CSRC to Further Regulate the Valuation Measures of Securities Investment Funds

(1) Market price shall be deemed as the fair market value of an investment product if there is a market for the investment product and the investment product has a market value on the valuation date.

(2) The last trading price of the investment product shall be deemed as the fair market value if the following conditions are met:

i. there is a market for the investment product;

ii. the investment product does not have a market value on the valuation date;

iii. there is no material change on the economic environment that affects the price of such an investment product after the valuation date; and

iv. there is no material event attributable to the company issuing the securities/investment product which would affect the price of such securities/investment product after the valuation date.

(3) The market price of a similar investment product and other factors such as material changes shall be taken into consideration in determining the fair market value if the following conditions are met:

i. there is a market for the investment product;

ii. the investment product does not have a market value on the valuation date.

iii. there is a material change on the economic environment that affects the price of such an investment product after the valuation date;

iv. there are material events attributable to the company issuing the securities/investment product which would affect the price of such securities/investment product after the valuation date; and

v. the occurrence of (iii) and (iv) above resulting in a 0.25% or more adjustment to the net asset value of the fund as of the last valuation date.

Article 2

Where investment products in which funds have invested do not have market prices, the Guiding Opinions sets out the following principles for fund management companies (FMCs) to undertake fund valuations so as to prevent FMCs from using their own methods to value their funds.

(1) The FMCs shall formulate sound and effective policies and procedures regarding fund valuation;

(2) Valuation policies and procedures shall be consistent;

(3) FMCs shall make regular assessments on their own valuation policies and procedures, and revise the valuation methods when material changes happen in respect of such policies and systems.

Article 3

The Guiding Opinions also set out disclosure obligations in respect of valuation methods including making an interim announcement and disclosing in the regular reports such as

i. the valuation models, hypotheses, parameters, effects on the net asset value of the fund, and the profits and losses of the current period;

ii. a description of the division of functions, professional competence, and related professional experience of all the parties and personnel participating in the valuation process; and

iii. the extent of fund managers participating in or determining the valuation; any of the major interest conflicts that exist among all the parties participating in the valuation process.

Article 4 & 5

The Guiding Opinions also sets out the duties for custodian banks and accounting firms in respect of in the valuation of stocks/investment products which have been suspended from trading.

The Guiding Opinions also provide, under certain conditions, that FMCs shall engage an accounting firm to issue a report to review the relevant valuation models, hypotheses, parameters adopted by the FMCs in the course of the fund valuation.

Significance & Impact of the Guiding Opinions

Prior to the issue of the Guiding Opinions, the market price of a stock/investment product which has been suspended for a significant period of time is the closing price on the last day of trading of the stock/investment product before suspension. After such a long period of suspension, the market would have changed significantly and such a closing price cannot accurately reflect the fair value of the stock/investment product which would bring about the under/over-valuation of the net asset value of the fund.

This inaccurate net asset value of the fund will affect the fairness of the subscription and redemption of the open-ended fund and will also distort the performance assessment of the fund industry;

As such, the Guiding Opinions set out the methods to resolve the abovementioned issues which are significant in two ways - the Guiding Opinions help to better protect mid- to long-term fund holders by further regulating the valuation methods of funds which have suspended stocks/investment products in their portfolio and to prevent the inaccurate and artificially high valuation of the fund; and it will benefit the fund industry and investors by introducing the new fund valuation methods.