IOSCO Publishes Principles for CIS Valuation

The Board of the International Organization of Securities Commissions published today the final report on Principles for the Valuation of Collective Investment Schemes, containing a list of Principles intended to serve as a basis for both industry practitioners and regulators to assess the quality of regulation and industry practices regarding the valuation of collective investment schemes (CIS).

The final report revises IOSCO’s Principles for CIS Valuation, originally developed in 1999, to take into account subsequent regulatory, industry and market developments. Many complex and hard-to-value assets are now eligible for CIS portfolios, including some that did not exist a decade ago. The value of such assets cannot be determined by using quoted prices (so- called mark-to-market), but instead CIS may rely on internal techniques which imply management’s judgment (so-called mark-to-model). The difficulty and subjectivity needed for certain valuations increases regulatory risks and calls for a set of principles to guide the identification of policies and procedures designed to ascertain the proper valuation of CIS assets.

The revised Principles contained in the report also take into account the IOSCO 2007 Principles for the Valuation of Hedge Fund Portfolios, as well as other relevant Principles elaborated for investment managers more recently. The implementation of comprehensive policies and procedures for the valuation of CIS assets is a fundamental principle underpinning investment management. 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 end up paying more for their shares or receive less upon redemption. Remaining investors also may be adversely affected.

The final report also emphasizes the importance of independent oversight in the establishment and application of the policies and procedures in order to mitigate the conflicts of interests that CIS operators face. The key objective underlying the CIS valuation Principles is that all investors should be treated fairly.

Generally, the Principles aim to reflect a level of common approach and to be a practical guide for regulators and industry practitioners. They are addressed to the entity/entities responsible for the overall operation of the CIS, and in particular its compliance with the legal / regulatory framework in the respective jurisdiction, but do not provide directly applicable standards to firms. When being implemented, the principles have to be transposed taking into account the local regulatory framework.