BY Alex Taylor , Jessica Blumenthal AND Johan Loubser
banking and finance
Conduct standard on net asset valuation calculation and pricing for CIS portfolios published
After extensive public consultation with industry participants and interested parties, as well as industry specific engagement, the Financial Sector Conduct Authority (“FSCA”) published Conduct Standard 1 of 2020 (CIS) on 19 May 2020 (“Conduct Standard”) to address net asset value calculation and pricing for collective investment scheme portfolios.
Who does the Conduct Standard apply to?
The Conduct Standard applies to all managers of collective investment schemes (“CIS”) in South Africa (“Mancos”), including CIS in property (where applicable), but excluding CIS in participation bonds.
When does the Conduct Standard come into effect?
The Conduct Standard comes into operation in mid-November 2020, six months after the date of publication, allowing a transitional period for Mancos to ensure compliance with the Conduct Standard.
What is the objective of the Conduct Standard?
In line with treating customers fairly principles, the Conduct Standard introduces general principles to mitigate risk in valuation and pricing processes, address the valuation of assets by Mancos and ensure that asset valuation and the pricing of portfolios is not distorted to the detriment of financial customers. This aligns local industry practice to international best practice, addressing the lack of uniform specified valuation principles previously identified as a negative aspect of South African CIS regulation.
What is the current regulatory position?
Currently, the valuation of assets and the pricing of portfolios is governed by broad principles contained in the Collective Investment Schemes Control Act, 2002 (“CISCA”), as well as additional requirements that Mancos may voluntarily introduce in the deeds establishing their schemes.
Section 44 of CISCA requires Mancos of CIS in securities to value securities at fair market price. “Fair market price” is not defined in CISCA. Provision is only made for a Manco unable to determine a “fair market price” to request an authorised user of a licensed exchange to make such determination.
Section 97 of CISCA provides that every deed in respect of:
- a CIS in securities must provide for the manner in which assets of the portfolios are to be valued for purposes of calculating the sale and repurchase prices of participatory interests; and
- a CIS in property must provide for the frequency and basis upon which assets of the portfolio are to be valued.
As to the pricing of participatory interests of portfolios, section 94 of CISCA provides that a Manco may not sell any participatory interest in a CIS for a price that exceeds or is less than the net asset value of that participatory interest. Section 93 deals with permissible deductions from portfolios. There are no detailed provisions in CISCA governing the calculation of net asset value.
Against this backdrop of wide principles in CISCA, the Association for Savings and Investment in South Africa (“ASISA”) published a standard for its members on net asset valuation and pricing, the last version of which was released in 2015 (the “ASISA Standard”). The ASISA Standard has been largely accepted and applied by the CIS industry in South Africa. However, it is only applicable to ASISA members and does not impose prescriptive obligations on Mancos.
As such, asset valuation and participatory interest pricing has, to date, largely been self-regulated.
How does the Conduct Standard change this?
The Conduct Standard provides principles and rules for Mancos to value assets and price participatory interests. The Conduct Standard incorporates many of the principles of the ASISA Standard, making some improvements and adjustments.
The key features of the Conduct Standard are:
- Mancos must ensure that the calculation process adheres to the principles of fairness, consistency, transparency and accuracy and the calculation of net asset value and pricing is correct. This codifies the accepted principles of the ASISA Standard.
- The net asset value of a portfolio should be determined through the following five processes:
- recording and valuing of assets;
- recording of income;
- recording of expenses;
- allocating of proportionate values to participatory interests; and
- calculating and processing of distributions to investors,
and further guidance as to the requirements for each such process is provided.
- Any asset in a portfolio must be valued at its fair market price, with the exception of money market portfolio assets (this echoes the provisions of the ASISA Standard), and Mancos must adopt a valuation policy that is approved by the board of directors of Manco in this regard. A Manco must also adopt policies and procedures to detect, prevent and correct material valuation or pricing errors.
- the disclosure requirements set out in the Conduct Standard as to the reporting of portfolio net asset value, distributions and yields are similar to those set out in the ASISA Standard. Mancos are required to publish details of declared distributions of all classes of portfolios on the website of the Manco on the first business day following the distribution.
- Mancos are obliged to report net asset value price information, distribution data in cents per participatory interest and the total expense ratio to a statistics service provider appointed by the FSCA for the purpose of collecting such data.
- the Conduct Standard codifies the materiality threshold for valuation errors as 0.5% of the net asset value price. This follows the suggestion of the ASISA Standard. Material errors over this threshold must be reported to the FSCA within five business days of detection, followed by a progress report as to the correction of such errors; and
- the Conduct Standard overrides any conflicting provision of a deed of a CIS.
What impact will the Conduct Standard have on Mancos?
As the majority of Mancos are members of ASISA and compliant with the ASISA Standard, the Conduct Standard should not require too much operational adjustment. The enhanced reporting obligations to the FSCA in respect of asset valuation and portfolio pricing must, however, be taken into account.
Mancos should also review their deeds against the Conduct Standard to understand any inconsistency, given that the Conduct Standard will prevail in the instance of any inconsistency or conflict.
In addition, Mancos who do not have a valuation policy adopted by their board of directors or documented policies and procedures designed to detect, prevent and correct material valuation or pricing errors will need to ensure that these are in place.
Finally, the FSCA has noted that, in consultation with ASISA, it is developing more detailed guidelines which will provide further guidance as to specific valuation methodologies which will be published soon. These will have to be considered and taken into account.
For a discussion on the recent FSCA exemption to Mancos in securities permitting them to suspend the creation, issue, sale and repurchase of participatory interests in certain circumstances, please click here.
Executive | Banking and Finance
+27 82 788 0352
Senior Associate | Banking and Finance
+27 82 560 3834
Executive | Banking and Finance
+27 83 704 6732