Amid growing concerns about investor protection — particularly as retail investors embrace alternative investment funds that are exposed to illiquid assets, such as private credit — global securities regulators are beefing up their fund valuation standards.
In a new report published today, the International Organization of Securities Commissions (IOSCO) set out its revised recommendations for valuation practices at global investment funds, including hedge funds and ETFs.
The report consolidates separate guidance that IOSCO had previously issued for hedge funds specifically and “collective investment schemes” more generally, into a single set of standards — and aims to toughen those standards on industry valuation practices, citing growing retail investor exposure to funds that are invested in “less liquid, harder-to-value assets,” including private assets.
The revisions also aim to address policymakers’ experience with recent periods of market stress, such as the onset of the pandemic, which prompted a loss of liquidity for corporate bonds and negatively impacted price discovery for many assets, including assets that are otherwise typically liquid, such as sovereign bonds — conditions that can create an incentive for fund investors to rush for the exits.
“Accurate valuation of fund assets is critical to investor protection and to maintaining confidence in financial markets,” IOSCO said — noting that valuation underpins the calculation of funds’ net asset values (NAVs), which impacts the prices that investors trade at when buying and selling fund units.
Among other things, the regulators’ recommendations focus on managing conflicts of interest; ensuring robust governance and oversight arrangements, including under stressed market conditions; the consistent application of sound valuation methodologies; the use and oversight of third-party valuation providers; along with transparency and disclosure to investors.
“The overarching objectives of these recommendations are to facilitate fair and consistent asset valuation across [funds], strengthen governance, oversight, and accountability of the valuation process, promote transparency and disclosure to investors and regulators, and mitigate potential systemic risk arising from inaccurate/inconsistent valuations,” the report said.
The revised standards are intended to apply to public open-ended funds generally, except money market funds, but including ETFs — which, although they are typically traded on secondary markets, rely heavily on NAV calculations. The report noted that the recommendations apply to ETF valuation processes, with “proportionate consideration” given to specific ETF features, such as dual pricing mechanisms between NAVs and secondary market prices.
“The recommendations provide comprehensive practical guidance to address potential valuation challenges arising from the growing investment in less liquid assets and growing use of more complex investment strategies,” said Jessica Reyes, chair of IOSCO’s committee on investment management, and head of the asset management policy division at France’s Autorité des Marchés Financiers (AMF), in a release.
“They also complement IOSCO’s broader commitment to fortifying the resilience of open-ended funds to support financial stability,” she added.