Funds registered under the Mutual Funds Law (as amended) (the “Mutual Funds Law”) are obliged to have appropriate and consistent procedures for the purposes of proper valuations of their assets. The Cayman Islands Monetary Authority (“CIMA”) has published rules for the calculation of net asset values (the “Rule”) to ensure that the valuation of the assets of a fund is fair, complete, neutral and free from material error and verifiable. The rules are largely a reiteration of best practice and, in most cases, we do not expect mutual funds will need to make significant changes to their existing procedures or documentation.
NAV Calculation Policy
Mutual funds within the scope of the Rule must establish, implement and maintain written pricing and valuation practices, policies and procedures to calculate a fund's net asset value (“NAV”) in accordance with the Rules (the “NAV Calculation Policy”). The NAV Calculation Policy must include price sources, procedures for resolving the management of exceptions and internal controls appropriate to the size, complexity and nature of the fund's operations.
The NAV Calculation Policy must be based on the International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan, Switzerland or a non-high risk jurisdiction (the “Financial Reporting Framework”), and the methodology must be consistent with the Financial Accounting Framework used for the mutual fund's audited financial statements.
The Rule provides high level guidance as to how to establish fair value, including the use and application of pricing models for hard-to-value securities.
The Service Provider
Under the Rule, a fund's valuation may be carried out (subject to certain conditions in each case) by the administrator, auditor, custodian, investment manager or advisor, prime broker, promoter, registrar or operator of the fund, or any of their delegates with responsibility for the fund's portfolio or operations (the “Service Provider”).
Where prices are provided or sourced by the investment manager or advisor, or the operator of the fund, the manager or advisor, or operator must also provide any supporting information that is used to determine the prices and the Service Provider carrying out the calculation of the fund's NAV must take steps that are reasonable and proportionate to the risk of material error or bias to verify the facts on which the prices are determined and the appropriateness of the provided price to the extent reasonably possible.
The fund has ultimate responsibility for oversight of the net asset valuation process and must approve, and review at least annually, the NAV Calculation Policy and any pricing models used to value investments. It is the fund's obligation to ensure that the Service Provider applies the NAV Calculation Policy and any pricing models consistently.
Contents of the NAV Calculation Policy
In addition to the matters set out above, the Rule specifies certain information required to be set out in the NAV Calculation Policy. This information includes:
- a description of its practical and workable pricing and valuation policies, practices and procedures;
- the frequency of calculation of the fund's NAV (which must be at least quarterly);
- when the NAV will be calculated, how it will be used and publication details;
- the Financial Reporting Framework to be used; and
- the role and responsibilities of the Service Provider.
Providing Information to Investors
The fund must ensure that the NAV Calculation Policy, together with a description of any inherent or potential limitations, is disclosed to the fund's investors. The Service Provider must issue reports to the investors of the fund setting out the net asset value of the fund including, in respect of each investor, their share of the balance or the net asset value per unit.
The fund must also disclose in its offering document any material involvement by the fund's investment manager or advisor in the pricing of the fund's portfolio or in the calculation, determination or production of the fund's NAV, and any associated conflicts of interest (including the involvement of the Fund's investment manager or advisor in the determination of the NAV, taking into consideration the pricing of hard to value securities). The offering document must also contain an explanation why another service provider could not calculate the fund's NAV.
Information in respect of any deviations made by the Service Provider from the NAV Calculation Policy (and any effect this may have on the reported net asset value of the fund) must be immediately disclosed to investors.1
1 Deviations which have an effect on the reported net asset value of the fund must also be agreed by the operator of the fund prior to the determination or production of the net asset value.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.