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VoltaireADV I SO R S


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How consistent are fund valuation requirements across the world?

This research paper looks at this question by analyzing the maze of regulations, standards and guidelines currently existing in three major market regions – US, Europe and Asia. In each case we look at how funds, their managers and service providers are obliged to value the fund’s assets and what levels of documentation and disclosure is required to be reported. We also review the attempts by bodies such as IOSCO to implement a globally recognized system for this activity.

We consider areas where harmony does look to exist across jurisdictional boundaries, and areas where there appear to be conflict or confusion. Additionally, we reflect on the challenges this landscape places on fund operations in terms of data and reporting.

A Special Report by Voltaire Advisors commissioned by Thomson Reuters

Global Fund Valuation Standards – Harmony or Discord?


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Foreword

The regulations and standards governing valuation of assets in investment funds are fundamental to the fair treatment of investors. As a consumer protection issue, this process is understandably subject to close examination by regulators and policy makers and this focus has become more pronounced following the recent financial crisis.

With hedge fund managers now subject to similar scrutiny as traditional investment funds, and new transparency requirements embedded in the post-crisis regulatory response, the landscape for fund valuation is dynamic and changing.

This report looks at fund valuation standards across the major regional jurisdictions, and explores whether there are areas of harmony or agreement, or whether the prevailing trend is one of inconsistency and discord.

Jayme Fagas is the Global Head of Evaluated Pricing at Thomson Reuters. With over 25 years in the financial industry, Ms. Fagas brings significant expertise to the Thomson Reuters team having worked in evaluations, trading and analytics at a number of firms on Wall Street. As a member of the Thomson Reuters Enterprise Content operating committee, Ms. Fagas focuses on managing the evaluated pricing product offering through Thomson Reuters DataScope Select, the strategic data delivery platform for non-streaming content. Ms. Fagas is an active industry participant working closely with mutual funds, hedge funds, asset managers, fund administrators and custodians, to provide solutions that meet the industry’s regulatory and compliance needs.

Jayme Fagas Global Head of Valuations & Transparency Thomson Reuters

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Executive Summary• Asset management is currently in the regulatory spotlight with much attention

being paid to practices in the industry to assess whether the buy-side is a risk to financial stability and investor confidence.

• Valuation of a fund’s assets and the subsequent calculation of the Net Asset Value (NAV) is a ‘mission critical’ feature of fund operations and has a major downstream impact on many other functions and applications. Sound valuation is the foundation upon which all the other superstructure of a fund is built.

• Post-crisis regulatory attention to valuation standards and procedures was to be expected, but the progress on harmonizing these globally has been a patchy affair, with fund valuation regimes remaining largely a local affair.

• IOSCO has produced some global valuation principles for both Hedge Funds and Collective Investment Schemes (CIS), but these are guidelines only. The organization make it clear that implementation will vary by jurisdiction according to local circumstances.

• The European Union has two main Directives addressing investment funds – UCITS for traditional retail funds and AIFMD for hedge funds and private equity. It is the latter Directive that provides the most detailed guidance on asset valuation.

• Equivalent legislation in the US is the Investment Company Act of 1940, which governs mutual funds, and Dodd-Frank in 2010 which extended regulation to private funds. The fund valuation requirements of the ’40 Act are, in our opinion, the most developed and proven in the world. Whilst private funds are not legally required to abide by these, the SEC has made it clear that they consider these standards and a best practice benchmark.

• The fund valuation regime in Asia is still largely a local patchwork, but efforts to create a UCITS-like passport for fund marketing are proceeding apace. The Asia Region Fund Passport has harmonized operating standards, which cover valuation briefly, but the onus still remains with local regulators and management companies.

• Analyzing the various global, supranational and national standards for fund valuation, we have identified five areas where there appears to be broad agreement on approach – Conflicts of Interest, Documentation & Disclosure, Consistency of Application, Periodic Review and Due Diligence.

• We have also picked out five areas where we see continued conflict and discord between different jurisdictions – Public vs Private Fund Standards, Valuation Responsibility, External vs Internal Valuation, Documentation Detail and the level of Due Diligence Requirements.

• Much of the discord in fund valuation lies in the detail rather than general principles, or is a result of undefined requirements. The lack of harmonization globally means that funds and their managers, advisers and service providers will have to live with a complex and varied regime for some time yet.

• The implications of this for valuation data and reporting are profound, with more transparency being required in different forms and for different reasons in different jurisdictions. The challenges for funds in managing this are significant and are not likely to ease soon.

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IntroductionThe global financial crisis that exploded in 2008 has prompted a slew of regulatory proposals designed to ensure that history does not repeat itself in the financial markets. The response of policy makers via the G20 and other international institutions, filtering down into concrete rules and proposals from regulators, is still ongoing.

Some of the early blame for the crisis was placed firmly at the door of asset valuation.

In many respects, the current crisis is about valuation. To be sure, factors underlying and affecting the crisis are many. Yet, what is particularly striking is that uncertainty about the true value of complex financial instruments … undermined global markets’ confidence, raised uncertainty about counterparties’ risk positions, and lead to contagion across asset classes, markets, and regions.Christian Noyer, Governor, Banque de France, October 2008

This position ensured that international finance officials had asset valuation practices firmly in their sights when the regulatory response to the problems began to emerge. A number of early initiatives addressed valuation standards in banking (via the Basel rules from the Bank for International Settlements) and accounting (IFRS and US GAAP) but up until a few years ago, asset managers had managed to avoid much of an additional regulatory burden.

All that has started to change, with some significant attention being paid to the practices and standards of the buy-side and their impact on investor confidence and overall financial stability.

With the banks already pilloried, from a buy-side perspective, first in the headlights were the hedge funds.

Source – Investment Company Institute, 2015

Investment Funds by Region

Large traditional asset managers appear to have avoided being classified as Systemically Important Financial Institutions (SIFI’s), thereby dodging some of the more onerous regulatory requirements this imposes on the large banks. However, the regulators have certainly not forgotten about this part of the industry, with extensive analysis still being undertaken by officials and proposals continuing to emerge in areas such as liquidity management and derivative usage.

This Special Report considers the current position of global standards for fund valuation in light of the recent regulatory changes. We assess whether there has been progress towards harmonizing such standards (as there has been in the banking and accounting spheres) and where there is still work to be done. We also consult the crystal ball to forecast what might be coming down the line in the future.

19,557

12,772

5,865122

AssetUnderManagement(US$bn)

Americas Europe AsiaPacific Africa

25,230

47,427

26,510

1,327

NumberofFunds

Americas Europe AsiaPacific Africa

5



34%

75%

42%

58%

8% 8%

25%

17%

25%

50%

The Importance of Valuation StandardsThe valuation of assets held in investment funds is one of the most important duties that needs to be performed by fund managers and those who oversee and govern them.

Amongst other things, valuation affects:

■ Net Asset Value (NAV) calculations

■ Financial reporting

■ Performance reporting

■ Fees paid to service providers

■ Redemption payments to exiting investors

■ Purchase prices for new investors

■ Recording of purchases and sales of fund assets

Our recent survey showed the full scope and extent of the consumption of pricing and valuation data within an investment firm.

The key objective underlying the … valuation principles outlined … is that investors should be treated fairly. IOSCO, Principles for the Valuation of Collective Investment

Schemes, 2013

Source – Voltaire Advisors AIFMD Survey, 2016

Main Consumers of Pricing & Valuation Data in Fund Firms

Sound valuation is therefore a mission critical feature of fund management.

From the perspective of the portfolio manager, correct valuation of these holdings is essential in order to make informed investment and risk management decisions.

From the point of view of an investor, sound and accurate valuation is critical to analysis of the performance of a fund over time, which might prompt an investment. It is also fundamental to the price at which the investor would expect to buy and sell fund shares.

Between these two standpoints lies an area with potential for significant conflicts of interest, and it is the identification, oversight and management of these that forms the basis for valuation standards.

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Main Global Valuation PrinciplesWhilst there have been more or less successful attempts at harmonizing global standards for valuations in banking and accounting, those for asset managers have yet to be fully addressed. Accordingly, the rules and regulations for valuation of assets within the bulk of investment funds remain resolutely locally driven.

Global - IOSCO PrinciplesThat is not to say that there is no guidance from global authorities on fund valuation, but guidance is all it currently is, having not been implemented into any coherent international regulatory framework.

The global securities regulators organization IOSCO have made a series of attempts to codify some high level principles for fund valuation in both the traditional and alternative sectors. However, they make it clear that implementation will vary by jurisdiction depending on local circumstances.

Most recently, the 2013 Principles for the Valuation of Collective Investment Schemes presented 11 Principles that the IOSCO working group considered should form a core of good practice for fund valuation. It focuses on the control of risks and conflicts of interest associated with asset valuation, especially for illiquid and hard to price instruments where market prices might not be available.

This report follows the 2009 Principles for the Valuation of Hedge Fund Portfolios which proposed 9 areas of best practice for alternative investment funds. Although somewhat aged now, and hatched in the febrile atmosphere of the immediate post-crisis years, these Principles remain important since much of the text was appropriated verbatim for the Level 2 rules implemented by ESMA under AIFMD (see below).

IOSCOThe International Organization of Securities Commissions (IOSCO) is the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector. IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation. It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda.

IOSCO was established in 1983. Its membership regulates more than 95% of the world’s securities markets in more than 115 jurisdictions; securities regulators in emerging markets account for 75% of its ordinary membership.

The IOSCO Objectives and Principles of Securities Regulation have been endorsed by both the G20 and the FSB as the relevant standards in this area. They are the overarching core principles that guide IOSCO in the development and implementation of internationally recognized and consistent standards of regulation, oversight and enforcement. They form the basis for the evaluation of the securities sector for the Financial Sector Assessment Programs (FSAPs) of the International Monetary Fund (IMF) and the World Bank.

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Europe - UCITS & AIFMDReferring only to hedge and private equity funds, the Level 1 text of the Alternative Investment Fund Managers Directive of 2011 consists of 71 Articles and 4 Annexes, with the fund valuation component covered in Article 19. This has 11 clauses and is very high level, focusing on who should perform the valuation. Importantly, this Article defines the role of an External Valuer, more of which below.

The detail of the AIFMD valuation requirements come in the Level 2 Delegated Acts, Articles 67-74. It is in this set of regulations that the 2009 IOSCO Principles come into play (referenced in the previous section). The Level 2 rules are much more prescriptive as to how a hedge fund should approach asset valuation. For example, Article 68 covers the use of internal models, and Article 71 has a raft of factors that an AIFM should consider when assessing if a valuation if fair and appropriate.

At a Pan-European level, EU laws effectively divide the investment fund world into two – UCITS (Undertakings for Collective Investments in Transferable Securities) and AIF’s (Alternative Investment Funds). There are also a range of different fund structures at national level.

The UCITS directive firmly devolves the rules for fund valuation to the national level. Article 85 states:

This implies that the valuation of fund assets for a UCITS will be subject to the rules pertaining in the jurisdiction in which it is domiciled.

UCITSUndertakings for the Collective Investment in Transferable Securities are investment funds regulated at European Union level. They account for around 75% of all collective investments by small investors in Europe. The legislative instrument covering these funds is Directive 2014/91/EU.

UCITS provides a single European regulatory framework for an investment vehicle which means it is possible to market the vehicle across the EU without worrying which country it is domiciled in.

Designed to enhance the single market while maintaining high levels of investor protection, UCITS funds have also become successful in Asia and Latin America because the UCITS ‘label’ means investors can have some assurance that certain regulatory and investor protection requirements have been met.

The two most popular domiciles for UCITS funds are Ireland and Luxembourg and both have national regulations governing valuation of fund assets.

In Ireland, these are laid down by the Central Bank of Ireland in Guidance Note 1/00 - Valuation of the Assets of Collective Investment Schemes. Essentially, valuations for listed instruments should be the closing or last known market price (unless this is unavailable or unrepresentative) and for others should be the probable value on realization which must be estimated with care and in good faith.

The responsibility for determining this policy lies with the management company, with the fund depositary required to carry out and document subsequent periodic reviews of the overall valuation methodologies.

“ The rules for the valuation of assets and the rules for calculating the sale or issue price and the repurchase or redemption price of the units of a UCITS shall be laid down in the applicable national law, in the fund rules or in the instruments of incorporation of the investment company.” UCITS directive, Article 85

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AIFMDThe Alternative Investment Fund Managers Directive (AIFMD) is a European financial directive which was published in the Official Journal of the European Union on July 1, 2011 and came into force on July 21, 2011. The AIFMD applies to hedge fund managers, private equity fund managers, real estate fund managers, and managers of other alternative investments operating within, or marketing to investors in, the European Union.

It was designed by EU policy makers as a comprehensive plan for the oversight of alternative investment fund managers (AIFMs) operating in the EU. The plan requires all covered AIFMs to obtain authorization from the EU and submit to government regulation. The directive was introduced following the global financial crisis, seeking to address regulatory gaps and reduce systemic risk in the alternative investment industry as well as helping the EU to meet G-20 established commitments. Prior to the directive, the alternative investment industry had not been regulated at the EU level.

AIFMD has added significantly to the operational burden of alternative asset managers in a number of areas, but especially in valuation and reporting. This is not helped by the fact that to come into effect it needs to be transposed into law in each of the 23 EU states, and this is not always done consistently.

There needs to be better coordination efforts between Nationally Competent Authorities to harmonize filing arrangements and interpretations which are needlessly burdensome for managers. European Hedge Fund Administrator, Voltaire Advisors AIFMD Survey, 2016

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United States - 40 Act & Dodd-FrankThe frequently amended and expanded Investment Company Act has governed the activities of US mutual funds for over 75 years. These rules, and the SEC enforcements, releases and staff guidance that support them, develop a detailed and thorough landscape for fund valuation.

In particular, the requirement for a mutual fund boards to ‘fair value in good faith’ any securities for which ‘market prices are not readily available’ is a concept that has been restated and refined regularly since 1969.

In our view, the valuation rules and regulations for US mutual funds represent the most highly developed set of fund pricing standards in the world, and have been proven in action over many years. Regular revisions and enhancements have dealt with issues arising over the years, ranging from market timing abuse to the use of derivatives. Most recently, in 2014, the Commission produced guidance on the use of pricing services to assist funds fair value their securities.

There have also been a regular series of enforcement actions relating to valuation failings in funds which have served to focus attention on these issues and (in the words of Voltaire himself) ‘encourager les autres’!

Nearly a quarter of FV Survey participants reveal that their Boards discussed the text contained in the SEC’s recent Money Fund Rule and made changes to its oversight as a result. Deloitte Fair Valuation Pricing Survey, Thirteenth Edition, 2015

THE 40 ACTThe Investment Company Act of 1940 is an act of Congress. It was passed as a United States Public Law on August 22, 1940. Along with the Securities Exchange Act of 1934 and Investment Advisers Act of 1940, and extensive rules issued by the Securities and Exchange Commission, it forms the backbone of United States financial regulation.

This piece of legislation clearly defines the responsibilities and limitations placed on open-end mutual funds, unit investment trusts and closed-end funds that offer investment products to the public. The 40 Act grew out of the stock market crash of 1929 as an attempt to stabilize financial markets. This act clearly sets out the limits regarding filings, service charges, financial disclosure and the fiduciary duties of fund companies.

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DODD-FRANKThe ‘Dodd-Frank Wall Street Reform and Consumer Protection Act ‘ is a compendium of federal regulations, primarily affecting financial institutions and their customers, that the Obama administration passed in 2010 in an attempt to prevent the recurrence of events that caused the 2008 financial crisis. Commonly referred to as simply “Dodd-Frank”, is supposed to lower risk in various parts of the U.S. financial system. It is named after U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank because of their significant involvement in the act’s creation and passage.

Asia – A Local PatchworkIn the Asian region there is currently no overarching supranational regulatory regime such as the EU. Each country has adopted their own financial regulatory arrangements, and these include differing requirements for fund valuation and governance.

Having said that, most of the regulators in the region are members of IOSCO, and the stated intent of this organizations principles for both hedge fund and CIS valuation are to provide a guide for their members when it comes to implementing fund valuation standards. However, as IOSCO makes clear, these are guidelines only and the practical application of such rules is still very much a local affair.

The fund markets in the region are developing quickly, however, and have substantial assets under management (as the chart shows) and there is clear policy intent to support and encourage this growth.

Quite recently, an ambitious initiative was launched by APEC (Asia Pacific Economic Co-operation) to create a UCITS-like framework for investment funds to facilitate cross border marketing. Called the Asia Region Funds Passport (ARFP), it aims to create a UCITS-like regime to allow funds from different countries to be sold in other countries with minimal regulatory hurdles provided they meet minimum standards.

Details on the valuation requirements of this standard is currently light, referring to the valuation obligations pertaining in the host countries, but what it does stress is that it is the responsibility of the fund ‘operator’ to ensure sound valuation (typically the management company) and it also defines fair value.

In 2010, the Dodd-Frank Act was passed in response to the financial crisis, and significantly extended the scope and powers of market regulators. Of especial relevance to the asset management industry, Title IV of the Act – implemented in 2011 - required most ‘private funds’ (hedge funds and private equity funds) to register as investment advisers with the SEC.

Not only did this require private funds to submit substantial fund information to the SEC in regulatory filings (notably, Form PF) but it also made them subject to inspection and examination by the Commission and enforcement and sanction if found in breach of the requirements of the Investment Advisers Act.

The first inspection ‘sweep’ of these new registrants by the SEC in 2012 highlighted valuation policies and procedures as a key priority. Whilst not technically subject to the securities pricing rules of mutual funds highlighted above, the Commission made it abundantly clear that they considered these to be best practice when it came to portfolio valuation, and any private fund adopting substantively different processes from these would have to have a pretty good explanation why!

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This effort follows the ASEAN CIS Framework agreed between Malaysia, Singapore and Thailand in 2014 – another cross border marketing arrangement. The standards to be applied to Collective Investment Schemes under this Framework require the fund’s assets to be valued using market prices if available, or fair value if not. These valuations are required to be performed by an independent party – either the administrator, auditor or a segregated unit within the manager.

It is still early days, but if the ARFP takes off and gains the support of major regional fund management centres such as Hong Kong and Singapore, then it has some real potential to harmonize standards in what is still today a local patchwork of regimes.

ARFPThe Asia Region Funds Passport is an economic initiative by APEC to provide regional marketing of funds throughout member states in Asia. It is led by Australia, Japan, New Zealand and the Republic of Korea, all of whom signed a Memorandum of Co-operation on 28 April 2016. The Philippines, Singapore and Thailand have also been involved in the development.

The MoC sets out the internationally agreed rules and cooperation mechanisms underpinning the passport. The MoC comes into effect on 30 June 2016 and some other regional economies are expected to join before then. Over time, the aim is to ensure all other eligible APEC economies are able to participate in the passport. Participating economies have up to 18 months from the 30 June 2016 to implement domestic arrangements in accordance with the rules.

The passport - first mentioned in the 2010 Johnson report by the Australian Financial Centre Forum - is expected to commence in 2017.

-

200

400

600

800

1,000

1,200

1,400

1,600

Australia Japan China Singapore Korea India Other

Source – Investment Company Institute, 2015

Assets Under Management in Asia by Country (US$bn)

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DOCUMENTATION & DISCLOSURE

That valuation policies and procedures should be fully documented and disclosed to investors is also an important standard. This includes the basic description in the fund offering documents and more detailed Valuation Policy Document which is usually made available on request. Other requirements on operational transparency may also apply.

Although a requirement under the main regulations, there is still some work to be done on full implementation of this, as our recent AIFMD Survey suggests.

85 percent of the AIFMD Survey have a fully documented valuation policy available for investors and regulators - perhaps surprising that 15 percent do not! Voltaire Advisors AIFMD Survey, 2016

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Do you have fully documented valuation policies and procedures?

■ YES

■ NO

CONFLICTS OF INTEREST

The management of conflicts of interest between managers of the funds and their investors is one of the primary focuses for consumer protection. In a valuation context this typically assumes the requirement that those who are rewarded for fund performance through management fees and bonuses do not have undue influence over the recording of this performance via the NAV of the fund.

Separation of duties for fund management and pricing is a core requirement in most of the regulatory rules and best practice standards.

… the management of conflicts of interests is critical to ensuring that the CIS’s assets are valued properly, and that CIS investors are protected. IOSCO, Principles for the Valuation of Collective Investment Schemes, 2013

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Five Areas of AgreementA detailed review of the various valuation standards applicable to investment funds does reveal some areas of general agreement. We have identified five key areas where harmony does seem to exist across multiple jurisdictions.

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DUE DILIGENCE

The majority of funds use external data and applications to assist them with valuations. It is incumbent on the users to ensure that these third parties are fit for the purpose for which they are deployed. This due diligence requirement applies both on initial adoption and periodically throughout the life of a contract.

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CONSISTENCY OF APPLICATION

No cherry picking! Valuation methods and sources should be applied in a consistent manner across asset classes, funds and over time. There should be no choosing between different options – or flipping these options - to achieve a result more attractive to the fund manager.3

PERIODIC REVIEW

Set and forget is not an option. It must not be assumed that what was appropriate at one point in time remains so over the duration of the funds life, especially if investment strategies change. Review frequency recommendations range from ‘continuous’ to at least annually.4

Principle 4: The assets held or employed by Collective Investment Schemes should be consistently valued according to the policies and procedures. IOSCO, Principles for the Valuation of Collective Investment Schemes, 2013

75 percent of FV Survey participants have regularly scheduled dates, most commonly on an annual basis, at which valuation policies and procedures are updated. Deloitte Fair Valuation Pricing Survey, Thirteenth Edition, 2015

12%

70%

18%

Onepricingsourceforallassetclasses

Differentpricingsourcesdependingonassetclass

Differentpricingsourcesdependingonassetclass,andoUendifferentpricingsourceswithinanassetclass

Whatdescribesyouruseofpricingvendors?

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Five Areas of ConflictWhilst there are some points of general agreement amongst global fund valuation rules, one does not have to look hard to find some areas where they disagree or conflict.

PUBLIC VS PRIVATE FUND STANDARDS

Ironically, other than in the United States, the valuation regulations and standards for public funds do not seem to be as well developed as those for alternative/private funds. Arguably this is due to the propensity for hedge and private equity funds to invest in more illiquid and complex assets which require more valuation rigor. This may have been true once, but is certainly not the case now and there is a definite need for funds outside US SEC jurisdiction to have a more transparent valuation regime.

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VALUATION RESPONSIBILITIES

There is also some variation in the rules as to whom is ultimately responsible for valuation. In the US, the obligation lies firmly with the board of directors – whether public of private funds - who may appoint someone to assist them with this, but may not delegate the ultimate liability.

In Europe and Asia, the various regulations make it clear that the Manager is responsible for valuation and the liability of the governing body in this respect is much less clear cut. This seems to conflict with company law, where the board has a fiduciary responsibility to investors.

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AIFMs are responsible for the proper valuation of AIF assets, the calculation of the net asset value and the publication of that net asset value. AIFMD, Article 19, Clause 10

EXTERNAL VS INTERNAL VALUATION

AIFMD also complicates matters with its definitions of Internal and External Valuers. Under this Directive valuation can be delegated to an External Valuer, but the requirements of this entity – especially their professional qualifications and liabilities to the manager – are very stringent. If this option is not deployed, then the AIFM themselves must act as Internal Valuer.

Ironically, developing best practice up to this point had been to encourage the use of independent, third party pricing wherever appropriate. By creating barriers to this, AIFMD arguably discourages this process!

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76 percent of the survey indicate that they do not use an External Valuer as defined under AIFMD. Voltaire Advisors AIFMD Survey, 2016

Do you use an External Valuer?■ YES

■ NO

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DOCUMENTATION DETAIL

Whilst it is a generally accepted rule that valuation policies and procedures should be documented and disclosed, the level of detail required from each jurisdiction and fund type varies enormously. Some regulations require just the briefest description of valuation methods which are not especially useful to investors.

4We have extensive valuation documentation, but I have to say that it is more theoretical than practical. European Hedge Fund Manager, Voltaire Advisors

AIFMD Survey, 2016

DUE DILIGENCE REQUIREMENTS

Again, due diligence of external sources is a generally agreed requirement for most valuation regimes, but the frequency and depth of this activity also varies significantly. A once-off ‘tick box’ exercise is of little use in assessing the appropriateness or otherwise of a valuation source and can rapidly go stale. Equally, few fund operations departments possess the time or resources to constantly assess the quality and robustness of pricing vendor’s services.

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Conclusions – Harmony or Discord?Despite some general areas of agreement and broadly accepted principles, with such a variety of valuation rules and regulations all subject to local and regional jurisdictions and circumstances it is little wonder that there are currently more conflicts amongst these rules than agreement.

Much of this conflict lies in the detail and/or implementation of the various valuation rules. Only rarely do the overall high level principles clash, arguably the most important being the differing assessments of valuation responsibility and external vs internal valuers between AIFMD and other standards and the differences over board and manager responsibility for valuation.

Regional and investment manager differences in applying fund valuation standards and regulations, practitioners will invariably be subject to scrutiny through regulatory examinations seeking to determine best practices related to fund valuation standards.

It will be no comfort to fund operations and governance to argue that they are compliant with high level principles. When the regulator calls, it is compliance with the detail and letter of the law they will be looking for.

How can we expect this to develop in the future?There certainly appears to be a desire amongst global regulators to address these issues since the financial crisis. The IOSCO Principles for the Valuation of Collective Investment Schemes in 2013 set some ground rules for this and we can see how these statements often act as proto-regulations with the adoption of the IOSCO hedge fund principles into AIFMD.

Furthermore, officials are still closely examining the practices of the asset management industry as is highlighted by the latest statement of priorities from the Financial Stability Board (FSB) which mentioned the vulnerabilities of the asset management sector as a cause for concern.

However, as the IOSCO report makes clear…

Implementation of the principles may vary from jurisdiction to jurisdiction, depending on local conditions and circumstances. IOSCO, Principles for the Valuation

of Collective Investment Schemes, 2013

So, rather than a harmonious globally accepted method for fund valuations, it seems that we are going to have to live with the current varied and complex landscape for the foreseeable future.

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0

10

20

30

40

50

60

70

80

AIFMD Dodd-Frank EMIR/MIFIDII IFRS/FASB

Num

bersofFirm

s

Rank

1 2 3

Annex: Data & Reporting ChallengesOne of the key themes to emerge from the regulatory and standard setting activity since 2008 has been the notion of increased transparency and disclosure, especially for private funds.

Under AIFMD, the larger alternative investment managers are required to report a range of financial and investment data to their national regulatory authority on a quarterly basis (Annex IV reporting). A similar exercise is required in the United States following the implementation of Dodd-Frank, which brought most private funds under the regulatory umbrella of the SEC (Form PF).

Public funds such as US Investment Companies and European UCITS have always had an extensive disclosure regime, with Net Asset Values being struck daily or even intra-day, and portfolio holdings and other investment and performance information reported frequently to investors.

All this is in addition to the financial reporting required for accounting and audit purposes which, depending on the structure of the investment vehicle, is also disclosed to investors and, in the case of a public fund, to the wider world.

The increase in reporting requirements and disclosure represented a major data challenge for funds. Much of the data required was either not readily available or not in the format required for the reports. Furthermore, the regulations and standards increasingly require valuation and pricing of fund assets to be much more transparent to regulators, investors and audit firms.

Looking at the range of new regulations which came into play, our recent survey asked buy-side firms to rank the various initiatives in terms of operational pain. Both AIFMD and Dodd-Frank came very high on the list.

Source – Voltaire Advisors AIFMD Survey, 2016

Regulations Ranked in Terms of Time and Cost to Implement

Annexe

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DISCOVER MORE

• Read our latest blog on AIFMD & IFRS: http://www.prdcommunity.com/index.php/community/blog/289-aifmd-ifrs-fair-value-management-portfolio-valuations

• Listen to the interview with Jayme Fagas on IFRS: http://www.prdcommunity.com/index.php/community/1-pricing--reference-data/10-evaluated-pricing---fair-value-measurement-ifrs-and-aifmd-developments

• What is an evaluated price? Look at our infographic and learn it in an easy way: http://www.prdcommunity.com/index.php/solutions/434-trps-infographic

• Thomson Reuters AIFMD solution: http://www.prdcommunity.com/index.php/solutions/regulatory-data/aifmd

• Thomson Reuters Pricing Service: http://www.prdcommunity.com/index.php/solutions/valuation-services

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APPROACH & METHODOLOGYGlobal Fund Valuation Standards is a product of extensive research and analysis undertaken by Voltaire Advisors into asset management operations over the last few years, supplemented by selective surveys and interviews in key segments of the industry by ourselves and other consultancy practices.

Our analysis of the response to AIFMD was the subject of a short survey of EU Alternative Investment Fund Managers looking at some of the key valuation considerations, such as the use of External Valuers and the implementation of standardized policies and procedures. Just over 80 firms participated in this survey undertaken by Voltaire in February/March of 2016, and this was augmented by follow up interviews with 10 of these respondents.

For trends amongst US funds subject to regulation by the SEC we were indebted to the work performed by Deloitte in its Fair Valuation Pricing Survey. Now in its thirteenth year, this annual review covered 103 firms in 2015.

About Voltaire AdvisorsVoltaire Advisors are specialists in Valuation Risk with deep domain knowledge of valuation methods, sources, data and processes not available to more general financial consulting and advisory firms. We work with a variety of clients in the valuation risk area, ranging from users and regulators through to vendors. Valuation Risk is inherent and unavoidable for many financial asset classes, and one can never eliminate the risk entirely. The main issue associated with this is how to recognize, classify and subsequently control this. Voltaire Advisors can help you achieve this. For more information go to www.voltaireadvisors.com

About Thomson ReutersThomson Reuters is the world’s leading source of intelligent information for businesses and professionals. We combine industry expertise with innovative technology to deliver critical information to leading decision makers in the financial and risk, legal, tax and accounting, intellectual property and science and media markets, powered by the world’s most trusted news organization. Thomson Reuters shares are listed on the Toronto and New York Stock Exchanges (symbol:TRI). For more information, go to www.thomsonreuters.com

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