CIR App 4 Guidance
1. This guidance relates to the calculation of a single price and net asset value in accordance with CIR Rules. Under the
Rules, the Fund Manager should take all reasonable steps, and exercise due diligence, to ensure that the Property of the Fund is valued in accordance with the Law, the Rules and the Fund's Constitution.
2. This guidance sets out minimum standards of control in relation to the valuation of the
Fund Property to which the Fund Manager, the Trustee and the Persons providing the oversight function should have regard in determining whether they have met their obligations under the applicable Rules and the Fund's Constitution.
Fund Manager should take action forthwith to rectify any breach in respect of valuation. Where the breach relates to the incorrect pricing of Units, rectification should extend to the reimbursement or payment of money by the Fund Manager to Unitholders, former Unitholders or to the Investment Undertaking.
Trustee or the Persons 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 the Fund Manager has adequate controls in place.
5. The price of a
Unit of any class should be calculated by valuing the Fund Property attributable to Units of that class and dividing that value by the number of Units of the class in issue. All the Fund Property should be valued at each valuation point and any part of the Fund Property which is not an Investment should be valued at fair value. The DFSA expects a Fund Manager to agree on its methodology for valuing the Fund Property with the Trustee or Eligible Custodian, or other Persons providing the oversight function and that the methodology in place is applied consistently.
6. In respect of
Securities quoted on an Exchange:
Fund's Constitution should set out the valuation policy that will be adopted by the Fund Manager where a single price for buying and selling a Security is quoted; and also where separate buying and selling prices are quoted on an Exchange. Either the official mid-market price or the last trade price should provide an appropriate basis of valuation for the Fund. The Fund Manager should, however, document the choice of methodology and ensure that the procedures are applied consistently and fairly; and
b. where there has been no recent trade in the
Security concerned, or no reliable price exists, an Investment should be valued at a price which, reflects a fair and reasonable price for that investment. For example, a Fund Manager may obtain a valuation from three experienced brokers and average the value. In such cases, the Fund 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 the
Fund Manager and Trustee or the Person providing oversight functions are able to meet the standards set out in this guidance. Evidence of persistent or repetitive errors, or errors consistently in the Fund Manager's favour, are likely to make it more difficult for the Fund 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 in
Fund 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 the Rules. 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 the
Rules. However, the use of a third party to carry out the pricing function, whether it is an Associate of the Fund Manager, or the Trustee or any Associate of the directors of the company or Persons providing the oversight function, or any independent third party, amounts to outsourcing. In this case the Fund 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 the Fund Manager. The Fund Manager should ensure that the third party contracts to provide the service on a basis which takes account of the Fund Manager's responsibilities which require the Fund to be priced in accordance with the applicable Rules and the Fund's Constitution.
10. Where the pricing function is outsourced, the
Fund Manager is required, in accordance with the Rules, 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.
Fund Manager should seek assurance that the pricing agent's system is robust and will produce accurate results. The Fund 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 of Units, the Fund 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 the
Fund Manager's records of a Fund at each valuation point. In addition, the Fund Manager's records, including debtors and creditors, should be agreed with a Custodian'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 the
Fund Manager or to a pricing agent as quickly as possible. It is desirable that all deals to which the Fund 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 a Unit, 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), the
Fund 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 the
Rules, where applicable and in the Fund's Constitution and Prospectus 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 the
Fund Manager should ensure periodically that any charge which is levied on a Unitholder for dilution has been calculated in accordance with the methodology which has been disclosed in the Constitution or Prospectus.
Fund 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 the Fund 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 of
Units in issue is recorded at each valuation point. This should be reconciled with the Unitholder register at least monthly.
21. A copy of the valuation should be sent to the
Fund Manager or the Fund'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
Persons providing oversight functions have a duty under the Rules to ensure that the Fund Manager's pricing methodology and operation is properly controlled. Its main emphasis should be to ensure that the Fund Manager keeps its controls and systems for pricing under review and to obtain evidence from the Fund Manager's systems that Unit prices are calculated correctly. This would also apply where the Fund Manager has outsourced some or all of its pricing functions to a Service Provider. The following paragraphs set out the minimum checks which DFSA expects any Person providing the oversight function to carry out in order to be satisfied with the Fund Manager's pricing methodology and operation, and to ensure that the likelihood of incorrect prices will be minimised.
Persons providing the oversight function should carry out a thorough review of the Fund 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 a Person who will provide oversight functions, and also when major changes are made by the Fund 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.
Persons providing oversight functions should conduct a review at least annually to confirm that the Fund Manager's systems and controls are satisfactory. This will need to be more frequent where the oversight arrangement knows or suspects that the Fund Manager's systems and controls and are weak and unsatisfactory. The Persons providing oversight functions should ensure that any issues which are identified are properly followed up and resolved. Additionally, the Persons providing oversight functions should carry out a review of the valuation of the property of each Fund 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 the
Fund 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.
Fund Manager should record each instance where the Unit price is incorrect and, as soon as the error is discovered, report the fact to the Persons providing oversight functions together with details of the action taken, or to be taken, to avoid repetition.
Fund Manager and the Persons providing the oversight function should if they become aware, report material instances of incorrect pricing to the DFSA as provided in the Rules. Materiality should be determined by taking into account a number of factors, including whether the Fund 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 to
Unitholders, and the Fund Manager's ability (or otherwise) to meet claims for compensation in full, may also be relevant.
Fund Manager should also report to the DFSA forthwith any instance of incorrect pricing where the error is greater than 0.5% of the price of a Unit, but where the Fund Manager and the Persons providing the oversight function believe that compensation is inappropriate and should not be paid by the Fund Manager.
Trustee or the Persons 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 a Unit and the number of errors which were less than 0.5% of the price of a Unit where the Trustee or the Persons providing the oversight function did not consider the Fund 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 any
Unit of a Fund is found to be incorrect by less than 0.5% of the price of a Unit of a Fund, compensation to Unitholders will not normally be required, unless the Custodian decides otherwise.
b. Where an issue or cancellation of
Units has taken place at a price which is incorrect by less than 0.5% of the price of a Unit of a Fund, compensation to or from the Fund will not normally be required, unless the oversight arrangement decides otherwise.
33. Where the dealing price of any
Unit of a Fund is found to be incorrect by 0.5% or more of the price of a Unit of a Fund, compensation to Unitholders will normally be required. If, exceptionally, the Trustee or the Persons providing the oversight function consider that compensation is inappropriate, he will need to report the matter to the DFSA, together with his recommendation and justification.
Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]