Following the adoption (at EU level) and the transposition into law (by the EU member states) of the Alternative Investment Fund Management Directive (the ‘AIFMD’), investment Funds are nowadays categorised as either UCITS or Alternative Investment Funds (‘AIFs’). Fundamentally, a Professional Investor Fund (‘PIF’) is also an AIF and therefore falls within the scope of the AIFMD. However, considering that the AIFMD does not regulate de minimis Fund Managers, the Maltese regulator has retained the local PIF regime.
This article examines the benefits of having a valuation policy for non-retail investment Funds, focusing on the AIF and the PIF regimes. It explores whether it is a requirement to have a valuation policy in place and the importance of keeping such a policy continuously updated. In this article an AIF and a PIF are collectively referred to as ‘the Fund’.
The AIFMD requires that the Alternative Investment Fund Manager (‘AIFM’), for each alternative Fund it manages, should have policies and procedures for the valuation of the AIF’s underlying investments. Moreover, the AIFMD regulation formulates the characteristics and contents of the valuation policies and procedures, which shall also incorporate the models to be used to value the underlying assets of the AIF. In addition, the AIFMD also stipulates that periodic reviews of these policies and procedures should be conducted.
With respect to PIFs, the local laws, regulations, standard licence conditions and the investment services rules regulating the PIF regime do not specifically require that a valuation policy is in place. Reliance is made on the valuation of assets disclosures within the offering documentation of the PIF, hence there is no formal requirement for a documented valuation policy. For a PIF, when compared to an AIF, regulatory requirements are less stringent and more flexible. Hence this could be the reason why a valuation policy is not clearly listed as a requirement.
Notwithstanding, a valuation policy should not be seen as a burden, but rather as a tool that increases clarity and reduces different interpretations among different stakeholders within the Fund structure, such as the Fund manager, Custodian, Fund administrator, the regulator, the auditor, and the Fund`s investors amongst others. At the outset, it would be beneficial for all stakeholders involved to set out a clear policy and detailed procedures for the valuation of the underlying investments in the Fund. This is more important for those Funds that invest in unlisted securities. In most cases, the valuation methodology included within the offering documents of the Fund is quite generic and does not include a certain level of detail on what methodologies and procedures are acceptable when valuing assets and calculating the Net Asset Value (‘NAV’). This could lead to a situation where best practices are not followed in valuing the Fund’s underlying assets, and the interests of investors are jeopardised. Thus, having a valuation policy in place is also beneficial for PIFs, and not only for AIFs. Such a policy would lay down the obligations, roles, and duties of all the parties involved in the valuation process. This would provide clear guidance as to what valuation methodologies are acceptable and who is responsible for what. Clearly, this increases accountability, and reduces the risk of having disagreement on the values of the underlying assets included in the NAV.
Undoubtedly, for a valuation policy and related procedures to be effective, it is important that these are reviewed periodically. In certain instances, it is believed that a valuation policy and procedures should be drafted at the inception of the Fund and should remain unchanged thereafter. This is not a good way to reaping a valuation policy's benefits. On the contrary, effective policies and procedures management require that these should change and adapt according to the changing needs of the Fund. While the core elements of a policy may remain constant, certain details and practices should reflect the changing characteristics of the industry, the market, the technology and most importantly of the Fund itself. Ongoing monitoring and policy review should be crucial to effective policy and procedures management. An outdated policy can leave a Fund exposed to certain risks, since outdated policies may fail to comply with the ever-changing laws and regulations. Moreover, an outdated policy would typically fall behind in addressing progress in new systems or technologies, which could result in inconsistent practices.
Ongoing review of policies and procedures keeps the Fund updated with new regulations, technology, and industry’s best practices. Reviewing policies and procedures is especially important for high-risk and highly regulated industries, such as the investment Funds industry. It is important to look at regulations applicable to the different Fund structures and ensure that the Fund’s valuation policies address all the relevant laws and regulations applicable to that Fund structure.
The writer and the company have obtained the information contained in this document from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof if any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. BOV Fund Services Limited is a recognised Fund Administrator in terms of the Investment Services Act and also authorised as a Class C Company Service Provider in terms of the Company Service Providers Act by the Malta Financial Services Authority. Issued by BOV Fund Services Limited, registered address 58, Triq San Żakkarija, Il-Belt Valletta, VLT 1130, Malta. Tel: 2123 7148, E-mail: [email protected], Website: www.bovfundservices.com, Source: BOV Fund Services Limited