The International Organization of Securities Commissions (IOSCO) has published a report on how assets within a collective investment scheme (CIS) have to be properly valued, whether or not exact market quotations are readily available for all instruments.
The report says, “Valuation is extremely important because a CIS must redeem and sell its shares at their net asset values…If CIS portfolio securities and assets are incorrectly valued, investors may unfairly pay more for their shares. [They may also] unfairly receive less upon redemption, and investors remaining in the CIS may be adversely affected.”
The report, called Principles for the Valuation of Collective Investment Schemes, contains a list of principles intended to serve as a basis for both industry practitioners and regulators to assess the quality of regulation regarding these schemes.
The final report revises IOSCO’s Principles for CIS Valuation, originally developed in 1999. It takes account of subsequent regulatory, industry and market developments, however, because many new and complex assets are now eligible for CIS portfolios that in 1999.
The value of these assets can’t be determined by using quoted prices, so the portfolios instead rely on internal techniques that are based on management’s judgments.
IOSCO says the difficulty and subjectivity needed for certain valuations increases regulatory risks, which calls for a tougher set of principles, policies and procedures.
The revised principles in the report also consider IOSCO’s 2007 Principles for the Valuation of Hedge Fund Portfolios.