The Canadian Securities Administrators are publishing for comment proposed amendments to rules regarding investment fund continuous disclosure that will allow funds to maintain their current valuation practices.

The rules, which came into force on June 1, 2005, harmonized continuous disclosure requirements among Canadian jurisdictions and replaced most existing local CD requirements. The proposed amendments have two primary purposes: to modify the requirements regarding the calculation of net asset value to reflect new accounting rules; and, to clarify or correct certain provisions.

New accounting requirements, which are effective for fiscal years beginning on or after Oct. 1, 2006, provide more specific guidance on how to measure financial instruments at fair value for financial statement purposes when fair value measurement is required. The CSA says that to comply with this guidance, investment funds would have needed to change how they value a large portion of the securities in their portfolios, particularly those that are traded on a recognized exchange. “These securities would need to be valued at bid or ask price on each valuation day, whereas now they are predominantly valued at closing price,” it notes.

CSA rules currently require investment funds to calculate net asset value in accordance with Canadian GAAP. Maintaining this requirement after the introduction of the new accounting treatment would mean that investment funds would have to change longstanding industry valuation practices, it notes. The CSA granted an exemption until Sept. 30, 2007 permitting investment funds to calculate net asset value for purposes other than financial statements without adhering to the new method. CSA members will likely need to consider extending the exemption, it notes.

The proposed amendments will permit investment funds to have two different net asset values: one for financial statements, which will be prepared in accordance with Canadian GAAP; and another for all other purposes, including unit pricing. “We propose to require a reconciliation between net assets and net asset value, and disclosure of how the valuation principles and practices established by the investment fund manager for the purposes of calculating net asset value differ from those required under Canadian GAAP,” it says.

“We propose to remove the requirement in the rule to calculate net asset value in accordance with Canadian GAAP and replace it with a requirement to fair value assets and liabilities,” the CSA says. “For this purpose, fair value of assets and liabilities will mean the current market value based on reported prices and quotations in an active market. When the current market value is not available or the manager determines that it is unreliable, fair value will mean a value that is fair and reasonable as determined by the manager.”

The CSA adds, “We propose to mandate this approach to fair value instead of maintaining a link to Canadian GAAP for net asset value calculations as this approach maintains the principles of the existing requirement while allowing investment funds to maintain their current valuation practices.”

“Although the calculation of net asset value will no longer be tied to Canadian GAAP, investment funds will be required to comply with the fair value standard established in the rule. For the majority of investment funds, this should not be a significant change to their current valuation practices, while it ensures that the industry is subject to a more consistent standard than existed before the instrument came into force,” it says.

The CSA says that it consulted with the investment fund industry throughout the process of developing the proposed approach and it believes that the industry is supportive. It does not anticipate that the proposed requirement to fair value an investment fund’s assets and liabilities will result in increased costs.

It also proposes to add a requirement to disclose the differences between the valuation principles and practices established by the manager and those in Canadian GAAP.

Comments are due by Aug. 31.