INTERNATIONAL: IOSCO Consultation on Revised CIS Valuation Principles

Thursday February 16 2012

Fund-Axis wishes to advice that the Technical Committee of IOSCO has published a consultation report on Principles for the Valuation of Collective Investment Schemes.

A copy of the full report can be found at the following link;

Principles for the Valuation of Collective Investment Schemes

The above report sets out principles that can be used to assess the quality of regulation and industry practices concerning the valuation of collective investment schemes (CIS), thereby ensuring that investors are treated fairly at all times. The full list of proposed principles is outlined below in this article.

This consultation report updates and modernises IOSCO’s 1999 report entitled “Principles for CIS Valuation”, to take into account subsequent regulatory, industry and market developments. It also clarifies some concepts put forward by IOSCO in its report entitled “Principles for the Valuation of Hedge Fund Portfolios”, such as the entity responsible for establishing a policy governing valuation and the independence of the valuation duty. A link to this report can be found below;

Principles for the Valuation of Hedge Fund Portfolios

The implementation of comprehensive policies and procedures for valuation of CIS assets is a fundamental principle underpinning this sector. It is critical that a CIS properly value all assets in its portfolio, including those instruments for which market quotations are not readily available. CIS valuations are extremely important because if portfolio securities and assets are incorrectly valued, investors may unfairly pay more for their shares or receive less upon redemption, while remaining investors may also be adversely affected.

 IOSCO during the course of this consultation seeks comments on the proposed principles as well as the following specific concerns;

• Do these principles adequately address the regulatory issues raised by the valuation of CIS?

• Are potential conflicts of interest appropriately addressed? Do you see a need for more stringent principles in this area?

• In particular, does the principle on the Net Asset Valuation (“NAV”) at which the purchase and redemption of CIS interests should be effected adequately cover the issues?

• Are there other areas that IOSCO should address?

Draft Principles for the Valuation of Collective Investment Schemes

 The draft principles are;

1. The Responsible Entity should establish comprehensive, documented policies and procedures to govern the valuation of assets held or employed by a CIS;

 2. The policies and procedures should identify the methodologies that will be used for valuing each type of asset held or employed by the CIS;

 3. The valuation policies and procedures should seek to address conflicts of interest;

4.The assets held or employed by CIS should be consistently valued according to the policies and procedures;

 5. A CIS should have policies and procedures in place that seek to detect and prevent pricing errors. Pricing errors that result in a material harm to CIS investors should be addressed promptly, and investors fully compensated;

 6. The Responsible Entity should provide for the periodic review of the valuation policies and procedures to seek to ensure their continued appropriateness;

 7. The Responsible Entity should provide for the periodic review of the valuation policies and procedures to seek to ensure that they are being implemented effectively;

 8. A third-party should review the CIS’s valuation process at least annually;

 9. The Responsible Entity should conduct initial and periodic due diligence on third parties that are appointed to perform valuation services;

 10. The Responsible Entity should seek to ensure that arrangements in place for the valuation of the assets in the CIS`s portfolio are disclosed appropriately to investors in the CIS offering documents or otherwise made transparent to investors;

 11. The purchase and redemption of CIS interests should not be effected at historic NAV;

 12. A CIS’s portfolio should be valued on any day that CIS units are purchased or redeemed; and

 13. A CIS’s NAV should be available to investors at no cost.

Fund-Axis would like to advice that the consultation period to submit comments to IOSCO in relation to this consultation is open for comments until 18 May 2012.

Fund-Axis would encourage Asset Managers to consider these IOSCO proposed principles very carefully and submit a response to IOSCO should they feel a particular principle is not feasible or practical or that a particular risk or concern in the industry has not been captured within the scope of the principles. It is very likely that the outcome of the final IOSOC report following the consultation period will lead to a regulatory impact for CIS’s in the near future and as such if Asset Managers do have any concerns on relation to the proposed principles then now is the opportunity to address same. If you require any assistance in addressing your response to IOSOC or would like to explore the possible impact of the above proposed principles, please don’t hesitate to contact Fund-Axis on info@fund-axis.com