IOSCO Publishes Principles For The Valuation Of Hedge Fund Portfolios

by Robin Pilgrim, LawAndTax-News.com, London

16 March 2007

The International Organization of Securities Commissions (IOSCO) on Tuesday published for comment its Principles for the Valuation of Hedge Fund Portfolios.

The Chairman of the IOSCO Technical Committee, Michel Prada, explained that:

"The chief aim of these Principles is to seek to ensure that hedge funds' financial instruments are appropriately valued, in particular, that these values are not distorted to the disadvantage of fund investors. Therefore, it is extremely important, therefore, that hedge funds adopt and operate robust portfolio valuation policies."

He continued:

"In recent years, hedge funds have grown enormously and now play an increasingly important role in global capital markets. Accordingly, these IOSCO Principles are meant to be a practical tool that hedge fund managers and governing bodies, and those involved in the valuation process. They may also be helpful for institutional and sophisticated investors and their representatives."

"The Principles describe techniques which should strengthen the valuation process thereby making it more likely that the resulting valuation is appropriate. They emphasize the importance of clear written procedures which are consistently operated and regularly reviewed, and which provide for an appropriate degree of independence to deliver effective checks and controls."

"In developing the principles, IOSCO drew upon the assistance of industry experts. IOSCO acknowledges the generous time and commitment given by these specialists. Their insight into effective valuation processes and their open dialogue with regulators was invaluable in bringing this work to a timely and successful conclusion."

The closing date for comments is June 21.

In a statement issued on Wednesday, the UK's Financial Services Authority (FSA) expressed its support for the IOSCO paper.

Dan Waters, FSA Asset Management Sector Leader and Chair of the IOSCO working group which drafted the valuation paper, observed that:

"Hedge funds are playing an increasingly important role in the international capital markets and we are pleased to support IOSCO in promulgating valuation principles which are applicable across all national boundaries. The paper addresses the issues of how effective controls may be placed around the valuation process to mitigate conflicts of interest, increase independence in sourcing and review of the resulting valuations."

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