The majority of the members of the Chartered Financial Analyst (CFA) Institute Centre for Financial Market Integrity believe that alternative investment fund managers should be mandated to appoint an independent third party for the valuation of assets, according to a recent survey by the group. The survey, which examines the fund management industry’s views on the requirements of the proposed European Alternative Investment Fund Managers Directive, indicates that 81% of respondents are in favour of mandatory third party valuations provision.
The respondents, which comprise 1,279 CFA members, believe that mandating the appointment of third party providers for valuations is important in order to limit the potential for fraud and ensure that investors’ interests in alternative investment funds are valued properly, as specified by the directive. Moreover, 71% of respondents agreed that an independent third party should retain control over the process to determine a final valuation.
Some of the comments in response to the question whether third party valuations provision should be mandatory are particularly interesting. Some contend that these third party valuations should only be mandatory for Level 2 and 3 assets, as determined by current accounting standards, whereas others believe they should be introduced for all assets. A number note the cost for firms of being compelled by regulation to invest in third party data, especially those at the smaller end of the scale.
“Although auditors as supposed to check valuations, it is not performed frequently, promptly or professionally enough. Any valuation used to calculate published net asset value (NAV) should be fully outsourced to an independent (registered/licensed) third party,” one respondent says. Another few note that the definition of “independent” is in need of clarification in order to prevent any level of confusion or loopholes. “Auditors, for example, are far from independent,” one respondent continues.
The conflict of interest issue is seemingly a significant one for these respondents and should give valuations data providers some leverage in their attempts to market their own data feeds. There definitely seems to be a push towards greater standardisation of pricing data and by offering the same set of data to each individual group, vendors may have the upper hand.
Many respondents also seem to feel regulators should go one step further and audit this valuations data in order to provide an industry benchmark and increase transparency around pricing. This is also likely why so many respondents believe third party providers should control the whole data process: in order to guarantee impartiality, consistency and transparency.
However, given that the directive has currently stalled due to political disagreements across the EU about the details, progress is likely to be slow. In the meantime though, it seems that industry participants are aware of the need for better data around pricing and are willing to face mandatory requirements in the future around this.