Entire Section
CIR App 4 CIR App 4 Guidance On Asset Valuation And Pricing
CIR App 4 Guidance
General
1. This guidance relates to the calculation of a single price and net asset value in accordance with CIR Rules. Under theRules , theFund Manager should take all reasonable steps, and exercise due diligence, to ensure that theProperty of theFund is valued in accordance with the Law, theRules and theFund's Constitution .2. This guidance sets out minimum standards of control in relation to the valuation of theFund Property to which theFund Manager , theTrustee and thePersons providing the oversight function should have regard in determining whether they have met their obligations under the applicableRules and theFund's Constitution .3. TheFund Manager should take action forthwith to rectify any breach in respect of valuation. Where the breach relates to the incorrect pricing ofUnits , rectification should extend to the reimbursement or payment of money by theFund Manager toUnitholders , formerUnitholders or to theInvestment Undertaking .4. TheTrustee or thePersons providing the oversight function may direct that rectification need not extend to reimbursement where it appears that the incorrect pricing is of minimal significance. This would only be appropriate where theFund Manager has adequate controls in place.5. The price of aUnit of any class should be calculated by valuing theFund Property attributable toUnits of that class and dividing that value by the number ofUnits of the class in issue. All theFund Property should be valued at each valuation point and any part of theFund Property which is not anInvestment should be valued at fair value. TheDFSA expects aFund Manager to agree on its methodology for valuing theFund Property with theTrustee orEligible Custodian , or otherPersons providing the oversight function and that the methodology in place is applied consistently.6. In respect ofSecurities quoted on anExchange :a. theFund's Constitution should set out the valuation policy that will be adopted by theFund Manager where a single price for buying and selling aSecurity is quoted; and also where separate buying and selling prices are quoted on anExchange . Either the official mid-market price or the last trade price should provide an appropriate basis of valuation for theFund . TheFund Manager should, however, document the choice of methodology and ensure that the procedures are applied consistently and fairly; andb. where there has been no recent trade in theSecurity concerned, or no reliable price exists, anInvestment should be valued at a price which, reflects a fair and reasonable price for that investment. For example, aFund Manager may obtain a valuation from three experienced brokers and average the value. In such cases, theFund Manager is required to document the reasons for his decision and should be prepared to justify any assumptions made.7. Where instances of incorrect pricing occur, the de minimis provisions set out in this guidance should apply only where theFund Manager andTrustee or thePerson providing oversight functions are able to meet the standards set out in this guidance. Evidence of persistent or repetitive errors, or errors consistently in theFund Manager's favour, are likely to make it more difficult for theFund Manager to demonstrate that he is able to meet the standards in this guidance.Pricing controls by the Fund Manager
8. Unit prices and currency rates used inFund valuations should be up to date and from a reputable source. The mere use of a source for prices and rates does not amount to delegation under theRules . Although it should not be necessary to carry out significant substantive checking, the reliability of the source of prices and rates should be kept under regular review, and the use of doubtful prices or rates should be followed up.9. The mere use of a source for prices and rates does not amount to delegation under theRules . However, the use of a third party to carry out the pricing function, whether it is anAssociate of theFund Manager , or theTrustee or anyAssociate of the directors of the company orPersons providing the oversight function, or any independent third party, amounts to outsourcing. In this case theFund Manager still retains its operating responsibilities and duties and, remains liable for the acts and omissions of that third party in performing the pricing functions as if they were the acts or omissions of theFund Manager . TheFund Manager should ensure that the third party contracts to provide the service on a basis which takes account of theFund Manager's responsibilities which require theFund to be priced in accordance with the applicableRules and theFund's Constitution .10. Where the pricing function is outsourced, theFund Manager is required, in accordance with theRules , to satisfy himself that the pricing agent remains competent to carry out the function, and that he has taken reasonable care to ensure that the pricing agent has carried out his duties in a competent manner.11. TheFund Manager should seek assurance that the pricing agent's system is robust and will produce accurate results. TheFund Manager should review the outputs from the system at least annually, and on any significant system change. In addition, if the pricing agent is also responsible for calculation of dealing prices ofUnits , theFund Manager should ensure that this system is reviewed to his satisfaction at least annually.12. Unless the valuation and record keeping systems are integrated, the valuation output should be agreed with theFund Manager's records of aFund at each valuation point. In addition, theFund Manager's records, including debtors and creditors, should be agreed with aCustodian's records of stocks and both capital and income cash at least monthly, with reconciling items followed up promptly, with debtors reviewed for recoverability.13. Systems should be in place whereby all transactions are confirmed in writing or by electronic means to theFund Manager or to a pricing agent as quickly as possible. It is desirable that all deals to which theFund is committed, which have been notified, at most, one hour before a valuation, are included in that valuation, at estimated prices if necessary. Unless, however, there is likely to be significant movement in a price of aUnit , it is more important that an accurate cut-off procedure is in place to ensure that omissions or duplications do not take place, than it is to ensure that estimates are included in a valuation.14. Where prices are obtained otherwise than from the main pricing source (e.g. unquoted, suspended, or illiquid stocks), theFund Manager should maintain a record of the source and basis for the value placed on the investment. These should be regularly reviewed.15. A system should be in place to ensure that investment and borrowing powers which are contained in theRules , where applicable and in theFund's Constitution andProspectus are not breached, and that if breaches occur they are identified and rectified.16. A system should be in place to ensure that dividends are accounted for as soon as stocks are quoted ex-dividend, unless, as with some foreign stocks, it is prudent to account for them only on receipt. Fixed interest dividends and interest should be accrued at each point unless the level of materiality makes a longer interval appropriate. Similar considerations apply to the expenses of theFund .17 TheFund Manager should ensure periodically that any charge which is levied on aUnitholder for dilution has been calculated in accordance with the methodology which has been disclosed in theConstitution orProspectus .18. TheFund Manager should set a percentage or absolute limit for certain key elements of the valuation, such that any movement outside these limits is investigated. The process for the investigation and a report of its outcome should be in writing and evidenced by an appropriate signature. These key elements could, where relevant, include the movement of the overall price of theFund against relevant markets, the movement of the prices and values of individual stocks, changes in currency rates, and accrual figures for income, expenses, and tax. In addition, prices which appear not to have changed after a fixed period of time should be investigated, since this may be the result of a price movement having been missed.19. Cash should be reconciled to the bank account regularly, with outstanding items promptly followed up, and a full reconciliation sent to the trustee or depositary monthly.20. Controls should be in place to ensure that the correct number ofUnits in issue is recorded at each valuation point. This should be reconciled with theUnitholder register at least monthly.21. A copy of the valuation should be sent to theFund Manager or theFund's investment manager, if applicable, at least weekly. He should specifically check that the correct securities are recorded.Pricing and valuation checks by oversight arrangement
22. ThePersons providing oversight functions have a duty under theRules to ensure that theFund Manager's pricing methodology and operation is properly controlled. Its main emphasis should be to ensure that theFund Manager keeps its controls and systems for pricing under review and to obtain evidence from theFund Manager's systems thatUnit prices are calculated correctly. This would also apply where theFund Manager has outsourced some or all of its pricing functions to aService Provider . The following paragraphs set out the minimum checks whichDFSA expects anyPerson providing the oversight function to carry out in order to be satisfied with theFund Manager's pricing methodology and operation, and to ensure that the likelihood of incorrect prices will be minimised.23. ThePersons providing the oversight function should carry out a thorough review of theFund Manager's overall system for pricing. This should include an analysis of the controls in place to determine the extent to which reliance can be placed on them. This review should be carried out at the start of the appointment of aPerson who will provide oversight functions, and also when major changes are made by theFund Manager to its system. On an ongoing basis, the systems should be kept under review to ensure that a series of minor changes do not, over a period of time, have a significant effect on the integrity of the systems.24. ThePersons providing oversight functions should conduct a review at least annually to confirm that theFund Manager's systems and controls are satisfactory. This will need to be more frequent where the oversight arrangement knows or suspects that theFund Manager's systems and controls and are weak and unsatisfactory. ThePersons providing oversight functions should ensure that any issues which are identified are properly followed up and resolved. Additionally, thePersons providing oversight functions should carry out a review of the valuation of the property of eachFund for which it is responsible, at least annually, which verifies, on a sample basis if necessary, the assets, liabilities, accruals, Units in issue, and any other relevant matters, for example, an accumulation factor or a currency conversion factor.25. Where theFund Manager's systems are manual, or have been installed or amended recently and are therefore unproven, the level of checking will need to be increased accordingly. This will also be necessary where a number of instances of incorrect pricing have previously been identified.Incorrect pricing
26. TheFund Manager should record each instance where theUnit price is incorrect and, as soon as the error is discovered, report the fact to thePersons providing oversight functions together with details of the action taken, or to be taken, to avoid repetition.27. TheFund Manager and thePersons providing the oversight function should if they become aware, report material instances of incorrect pricing to theDFSA as provided in theRules . Materiality should be determined by taking into account a number of factors, including whether theFund Manager has followed the pricing controls set out in this guidance.28. The significance of any breakdown in management controls or other checking procedures should also be taken into account. The significance of any failure of systems should be considered. This may include situations where inadequate back-up arrangements exist. The duration of an error should also be taken into account; the longer an error persists, the more likely that it will have a material effect on a price.29. The level of compensation paid toUnitholders , and theFund Manager's ability (or otherwise) to meet claims for compensation in full, may also be relevant.30. TheFund Manager should also report to theDFSA forthwith any instance of incorrect pricing where the error is greater than 0.5% of the price of aUnit , but where theFund Manager and thePersons providing the oversight function believe that compensation is inappropriate and should not be paid by theFund Manager .31. TheTrustee or thePersons providing oversight functions, in their reports, should summarise the number of instances of incorrect pricing during a particular period. This should include the number of errors which were greater than 0.5% of the price of aUnit and the number of errors which were less than 0.5% of the price of aUnit where theTrustee or thePersons providing the oversight function did not consider theFund Manager's controls to be adequate.Action to be taken as regards compensation for incorrect pricing.
32. Prices found to be incorrect by less than 0.5%a. Where the dealing price of anyUnit of aFund is found to be incorrect by less than 0.5% of the price of aUnit of aFund , compensation toUnitholders will not normally be required, unless theCustodian decides otherwise.b. Where an issue or cancellation ofUnits has taken place at a price which is incorrect by less than 0.5% of the price of aUnit of aFund , compensation to or from theFund will not normally be required, unless the oversight arrangement decides otherwise.33. Where the dealing price of anyUnit of aFund is found to be incorrect by 0.5% or more of the price of aUnit of aFund , compensation toUnitholders will normally be required. If, exceptionally, theTrustee or thePersons providing the oversight function consider that compensation is inappropriate, he will need to report the matter to theDFSA , together with his recommendation and justification.Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]