Funds registered under the Private Funds Law (as amended) (the “Private Funds Law”), with the exception of certain alternative investment vehicles, are obliged to have appropriate and consistent procedures for the purposes of proper valuations of their assets. The Cayman Islands Monetary Authority (“CIMA”) has published rules for the calculation of net asset values (the “Rule”) to ensure that the valuation of the assets of a fund is fair, reliable, complete, neutral and free from material error and verifiable. The rules are largely a reiteration of best practice and, in most cases, we do not expect private funds will need to make significant changes to their existing procedures or documentation.
NAV Calculation Policy
Private funds within the scope of the Rule must establish, implement and maintain written pricing and valuation practices, policies and procedures to calculate a fund's net asset value in accordance with the Private Funds Law and the Rule (the “NAV Calculation Policy”). The NAV Calculation Policy must include price sources, procedures for resolving the management of exceptions and internal controls appropriate to the size, complexity and nature of the fund's operations.
The NAV Calculation Policy must be calculated in accordance with the International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan, Switzerland or a non-high risk jurisdiction (the “Financial Reporting Framework”), and the methodology must be consistent with the Financial Accounting Framework used for the private fund's audited financial statements.
The Rule provides high level guidance as to how to establish fair value, including the use of pricing models for hard-to-value securities.
The Service Provider
Under the Private Funds Law, a fund's valuation may be carried out (subject to certain conditions in each case) by an independent third party, the manager or operator of the fund or the fund's administrator (the “Service Provider”).
The fund has ultimate responsibility for oversight of the net asset valuation process and must approve, and review at least annually, the NAV Calculation Policy and any pricing models used to value investments. It is the fund's obligation to ensure that the Service Provider applies the NAV Calculation Policy.
Contents of the NAV Calculation Policy
In addition to the matters set out above, the Rule specifies certain information required to be set out in the NAV Calculation Policy. This information includes:
- a description of its practical and workable pricing and valuation policies, practices and procedures;
- the frequency of valuation (which must be at least annually);
- the value of the assets and publication details;
- the Financial Reporting Framework to be used; and
- the role and responsibilities of the Service Provider.
Providing Information to Investors
The fund must ensure that the NAV Calculation Policy, together with a description of any inherent or potential limitations, is disclosed to the fund's investors. The Service Provider must issue reports to the investors of the fund setting out the net asset value of the fund including, in respect of each investor, their share of the balance or the net asset value per unit.
Funds must also disclose any material involvement by the fund's investment manager or advisor in the pricing of the fund's portfolio or in the calculation, determination or production of the fund's net asset value, and any associated conflicts of interest. These disclosures can be made in the fund's constitutional documents, its marketing materials or another form of investor communication typically used by the fund.
Information in respect of any deviations made by the Service Provider from the NAV Calculation Policy (and any effect this may have on the reported net asset value of the fund) must be disclosed to investors.1
1 Deviations likely to have an effect on the reported net asset value of the fund must also be agreed by the operator of the fund prior to the determination or production of the net asset value.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.