Fund Manager Code of Conduct, Hong Kong and Valuation of fund assets

Managers of collective investment schemes and of discretionary accounts have to implement provisions related with valuation of fund assets as provided in the revised Fund Manager Code of Conduct (the “FMCC”) w.e.f. 17 November 2018 as part of their compliance journey and to monitor its compliance. In this regard, the step by step action to be taken by managers to keep themselves in compliance with the applicable provisions of FMCC are discussed below.

1.       Maintain and implement valuation policies, procedures and processes (the “Valuation Policy”)

a.       Mandatory to maintain a documented Valuation Policy

b.       The Valuation Policy should also cover the exception circumstances when price override or deviation can be done

c.       To ensure proper and independent valuation of the fund assets are performed

d.       The valuation is consistently applied to similar type of fund assets as per the Valuation Policy

2.       Considerations for drafting the Valuation Policy:

a.       The Valuation Policy has to be consistent with the requirement of section 5.3.1 to 5.3.7 of the FMCC

b.       Applicable accepted accounting principles as well as best industry standards and practices for valuing fund assets and follow the general principles as laid out in section 5.3.6 of the FMCC unless otherwise specified in the constitutive documents of the fund

c.       Ensure that the fund’s documentation on valuation is consistent with the Valuation Policy

3.       Periodicity of valuation must be appropriate for the fund assets and be aligned with the dealing frequency and timelines.

4.       Disclose the frequency of valuation and dealing and basis valuation to the investors in the fund.

5.       Independent review of Valuation Policy

a.       The Valuation Policy has to be reviewed by a functionally independent third party. Independent director and internal audit can be considered to be functionally independent third party

b.       The review must be done periodically but at least annually

c.       The first independent review must be completed before the anniversary of the implementation of FMCC

d.       Effectiveness and consistent application of the valuation policy over a period of time. The review shall specifically focus whether valuation policy appropriately value the assets of the fund as a function of the complexity of the assets held by the fund. This is a very critical area of focus and is also likely to invite the attention of the regulator.

6.       Outsourcing the valuation services to third parties, the manager has to ensure the suitability of the service provider, adherence to the manager’s valuation policy and manager continues to remain responsible for the valuation of the fund’s assets.