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COLL 6.3 Valuation and pricing

Application

COLL 6.3.1RRP

This section applies to an authorised fund manager, a depositary, an ICVC and any other director of an ICVC.

Purpose

COLL 6.3.2GRP
  1. (1)

    In accordance with Principle 6, this section is intended to ensure that the authorised fund manager pays due regard to its clients' interests and treats them fairly.

  2. (2)

    An authorised fund manager is responsible for valuing the scheme property of the authorised fund it manages and for calculating the price of units in the authorised fund. This section protects clients by:

    1. (a)

      setting out rules and guidance to ensure the price of units in an authorised fund is calculated fairly and regularly;

    2. (b)

      allowing for the authorised fund manager to mitigate the effects of any dilution (reduction) in the value of the scheme property by:

      1. (i)

        payment of stamp duty reserve tax (SDRT) in relation to certain unit transactions; and

      2. (ii)

        buying and selling underlying investments as a result of the issue or cancellation of units;

    3. (c)

      making appropriate provision to ensure clients are treated fairly where units are being dealt with at a known (historic) price; and

    4. (d)

      ensuring that the price is made public in an appropriate manner.

  3. (3)

    The requirements in this section are to be applied separately to each sub-fund of a scheme which is an umbrella, and, if appropriate, the currency of a sub-fund may be used instead of the base currency of the umbrella.

Valuation

COLL 6.3.3RRP

To determine the price of units the authorised fund manager must carry out a fair and accurate valuation of all the scheme property.

Valuation points

COLL 6.3.4RRP

  1. (1)

    An authorised fund must not have fewer than two regular valuation points in any month and if there are only two valuation points in any month, the regular valuation points must be at least two weeks apart.

  2. (2)

    The prospectus of a scheme must contain information about its regular valuation points for the purposes of dealing in units in accordance with COLL 4.2.5R (16) (Table: contents of the prospectus).

  3. (3)

    Where a scheme operates limited redemption arrangements, (1) does not apply and the valuation points must be stated in the prospectus but must not be set more than six months apart.

  4. (4)

    Where a scheme operates limited redemption arrangements, it must be valued and prices published in the manner set out in COLL 6.3.11 R (Publication of prices) at least once in every month.

  5. (5)

    In (4), a valuation point for the purpose of publishing prices only, does not make it a valuation point for the purpose of (2) unless it is disclosed as such in the prospectus.

  6. (6)

    Higher volatility funds must have at least one valuation point every business day.

  7. (7)

    No valuation points are required during the period of any initial offer.

  8. (8)

    The authorised fund manager may determine to have an additional valuation point for an authorised fund as a result of market movement under COLL 6.3.9 (Forward and historic pricing) or otherwise, in which case hemust inform the depositary.

Price of a unit

COLL 6.3.5RRP
  1. (1)

    The price of a unit of any class must be calculated by reference to the net value of scheme property and must be calculated in accordance with the provisions of the prospectus.

  2. (2)

    Any unit price calculated in accordance with (1) must be expressed in a form that is accurate to at least four significant figures.

Valuation and pricing guidance

COLL 6.3.6GRP

Table: This table belongs to COLL 6.3.2 G (2) (a).

Valuation and pricing

1

The valuation of scheme property

(1)

Where possible, investments should be valued using a reputable source. The reliability of the source of prices should be kept under regular review.

(2)

An investment for which different prices are quoted according to whether it is being bought or sold should be valued at its mid-market price. The instrument constituting the scheme should set out the valuation method that will apply where a single price for buying and selling a security is quoted.

(3)

Any part of the scheme property of an authorised fund that is not an investment should be valued at a fair value, but for immovables this is subject to COLL 5.6.20 R (3) (f) (Standing independent valuer and valuation).

(4)

For the purposes of (2) and (3), any fiscal charges, commissions, professional fees or other charges that were paid, or would be payable on acquiring or disposing of the investment or other part of the scheme property should be excluded from the value of an investment or other part of the scheme property.

(5)

Where the authorised fund manager has reasonable grounds to believe that:

it should value an investment at a price which, in its opinion, reflects a fair and reasonable price for that investment (the fair value price);

(6)

The circumstances which may give rise to a fair value price being used include:

  • no recent trade in the security concerned; or
  • the occurrence of a significant event since the most recent closure of the market where the price of the security is taken.
In (b), a significant event is one that means the most recent price of a security or a basket of securities is materially different to the price that it is reasonably believed would exist at the valuation point had the relevant market been open.

(7)

In determining whether to use such a fair value price , the authorised fund manager should include in his consideration:

(8)

The authorised fund manager should document the basis of valuation (including any fair value pricing policy) and, where appropriate, the basis of any methodology and ensure that the procedures are applied consistently and fairly.

(9)

Where a unit price is determined using properly applied fair value prices in accordance with policies in (8), subsequent information that indicates the price should have been different from that calculated will not normally give rise to an instance of incorrect pricing.

2

The pricing controls of the authorised fund manager

(1)

An authorised fund manager needs to be able to demonstrate that it has effective controls over its calculations of unit prices.

(2)

The controls referred to in (1) should ensure that:

  • asset prices are accurate and up to date;
  • investment transactions are accurately and promptly reflected in valuations;
  • the components of the valuation (including stock, cash, and units in issue), are regularly reconciled to their source or prime records and any reconciling items resolved promptly and debtors reviewed for recoverability;
  • the sources of prices not obtained from the main pricing source are recorded and regularly reviewed;
  • compliance with the investment and borrowing powers is regularly reviewed;
  • dividends are accounted for as soon as stocks are quoted ex-dividend (unless it is prudent to account for them on receipt):
  • fixed interest dividends, interest and expenses are accrued at each valuation point;
  • tax positions are regularly reviewed and adjusted, if necessary;
  • reasonable tolerances are set for movements in the key elements of a valuation and movements outside these tolerances are investigated; and
  • the fund manager regularly reviews the portfolio valuation for accuracy.

(3)

In exercising its pricing controls, the authorised fund manager may exercise reasonable discretion in determining the appropriate frequency of the operation of the controls and may choose a longer interval, if appropriate, given the level of activity on the fundor the materiality of any effect on the price.

(4)

Evidence of the exercise of the pricing controls should be retained.

(5)

Evidence of persistent or repetitive errors in relation to these matters, and in particular any evidence of a pattern of errors working in an authorised fund manager's favour, will make demonstrating effective controls more difficult.

(6)

Where the pricingfunction is delegated to a third party, COLL 6.6.15 R (1) (Committees and delegation) will apply.

3

The depositary's review of the authorised fund manager's systems and controls

(1)

This section provides details of the types of checks a depositary should carry out to be satisfied that the authorised fund manager adopts systems and controls which are appropriate to ensure that prices of units are calculated in accordance with this section and to ensure that the likelihood of incorrect prices will be minimised. These checks also apply where an authorised fund manager has delegated all or some of its pricing functions to a third party.

(2)

A depositary should thoroughly review an authorised fund manager's systems and controls to confirm that they are satisfactory. The depositary's review should include an analysis of the controls in place to determine the extent to which reliance can be placed on them.

(3)

A review should be performed when the depositary is appointed and thereafter as it feels appropriate given its knowledge of the robustness and the stability of the systems and controls and their operation.

(4)

A review should be carried out more frequently where a depositary knows or suspects that an authorised fund manager's systems and controls are weak or are otherwise unsatisfactory.

(5)

Additionally, a depositary should from time to time review other aspects of the valuation of the scheme property of each authorised fund for which it is responsible, verifying, on a sample basis, if necessary, the assets, liabilities, accruals, units in issue, securities prices (and in particular the prices of unapproved securities and the basis for the valuation of unquoted securities) and any other relevant matters, for example an accumulation factor or a currency conversion factor.

(6)

A depositary should ensure that any issues, which are identified in any such review, are properly followed up and resolved.

4

The recording and reporting of instances of incorrect pricing

(1)

An authorised fund manager should record each instance where the price of a unit is incorrect as soon as the error is discovered, and report the fact to the depositary together with details of the action taken, or to be taken, to avoid repetition as soon as practicable.

(2)

In accordance with COLL 6.6.11 G (Duty to inform the FSA), the depositary should report any breach of the rules in COLL 6.3 immediately to the FSA. However, notification should relate to instances which the depositary considers material only.

(3)

A depositary should also report to the FSA immediately any instance of incorrect pricingwhere the error is 0.5% or more of the price of a unit, where a depositary believes that reimbursement or payment is inappropriate and should not be paid by an authorised fund manager.

(4)

In accordance with SUP 16.6.8 R, a depositary should also make a return to the FSA on a quarterly basis which summarises the number of instances of incorrect pricing during a particular period.

5

The rectification of pricing breaches

(1)

COLL 6.6.3 R (1) (Functions of the authorised fund manager) places a duty on the authorised fund manager to take action to reimburse affected unitholders, former unitholders, and the scheme itself, for instances of incorrect pricing, except if it appears to the depositary that the breach is of minimal significance.

(2)

A depositary may consider that the instance of incorrect pricingis of minimal significance if:

(3)

In determining (2), if the instance of incorrect pricing is due to one or more factors or exists over a period of time, each price should be considered separately.

(4)

If a depositary deems it appropriate, it may, in spite of the circumstances outlined in (2), require a payment from the authorised fund manager or from the authorised fund to the unitholders, former unitholders, the authorised fund or the authorised fund manager (where appropriate).

(5)

The depositary should satisfy itself that any payments required following an instance of incorrect pricing are accurately and promptly calculated and paid.

(6)

If a depositary considers that reimbursement or payment is inappropriate, it should report the matter to the FSA, together with its recommendation and justification. The depositary should take into account the need to avoid prejudice to the rights of unitholders, or the rights of unitholders in a class of units.

(7)

It may not be practicable, or in some cases legally permissible, for the authorised fund manager to obtain reimbursement from unitholders, where the unitholders have benefited from the incorrect price.

(8)

In all cases where reimbursement or payment is required, amounts due to be reimbursed to unitholders for individual sums which are reasonably considered by the authorised fund manager and depositary to be immaterial, need not normally be paid.

SDRT Provision

COLL 6.3.7R
  1. (1)

    The authorised fund manager may, in accordance with the prospectus, require the payment of an SDRT provision for the issue or sale of units or any class of units or the deduction of an SDRT provision for the redemption or cancellation of units or any class of units.

  2. (2)

    Any such payment or deduction becomes due at the same time as payment or transfer of property becomes due for the issue, sale, redemption or cancellation.

  3. (3)

    Any payment referred to in (1) must be paid to the depositary to become part of scheme property as soon as practicable after receipt.

  4. (4)

    As soon as practicable after each valuation point, the authorised fund manager must notify the depositary of the transactions, or types of transactions for which an SDRT provision is applied and the amounts or rates of those SDRT provisions.

Dilution

COLL 6.3.8RRP
  1. (1)

    When arranging to sell, redeem, issue or cancel units, or when units are issued or cancelled under COLL 6.2.7 R (1) (Issues and cancellations through an authorised fund manager), an authorised fund manager is permitted to:

    1. (a)

      require the payment of a dilution levy; or

    2. (b)

      make a dilution adjustment; or

    3. (c)

      neither require a dilution levy nor make a dilution adjustment;

    in accordance with its statements in the prospectus required by COLL 4.2.5R (18) (Table: contents of the prospectus).

  2. (2)

    An authorised fund manager operating either a dilution levy or a dilution adjustment, must operate that measure in a fair manner to reduce dilution and solely for that purpose.

  3. (3)

    A dilution levy becomes due at the same time as payment or transfer of property becomes due for the issue, sale, redemption or cancellation and any such payment in respect of a dilution levy must be paid to the depositary to become part of scheme property as soon as practicable after receipt.

  4. (4)

    A dilution adjustment may be made as part of the calculation of the unit price for the purpose of reducing dilution in the scheme or to recover any amount which it had already paid or reasonably expects to pay in the future in relation to the issue or cancellation of units.

  5. (5)

    Where the authorised fund manager decides to make or not to make a dilution adjustment, it must not do so for the purpose of creating a profit or avoiding a loss for the account of an affected person.

  6. (6)

    As soon as practicable after a valuation point, the authorised fund manager must provide the depositary with the amount or rate of any dilution adjustment made to the price or any dilution levy applied.

Forward and historic pricing

COLL 6.3.9RRP
  1. (1)

    For the sale and redemption of units, the authorised fund manager must, in accordance with the prospectus of an authorised fund, operate on the basis of forward price only or historic prices.

  2. (2)

    If forward prices only are to be used, all deals must be at a forward price.

  3. (3)

    Forward prices for the sale and redemption of units must be used:

    1. (a)

      for a higher volatility fund;

    2. (b)

      where the regular valuation points are more than one day apart;

    3. (c)

      if the request to deal reaches the authorised fund manager through the post or by any similar form of non-interactive communication;

    4. (d)

      for an issue or cancellation under COLL 6.2.7 (Issue and cancellation of units through an authorised fund manager);

    5. (e)

      if the applicant for the sale or redemption so requests; or

    6. (f)

      where the authorised fund manager has reason to believe at any time that the price that would reflect the current value of the scheme property would vary by more than 2% from the last calculated price, unless the authorised fund manager has decided to carry out an additional valuation.

  4. (4)

    If an authorised fund manager operates historic prices, the prospectus must detail the circumstances under which deals in the authorised fund, individually or otherwise, will nevertheless be carried out on a forward price basis or when the authorised fund will elect to move to forward prices or declare an additional valuation point.

  5. (5)

    Where the authorised fund elects to move to forward prices temporarily in accordance with (4), such election will only apply until the next valuation point.

  6. (6)

    All sub-funds of a scheme which is an umbrella must adopt the same pricing basis, but this does not apply merely because of a requirement to price on a forward price basis temporarily under this rule.

Historic pricing: guidance

COLL 6.3.10G

The authorised fund manager should advise the depositary of the date and time of any decision to use forward prices.

Publication of prices

COLL 6.3.11RRP

Where the authorised fund manager is prepared to deal in units, or is willing to issue or cancelunits, under COLL 6.2.7, it must make the dealingprices public in an appropriate manner.

Manner of price publication

COLL 6.3.12GRP
  1. (1)

    In determining the appropriate manner of making prices public, the authorised fund manager should ensure that:

    1. (a)

      a unitholder or potential unitholder can obtain the prices at a reasonable cost;

    2. (b)

      prices are available at reasonable times;

    3. (c)

      publication is consistent with the manner and frequency at which the units are sold;

    4. (d)

      the manner of publication is disclosed in the prospectus; and

    5. (e)

      prices are published in a consistent manner.

  2. (2)

    Examples of what might be deemed appropriate include:

    1. (a)

      publication in a national newspaper;

    2. (b)

      supply through an advertised local rate or freephone telephone number;

    3. (c)

      publication on the internet;

    4. (d)

      inclusion in a database of prices which is publicly available; or

    5. (e)

      communication to all existing unitholders.

  3. (3)

    The authorised fund manager should make previous prices available to any unitholder or potential unitholder.