21-212MR ASIC finds good practices from COVID-19 review of managed funds’ valuation of illiquid assets

ASIC today announced the findings from its review of managed funds’ illiquid-asset valuation practices during the early stages of the COVID-19 .

ASIC gathered data between 1 March and early November 2020 when the industry was dealing with significant economic uncertainties as a result of the pandemic.

ASIC undertook the review to assess whether the current regulatory settings for the valuation of illiquid assets are adequate to protect members’ interests in times of heightened market volatility. ASIC examined how well the responsible entities (REs) in the review managed the challenges of illiquid asset valuation whilst meeting their regulatory obligations during this volatile period.

ASIC reviewed 10 fund managers (REs with around $165 billion in assets under management, including $21 billion in illiquid assets). The review included listed and unlisted registered schemes targeted at retail and wholesale investors. It covered direct real property, mortgage, infrastructure, private equity, private debt and hedge funds.

ASIC estimates that more than 2.5 million investors are likely to have been financially exposed to the managed funds of the REs that were reviewed. This exposure may have occurred directly (as an investor) and indirectly (through an investment vehicle such as a superannuation fund).

‘Robust and timely valuation of assets, especially illiquid assets, is fundamental to managed funds being fair and efficient for their investors,’ said ASIC Deputy Chair Karen Chester.

‘Over 2.5 million investors can take comfort from our review findings. Namely, that even during the market volatility of 2020, we found the illiquid-asset valuation practices to be robust, timely and consistent with ASIC guidance and industry standards.

‘Based on our review, we do not see any need to change our guidance on valuations for managed funds. We encourage the REs to closely review our findings specific to their practices, but also to look to the better practices of some fund managers we identified in our review.

‘Investors, especially retail investors, will always rely on REs to remain vigilant and responsive to market fluctuations and to ensure their valuations are regular, robust and reflect the fair value of the assets,’ Ms Chester said.

Key findings
ASIC’s review considered how the ten REs valued different types of illiquid assets as well as the governance frameworks, policies and procedures they used to undertake the valuations.

ASIC found that the REs were responsive to the increased valuation risks during the review period. They continued to provide timely valuations of their illiquid assets, including by increasing the frequency of valuations, expanding the sources of information to benchmark valuations and assumptions. The REs also continued to be able to obtain and rely on external valuations.

The REs also had adequate arrangements to manage conflicts of interest associated with valuations, and appropriately revalued illiquid assets downwards and upwards as appropriate.

The review identified some better valuation practices by the REs, including:

close board supervision of valuation processes and involvement in the adoption of the external valuations;
segregation of roles, involvement of independent committees and the use of multi-level review processes for internal and external valuations to ensure the accuracy of valuations and to support a robust conflicts-of-interest framework;
recognition of conflicts in valuation processes as a standing organisational conflict and addressing these in compliance frameworks to ensure robustness and independence in the valuation process; and
clearly defined valuation frequencies and trigger points (such as percentage variation of internal valuation compared to the last external valuation) for external valuations to take place.
Poor practice in valuation was limited to minor inconsistencies between internal policy and compliance plans.

ASIC strongly encourages all REs to review their valuation practices against these better practices and adopt them where applicable. REs should also ensure that the valuation practices in their policies are consistently reflected in their compliance plans and the policies reviewed regularly to ensure they remain adequate.

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