A key role of a Fund Administrator is to ensure a true and fair value is applied to all securities when determining the Net Asset Value (NAV) of a fund and to ensure transparency so that investors are aware what proportion of the NAV has been independently valued. Fund Administrators are often presented with a major ordeal valuing hard-to-value or illiquid securities which require them to understand the security and how it is structured.
To help reduce valuation risk, it is imperative that the Directors ensure, as part of good corporate governance, that proper disclosure of pricing policies and procedures for hard-to-value or illiquid securities is made to investors. Fund Administrators need to have sufficient experience to know if it is possible to value the securities in accordance with the pricing policies and must then ensure that those pricing policies are used methodically and applied consistently.
It is usual for Fund Administrators to use third party pricing models or obtain prices directly from market makers for hard-to-value or illiquid securities. Fund Administrators should ensure that prices obtained from market makers are free from any bias from Managers as Fund Administrations in the past have been deceived by fictitious or inaccurate marks furnished by Managers.
There are still a number of lingering issues resulting from the use of side pockets for illiquid securities created during the financial crisis and some Managers claim that it could take another year before these can be unwound. In these circumstances Fund Administrators need to direct the valuation process and ensure that independent valuations are reported to investors on a timely basis.
Problems occur when the Manager and Fund Administrator disagree on prices and there needs to be a procedure where any disputes may be referred to an independent referee, such as a valuation or pricing committee.
At Summit Management, we recommend as part of our best corporate governance guidelines that the minutes from any independent pricing committees and pricing by the investment manager or other non-independent sources should be reviewed or ratified at the following board meeting and that transparency and disclosure are always the best course of action when it comes to valuing hard-to-value or illiquid securities.
You can direct any questions concerning this article to Summit Management Limited, PO Box 32311, Grand Cayman, KY1-1209, Cayman Islands, Tel: +1 345 945 7676 or email: firstname.lastname@example.org.