(Article from Registered Funds Regulatory Update, July 2026)
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On July 1, 2026, the Financial Accounting Standards Board (FASB) proposed a rule change that would affect the manner in which investment companies determine the fair value of an equity security subject to a contractual restriction prohibiting its sale. The proposal responds to concerns expressed by industry participants that the current accounting framework may overstate the value of such restricted holdings because it does not reflect the discount a market participant would apply to stock that cannot be resold immediately.
Under guidance issued in June 2022, investment companies are required to value restricted stock at the same price as freely tradable stock of the same issuer, effectively disregarding the restriction altogether. As a result, an investment company holding shares that cannot be sold for six months reports the same value as a fund holding identical shares without any such restriction. The new proposal would alter this approach for investment companies by requiring them to apply a discount that reflects the impact of the sale restriction when valuing those holdings.
In addition, the proposal would require investment companies to disclose separately the amount of any discount applied as a result of sale restrictions, thereby providing investors with greater transparency regarding the valuation of these holdings. FASB believes these revisions would make investment company financial reporting more useful by aligning fair value measurements with the value market participants would place on those shares.
Early adoption would be permitted. The proposal is significant for fund managers and asset management firms holding pre-IPO or lock-up shares, as it could result in lower reported net asset values for positions subject to resale restrictions—with downstream effects on performance reporting, management fee calculations, and investor allocation decisions.
Stakeholder comments on the proposed rule change were due on July 17, 2026.
FASB News, FASB Seeks Public Comment on Proposal to Improve Investment Company Fair Value Reporting (July 1, 2026), available at: https://www.fasb.org/news-and-meetings/in-the-news/fasb-seeks-public-comment-on-proposal-to-improve-investment-company-fair-value-reporting-424892.