In May 2013, The Board of the International Organization of Securities Commissions (“IOSCO”) has published its Final Report on Principles for the Valuation of Collective Investment Schemes (the “Final Report”).

The objective of the Final Report is to update the Principles for Collective Investment Schemes (“CIS”) (the “Principles”) by creating a common approach and providing a practical guide to CIS valuation.

A CIS must value the assets and securities in its portfolio correctly as the sale and redemption of shares must be at Net Asset Value (“NAV”). If the NAV is not valued correctly, investors may be adversely affected. NAV is defined in the Final Report as the value of a CIS’ portfolio securities and other assets (less liabilities).

The Final Report follows on from a Consultation Report (the “Consultation”) from February 2012. IOSCO has considered the comments received pursuant to the Consultation when developing the Principles.

The Final Report notes that the implementation of the Principles can vary depending on the jurisdiction as it depends on the conditions and circumstances of the locality.

The 11 Principles are as follows:

Principle 1: A responsible entity should establish comprehensive, documented policies and procedures to govern the valuation of assets held or employed by a CIS.

Principle 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.

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

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

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

Principle 6: A responsible entity should provide for the periodic review of the valuation policies and procedures to seek to ensure their continued appropriateness and effective implementation. A third party should review the CIS valuation process at least annually.

Principle 7: A responsible entity should conduct initial and periodic due diligence on third parties that are appointed to perform valuation services.

Principle 8: A 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.

Principle 9: The purchase and redemption of CIS interests generally should not be effected at historic NAV.

Principle 10: A CIS’s portfolio should be valued on any day that CIS units are purchased or redeemed.

Principle 11: A CIS’s NAV should be available to investors at no fee.

The Final Report also contains a number of appendices as follows:

  • Appendix A outlines guiding principles that may apply to all jurisdictions;
  • Appendix B identifies 9 principles for the valuation of hedge funds;
  • Appendix C reiterates the Principles for the valuation of CIS;
  • Appendix D contains the Feedback Statement on the Consultation; and
  • Appendix E lists the working group members.

For a link to the Final Report, please click here.