Amid the growth of investment funds’ exposure to illiquid alternative assets, and increasing retail investor exposure to these assets, the International Organization of Securities Commissions (IOSCO) is proposing new guidance on properly valuing fund assets.
The umbrella group of global securities regulators issued a consultation paper on a combined set of recommendations to update existing guidance on valuing hedge fund portfolios specifically, and “collective investment schemes” generally, which were adopted in 2007 and 2013, respectively.
“Robust valuation practice is a critical component of asset management,” IOSCO said, in a release, noting that this determines funds’ net asset value, and therefore their trading price.
“Proper valuation also serves as important information for investors when making asset allocation decisions and selecting funds as well as financial reporting, performance reporting and calculating fees paid to [fund] service providers,” it added.
“If asset valuations are improper, investors may unfairly pay more or receive less for their shares which can lead to diminished returns for investors as well as a loss of investor confidence,” the group warned.
IOSCO reported that, while a review of the existing principles found that they are still effective, it also concluded that there’s a “strong case” for updating them, given the market’s evolution since the current principles were adopted — including funds holding more illiquid alternative assets, increased retail investment in these funds and evolving valuation practices, particularly during episodes of market stress.
As a result, the regulators are proposing 13 revised recommendations, with key reforms in various areas such as managing conflicts of interest, fair value, back testing, using third-party service providers, oversight arrangements, governance under stressed market conditions and recordkeeping.
“In view of [funds’] growing exposure to less liquid and alternative assets, updating the valuation principles is essential to safeguarding investor confidence. The updated recommendations build upon and aim to consolidate and modernize the solid foundational framework laid out in the 2007 and 2013 principles,” said Jessica Reyes, chair of IOSCO’s Committee for Investment Management, in a release.
The proposals are out for consultation until Feb. 2, 2026. IOSCO said that it aims to finalize the guidance in the second or third quarter next year.