A situation that could have caused significant grief to investors, advi-sors and the mutual fund industry is being resolved in a manner that hopefully will prove workable for both regulators and the industry.
The issue involves the calculation of daily net asset value per unit. National Instrument 81-106: Investment Fund Continuous Disclosure requires NAV be calculated in accordance with Canadian generally accepted accounting principles, which previously provided enough flexibility to allow mutual funds to use the “last trade” to value their equity portfolios. But recent changes made to Canadian GAAP to harmonize with international accounting standards have redefined “fair value” for accounting purposes as the “closing bid price.” These changes are included in Sec. 3855 of the Canadian Institute of Chartered Accountants handbook.
The potential ramifications of what some may see as a small change are actually quite large. They include a change in valuation methods, which would probably mean a drop in the NAV of the fund so that those who bought before and sold after the change in valuation would be hurt by a difference in the NAV. On top of that, potential arbitrage opportunities could arise from a drop in a fund’s NAV. And, more than anything, the changes could cause confusion among investors — a situation no one wants to occur, especially if a solution can be found.
The Canadian Securities Administrators issued an exemption order just a few days prior to the scheduled Oct. 1, 2006, implementation date of the new accounting standards. The year-long exemption requires the industry to come up with an appropriate approach to calculating NAV for pricing purposes.
And this is where the process gained the kind of momentum and synergy all sides would like to see more often.
The Investment Funds Institute of Canada‘s affiliate members in the tax and legal professions immediately joined together to create a task force and came up with what all sides hope will be a workable solution. The task force invited representatives from non-mutual fund companies to help in the decision-making process, including representatives from labour-sponsored investment funds and closed-end investments.
The task force has had one main concern in coming up with its proposals: that fair value be maintained for all investors, including buyers, sellers and those remaining in the fund.
The task force has submitted its suggestions to the Ontario Securities Commission and the other members of the CSA, and included evaluation criteria for pricing, such as fair transaction terms to clients, transparency of NAV valuation and the need to minimize market confusion, among others.
The regulators have been working closely with the task force, and should be coming out with a response shortly.
In today’s regulatory environment, it is essential that industry members and regulators come together to work out issues. The desire to tackle thorny issues along the productive lines of Sec. 3855 is a model we all hope to be able to follow. IE
Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada.