Fund managers and portfolio managers are reminded of their obligations and compliance requirements
In its recently issued Summary Report for Dealers, Advisers, and Investment Fund Managers, the Ontario Securities Commission (OSC) reiterated the need for portfolio managers (PMs) and investment fund managers (IFMs) to properly consider the level of illiquidity in their investment portfolios.
“Some firms do not have an adequate process to identify and value illiquid assets,” the OSC said in its report. It noted that some firms considered equity investments to be liquid based on its presence on an exchange without considering market activity or conditions. As a result, thinly traded, restricted, or private securities held in investment funds were not always adequately valued as illiquid holdings.
Valuation procedures followed by IFMs, the report stressed, should assess the fund’s ability to dispose of securities held at publicly quoted prices, taking into account market activity and conditions.
The OSC report noted other deficiencies relating to the valuation of illiquid holdings, such as:
- Inadequate documentation of the firm’s valuation methodology;
- Infrequent updating of market inputs when valuing securities using a valuation model; and
- Reliance on the PM’s pricing of the illiquid security without the IFM performing an independent verification of the stated price.
Some mutual funds that are reporting issuers also reportedly showed lapses in complying with concentration restrictions in illiquid assets outlined in section 2.4 of NI 81-202. Such public funds, the OSC stressed, are not allowed to buy an illiquid asset if, immediately following the purchase, the fund becomes more than 10% concentrated in illiquid assets. A public fund may invest up to 15% of its NAV in illiquid assets, but doing so for a period of 90 days or more is prohibited.
“An IFM should have an adequate process to monitor compliance with the concentration restrictions for illiquid assets including taking the appropriate corrective action in a timely manner for any breaches identified,” the report stressed.
The OSC report was released just as the U.K.’s Financial Conduct Authority turned fresh attention on the level of illiquidity in investment funds. The scrutiny follows high-profile fund manager Neil Woodford’s June decision to stop redemptions from his Woodford Equity Income Fund; Six months before the announcement, the fund was said to have close to 80% of its assets invested in illiquid securities.
It’s believed that the freeze will remain in effect until December. Despite calls from industry participants and politicians, the fund continues to charge management fees to its investors.