FASB Proposed ASU 2026: Investment Companies Must Now Factor Lock-Up Discounts into Fair Value

On July 1, 2026, exactly four years after ASU 2022-03 settled the question, FASB reopened it. The Board's proposed ASU under ASC Topic 820 would require investment companies to consider contractual sale restrictions when measuring the fair value of restricted equity securities, and to disclose the resulting discount. For fund CFOs, NAV administrators, and valuation teams, this is not a technical footnote. It changes how you measure, what you disclose, and potentially what you pay in management fees.

Key takeaway: The proposed ASU does NOT repeal ASU 2022-03. It carves out investment companies under ASC Topic 946 from the general rule. Every other entity continues to ignore contractual sale restrictions in fair value measurement. The split is permanent, not transitional.

What ASU 2022-03 Said, and Why It Became Controversial

ASU 2022-03, issued June 30, 2022, resolved a genuine diversity in practice by ruling that contractual sale restrictions are not part of the unit of account of an equity security and therefore are not considered when measuring fair value. The conceptual logic: a lock-up agreement is a characteristic of the holder, not the asset. Under that view, a fund holding 10 million locked-up shares of a newly public company measures them at the same price as freely tradeable shares.

The problem was that ASC 820 itself contained conflicting signals. Certain paragraphs pointed to the holder-characteristic view; an example in the standard pointed the other way, treating the restriction as an asset characteristic that should affect fair value. ASU 2022-03 resolved that conflict in favor of ignoring the restriction, and three FASB board members, Messrs. Cannon, Jones, and Kroeker, dissented at issuance. The majority of public commenters had also opposed the standard before it was finalized. The 2026 proposed ASU is a partial vindication of those dissenting views.

Market dynamics made the problem worse. Since 2022, IPO activity declined sharply. Private companies stayed private longer, reaching higher valuations before listing. As Roberto Braceras, General Counsel of Fidelity Investments, wrote in a formal FASB agenda request on April 13, 2026: "When these companies eventually list, the economic impact of lock-up restrictions may be substantially higher than anticipated by the Board when ASU 2022-03 was issued." Fidelity administers approximately $18 trillion in assets across more than 50 million individual investors, 29,000 employer client firms, and 8.5 million clearing and custody accounts. That is not a fringe voice.

What the 2026 Proposed ASU Actually Requires

The proposed ASU creates two new obligations for investment companies under ASC 946:

1. Measurement: Investment companies must consider contractual sale restrictions when measuring the fair value of equity securities subject to those restrictions. The "restriction as holder characteristic" rule no longer applies to this population.
2. Disclosure: Investment companies must disclose the amount of the discount attributable to contractual sale restrictions.

As KPMG's July 2026 Defining Issues brief confirms, the scoping is entity-type-based, not asset-class-based. If you qualify as an investment company under ASC 946, the exception applies to all your restricted equity securities. If you don't, ASU 2022-03 still governs.

The types of contractual sale restrictions in scope are the same categories covered under ASU 2022-03:

• Underwriter lock-up agreements from IPOs or secondary public offerings
• Lock-up or market standoff agreements in capital-raising transactions not involving underwritten offerings
• Separate shareholder agreements in private placements, PIPEs, or de-SPAC transactions

The proposed ASU effectively resurrects the "restriction as asset characteristic" view, but only for investment companies. As the FASB press release states, "The proposed change would make investment company financial reporting more useful by aligning the fair value measurement of restricted equity securities with the value market participants would place on those shares."

Who Is an "Investment Company" for This Purpose?

The proposed ASU applies to entities that qualify as investment companies under ASC Topic 946, Financial Services, Investment Companies. That is a specific accounting definition, not a regulatory label. Entities that typically meet the ASC 946 definition include:

• Registered open-end funds (mutual funds)
• Registered closed-end funds
• Exchange-traded funds (ETFs)
• Business development companies (BDCs)
• Hedge funds that follow ASC 946 accounting
• Private equity funds and venture capital funds that apply ASC 946
• Fund-of-funds structures where the fund itself meets the ASC 946 criteria

The Investment Company Institute, whose members manage $43.4 trillion in registered fund assets in the U.S. alone, wrote to FASB in May 2026 explicitly supporting the reconsideration and emphasizing urgency for regulated funds and their shareholders.

Critically, a corporate entity holding a restricted equity security, even a large one, does not qualify. The exception is narrow by design. A corporate treasury function or a non-investment-company holding company continues to apply ASU 2022-03 and ignores the restriction in fair value measurement.

The NAV Overstatement Problem: Why This Matters for Fund Shareholders

The practical harm from ASU 2022-03 is most acute in open-end fund structures with daily liquidity. Here is the mechanics of the problem Fidelity identified.

Suppose a mutual fund holds 5 million shares of a company that just went public at $40 per share, subject to a 180-day lock-up. Under ASU 2022-03, the fund carries those shares at $40, the unrestricted market price. But a market participant buying those shares from the fund today cannot sell them for 180 days. The economic value is less than $40, perhaps materially so.

The consequences cascade:

• Redeeming shareholders exit at an overstated NAV, effectively transferring value from remaining shareholders.
• Purchasing shareholders buy in at an overstated NAV, immediately suffering dilution.
• Performance reporting overstates returns during the lock-up period.
• Management fees calculated on NAV are inflated if NAV is inflated.

As Braceras wrote: "The potential decoupling of fair value from economic reality under ASU 2022-03 not only threatens harm to mutual fund shareholders (e.g., through the potential to result in overstated NAVs) but is also in tension with Securities and Exchange Commission rules and guidance regarding the fair valuation of fund holdings under the 1940 Act."

The 1940 Act Tension: SEC Rule 2a-5 and Regulatory Convergence

This is the angle most coverage misses entirely. SEC Rule 2a-5 under the Investment Company Act of 1940, the fair valuation rule for registered investment companies, already requires fund boards and their designated valuation designees to consider all relevant factors when determining fair value. A fund adviser who ignores a material lock-up restriction in valuing a position is arguably not meeting that obligation.

The ICI's May 2026 letter noted that regulated funds would continue to be subject to the rigorous requirements under Rule 2a-5 in assessing the economic impact of contractual sale restrictions. The proposed ASU would bring GAAP into alignment with what Rule 2a-5 arguably already requires. For fund compliance teams, this is regulatory convergence, not a new burden. The accounting standard is catching up to the regulatory standard.

For non-registered funds (hedge funds, private equity funds) that follow ASC 946 but are not subject to 1940 Act requirements, the proposed ASU still applies, but the Rule 2a-5 alignment argument does not. Those funds should evaluate the proposed change purely on its accounting merits.

How to Measure the Lock-Up Discount: No Explicit FASB Guidance Yet

This is the most practically urgent gap in the current proposal. FASB requires investment companies to consider the restriction and disclose the discount amount, but the proposed ASU does not specify acceptable methodologies. Practitioners are working without a prescribed framework.

The valuation profession has developed several approaches for measuring discounts for contractual sale restrictions, commonly referred to as discounts for lack of marketability (DLOM) in this context:

In the absence of explicit FASB guidance, funds should document their chosen methodology thoroughly, apply it consistently across similar restrictions, and expect auditors to scrutinize the inputs and assumptions. The PCAOB will likely focus on this area once the final standard is in effect, given the inherent subjectivity.

One additional complexity: the proposed disclosure requires investment companies to report "the amount of the discount attributable to contractual sale restrictions." The proposal does not specify whether this is required per security, in aggregate across the portfolio, by fund, or by restriction type. Audit committees should be asking their valuation teams and auditors now how they intend to operationalize this disclosure before the final standard sets the expectation.

The XBRL Taxonomy Change: A Parallel Compliance Track

Almost no existing coverage addresses this, and it matters operationally. On July 8, 2026, the SEC proposed an update to the U.S. GAAP Financial Reporting Taxonomy to accommodate the new XBRL elements the proposed ASU would require. The comment period for the taxonomy update ran concurrently with the FASB comment period, also closing July 17, 2026.

Key points for finance and IT teams:

• The taxonomy update includes reference modifications, new elements for ASU identification, and deprecation of guidance no longer applicable.
• Only annual compilations of the U.S. GAAP Financial Reporting Taxonomy specified on the SEC's website may be used in EDGAR submissions. New elements cannot be used until the taxonomy is formally approved and the EDGAR Filer Manual is updated.
• The taxonomy version will be determined based on the effective date of the final ASU, meaning the XBRL implementation timeline is directly tied to when FASB finalizes the standard.

The SEC explicitly encouraged filers, investors, analysts, and software service providers to participate in the taxonomy comment review, signaling this is operationally significant. Fund finance teams should loop in their XBRL tagging teams and software vendors now, not after the final ASU is issued. For a broader view of ASC 820 disclosure mechanics under current GAAP, see Finrep's ASC 820 Fair Value Disclosure Requirements: 2026 Compliance Guide.

What the 16-Day Comment Window Signals

FASB's standard comment period runs 60 to 90 days. The comment window for this proposed ASU was 16 days, July 1 to July 17, 2026. That is the shortest comment period in recent FASB memory and is analytically significant.

A compressed window of this kind typically signals one of two things: FASB has substantially pre-deliberated the final standard and is treating the comment period as a procedural requirement rather than a genuine input-gathering exercise, or the Board perceives urgency given the market dynamics and 1940 Act tension Fidelity and ICI identified. Given that FASB had already held a board meeting on this project on May 13, 2026, before the proposed ASU was even issued, the former explanation is plausible. Fund CFOs and their advisers should plan for a final ASU potentially arriving before year-end 2026, though no effective date has been set.

What Doesn't Change

To be precise about scope:

• Non-investment-company entities continue to follow ASU 2022-03. Contractual sale restrictions are not considered in fair value measurement. No change.
• The distinction between security-level restrictions and holder-level restrictions remains relevant for non-investment-company entities. An unregistered security with a legal restriction on sale (a security characteristic) still gets a fair value adjustment. A lock-up agreement (a holder characteristic) does not, for those entities.
• ASU 2022-03's existing disclosure requirements (fair value of restricted securities, nature and remaining duration of restrictions, circumstances causing lapse) remain in place for all entities. The proposed ASU adds the new quantitative discount disclosure on top of those, specifically for investment companies.
• IFRS reporters are not directly affected. IFRS 13, the IASB's fair value standard, follows the same general principle as ASU 2022-03: restrictions are not considered. If FASB finalizes this investment-company exception, U.S. GAAP will diverge from IFRS 13 for this population. Dual-reporters and the IASB's own standard-setting agenda should monitor this gap.

For context on how the current ASU 2022-03 framework fits into the broader ASC 820 disclosure structure, Finrep's ASC 820 Fair Value Disclosure Requirements: 2026 Compliance Guide covers the full three-track disclosure framework.

Decisions to Make Now

The comment period has closed, but the practical decisions have not. Investment companies and their advisers should be working through the following:

1. Assess scope. Confirm whether the entity qualifies as an investment company under ASC 946. This is not always straightforward for hybrid structures.
2. Inventory restricted positions. Identify all equity securities currently subject to contractual sale restrictions: IPO lock-ups, PIPE restrictions, de-SPAC lock-ups, private placement restrictions.
3. Select and document a discount methodology. Choose an approach (option-pricing model, empirical study, protective put) and document the rationale before auditors ask. Apply it consistently.
4. Estimate NAV impact. Model the potential change in NAV for each restricted position. If the impact is material, brief the board and audit committee before the final ASU is issued.
5. Review fee agreements. If NAVs change materially, management fee and performance fee calculations based on NAV may be affected. Review fund agreements to understand the downstream economic impact.
6. Engage XBRL and IT teams. Track the SEC taxonomy update separately from the accounting change. New XBRL elements will be required in EDGAR filings once the taxonomy is approved.
7. Consider SAB 74 disclosure. If the proposed ASU is likely to have a material effect on financial statements, SEC filers should evaluate whether SAB 74 disclosures about the pending standard are required in interim filings before adoption. See Finrep's SAB 74 Disclosure Requirements guide for the five required elements and the progressive disclosure ratchet.
8. Monitor FASB for the final ASU. Given the compressed comment period and prior board deliberations, a final standard before year-end 2026 is plausible. Build the effective date into your close calendar now.

FAQ

Does the proposed ASU repeal ASU 2022-03? No. ASU 2022-03 remains in effect for all entities that are not investment companies under ASC 946. The proposed ASU creates a targeted exception for that specific population only.

Which types of contractual sale restrictions are covered? IPO and secondary offering lock-up agreements, market standoff agreements in non-underwritten capital raises, and separate shareholder agreements in private placements, PIPEs, and de-SPAC transactions. The same categories as ASU 2022-03, but now investment companies must factor them into fair value rather than ignore them.

When is the proposed ASU effective? No effective date has been set. It will be determined upon finalization of the standard. Given the 16-day comment period and prior board deliberations, a final ASU before year-end 2026 is plausible but not confirmed.

What discount methodology should we use? FASB has not prescribed one. Option-pricing models (Finnerty, Asian put), empirical lock-up discount studies, and protective put approaches are all used in practice. Document your chosen method and apply it consistently. Expect auditor scrutiny.

Does this affect IFRS reporters? Not directly. IFRS 13 follows the same general rule as ASU 2022-03. If FASB finalizes this exception, U.S. GAAP and IFRS 13 will diverge for investment companies. Dual-reporters should monitor the IASB's response.

What does the XBRL taxonomy change require? The SEC proposed a taxonomy update on July 8, 2026, with new elements to support the proposed ASU's disclosure requirements. New elements cannot be used in EDGAR filings until the taxonomy is formally approved and the EDGAR Filer Manual is updated. The timeline tracks the final ASU's effective date.