Friday, November 26, 2010

Hedge Fund Industry Seeks Fair Market Valuation for Securities in Dodd-Frank Liquidation Authority

The hedge fund industry has urged regulators implementing the orderly liquidation provisions of the Dodd-Frank Act to provide for the fair market valuation of securities of failing financial firms rather than the fixed valuations proposed for government securities and contemplated for other securities. In a letter to the Managed Funds Association said that assigning fixed valuations for certain types of assets in advance, as the Proposed Rule contemplates for Treasury and other U.S. government securities, is likely to lead to valuations inconsistent with the statutory standard of fair market value. It could also lead to distortions in market activity.

In the MFA's view, the appropriate valuation of assets is a critical component of any liquidation process. Section 210(a)(3)(D)(ii)(I) of the Dodd-Frank Act treats any portion of a secured claim which exceeds the fair market value of the underlying collateral as an unsecured claim, paid in the same manner as other general unsecured creditors. But Dodd-Frank does not define the term “fair market value” for the purpose of determining the amount of secured claim that will be treated as an unsecured claim. The proposed rules contemplate adopting a regulation establishing a fixed valuation for U.S. government securities, and asks whether valuations should be fixed for other forms of collateral.