The Malta Financial Services Authority (the “MFSA”) has published a detailed circular following reviews of the valuation processes adopted by UCITS Management Companies and AIFMs, including self-managed structures (collectively, “Fund Managers”).
While the overall level of compliance with regulatory requirements was satisfactory, the MFSA recommended improvements in crucial areas.
Main Observations by the MFSA
The MFSA identified the following ‘major’ deficiencies in relation to the valuation function:
- weak governance arrangements;
- a lack of proper assessments, probing, and oversight by the Board of Directors;
- inadequate valuation policies/ procedures; and
- failures in respect of external valuers.
Governance Arrangements
The MFSA stressed that the roles, responsibilities and reporting lines of persons involved in the valuation function are not always clear with Fund Managers. Adequate governance arrangements – including independence within the valuation process – are essential to ensure compliance with applicable MFSA rules. The Board of Directors is ultimately responsible for the governance framework of the Fund Manager and should conduct regular reviews.
Assessments, Probing and Oversight by the Board of Directors
The responsibility of the Board of Directors does not end with the approval of the valuation policy. The Board should understand valuation risks, challenge valuation methodologies, and generally oversee the valuation process of the Fund Manager. A recurring finding by the MFSA was the lack of assessments and probing by the Board, particularly in the case of less liquid assets (or liquid assets whose prices had been stale for a lengthy period).
Valuation Policies and Procedures
The MFSA outlined various improvements in respect of the valuation policies and procedures of Fund Managers. We outline the key enhancements below:
- the responsibilities of the Directors, valuation officer, valuation committee, external valuers and advisers should be accurately defined;
- appropriate and detailed pricing methodologies should be implemented by Fund Managers for both liquid and less liquid assets;
- the circumstances allowing for pricing exceptions should be clearly established; and
- more formal procedures are required for (a) identifying/ escalating pricing differences, (b) conducting reconciliations, (c) detecting/ escalating valuation errors, and (d) pursuing remedial action with investors in the event of NAV and valuation errors.
External Valuers
The MFSA witnessed several instances where Fund Managers failed to inform the Authority of an appointment of an external valuer (i.e., prior to such appointment). Furthermore, the MFSA highlighted that the initial due diligence and ongoing supervision of external valuers was weak in respect of certain Fund Managers. The AIFMD prescribes dedicated provisions when delegating the valuation function to an external valuer in respect of AIFs.
Concluding Remarks
Fund Managers should evaluate their governance structures and valuation processes in view of the MFSA’s findings. In its final remarks, the MFSA warns that appropriate regulatory action may be pursued if shortcomings are not remedied by Fund Managers.
