In July 2020, CIMA issued new rules on calculation of asset values for regulated funds. They also issued similar rules for private funds. The documents containing the rules each run to 7 pages (for regulated funds) and 4 pages (for private funds) and are available here (for regulated funds) and here (for private funds). Some of the main things to note from the rules relating to regulated funds are set out below:
Funds must establish, implement, and maintain a NAV Calculation Policy that ensures a Fund’s NAV is fair, complete, neutral and free from material error and is verifiable. Our understanding is that the fund may either have a standalone policy itself or it may ‘adopt’ the investment manager’s policy.
The NAV Calculation Policy must be based on the IFRS or generally accepted accounting principles of the USA, Japan, Switzerland or a Non-High Risk Jurisdiction (based on a comprehensive risk assessment of the relevant jurisdiction) - consistent with the accounting principles or reporting standards used to prepare the Fund’s audited financial statements.
The NAV Calculation Policy must be written and disclosed in the Fund’s offering document. Although we understand that the offering document can summarise the policy which can be contained in a standalone document to be provided to investors. The rules set of the various pricing and valuation policies, practices and procedures, the roles and responsibilities of the various service providers to the fund and (among other things) must require the calculation of the fund’s NAV regularly and at least quarterly.
The Policy must also identify (i) escalation and resolution procedures for any management exceptions or overrides; and (ii) any pricing models for determining fair values for ‘hard to value’ securities.
NAV must be calculated by a service provider that is independent of the fund’s investment manager/advisor/operator, subject to where the manager/advisor/operator provides or sources any price they must provide supporting information used to determine those prices and the service provider must take reasonable steps to verify the facts on which such prices are determined. Subject to a couple of limited carve-outs, any assistance from a manager/advisor/operator must be detailed in the fund’s offering document with an explanation as to why another service provider could not calculate the fund’s NAV.
Any inherent limitations in the NAV Calculation Policy must be explicitly described in the fund’s offering document, including any involvement of the investment manager/advisor in the pricing and any conflicts of interest caused by such involvement.
NAV must be communicated directly to investors by the service provider charged with NAV calculation.
Fund Operators must review and approve the NAV Calculation Policy and any pricing models at least annually.
The rules for Private Funds are shorter and the requirements are less stringent, with no requirement for the policy to be included in an offering document. The policy for Private Funds must be written and disclosed in the Fund’s constitutional documents or Marketing Materials or other form of Investor communication typically used by the Private Fund.
Should you have any queries in relation to anything contained in the rules, we suggest you reach out to your usual IMS contact or to your usual Cayman fund counsel.