Level 3 (unobservable inputs, including management's own assumptions). Tender offer funds invest predominantly in Level 3 assets under the ASC 820 hierarchy, meaning the fair values of their assets are determined using valuation models and techniques that rely on inputs not readily observable in active markets. Unlike exchange-traded securities, whose prices are updated continuously, Level 3 asset valuations may not change on a daily basis.
IV. Disclosure
Tender offer funds prominently disclose their liquidity terms and valuation policies to investors in their offering materials. It is important for investors and financial intermediaries to understand that the liquidity of a fund’s underlying assets effectively dictates such fund’s liquidity terms. The form follows the strategy. Tender offer funds are also required to provide additional information to investors each time a repurchase offer is made. Repurchase offers by tender offer funds require the filing of Schedule TO with the SEC, together with delivery of an Offer to Purchase and Letter of Transmittal to shareholders. The Schedule TO framework ensures that shareholders receive comprehensive, current information about the fund’s financial condition and the specific terms and purpose of each repurchase offer at the time it is made. Among other things, Schedule TO requires disclosure of: The percentage of shares sought, the offer price, the source and amount of repurchase proceeds, as well as any arrangements made in connection with, and the purpose of, the tender offer; Audited financial statements for the prior two fiscal years and unaudited financials for the most recent quarter; and
8 Rule 2a-5 under the 1940 Act, Good Faith Determinations of Fair Value , Investment Company Act Rel. No. 34128 (Dec. 3, 2020), effective September 8, 2022.
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