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Derek Adler, International Financial Administration

Article 19 – Have we not learnt our lessons?

By Derek Adler, Director, International Financial Administration Ltd – Let me state at the outset that I am absolutely in favour and welcome good regulation, but am opposed to regulation just for the sake of it.

It is quite clear that, post the recent scams, fraudulent activities and financial irregularities, the politicians and the commission in their infinite wisdom have decided to “shoot from the hip” and bring in a raft of regulations – some good but some of which will horrify anyone who has been in the financial world for any length of time. If this situation wasn’t so serious it would be funny!
I am referring to Article 19 relating to Valuation (see below). I should declare at this point that I am a founding member and director of a fund administrator so it might appear that I am merely touting for business. I have personally been active in the world of asset management for more than 35 years and I have worked through the years of little or no regulation evolving into some regulation and finally over regulation. Are things any better for the additional rules and regulations that have been introduced? I am not too sure that we are that much better off at all. I do not recall there being more scams and frauds when I first started out and cynically I am wondering when the rules are set out so clearly, does this not invite those with fraudulent intent to find ways to by-pass them?
I have written articles before on the stupidity of allowing institutions or persons to establish a fund, market it to their clients, manage the investments, execute the trades, act as custodian and administer the fund, and all without the possibility of the occasional cover up. When Article 19 was first shown to me, I almost burst a blood vessel and thought that as has happened before, common sense would prevail and that it would be amended. I was wrong!
I therefore decided to contact a number of lawyers who specialise in this area and double check to see if I was alone in regarding this as a crazy rule. Without exception, each one wrote back and agreed with me totally, so at least, it seems, I can hang up my straight jacket for the time being! If you are worried by any of this then do try and contact a regulator in the jurisdiction of your choice but don’t be surprised if they either have no comment to make, suggest contacting a law firm or even offer a gentle shrug of the shoulders and state that their hands are tied.
I am writing this article with the hope that someone can explain to me why allowing an investment manager the opportunity to be responsible for pricing and valuation purposes, is a good idea. My recommendation to any investor is not to invest in any fund that does not have an external administrator, as I believe that this regulation is an accident waiting to happen.
Derek Adler
[email protected]
International Financial Administration Ltd.
Official Journal of the European Union 1.7.2011
Article 19 Valuation

AIFMs shall ensure that the valuation function is either performed by:

4. a) an external valuer, being a legal or natural person independent from the AIF, the AIFM and any other persons with close links to the AIF or the AIFM: or

4. b) the AIFM itself, provided that the valuation task is functionally independent from the portfolio management and the remuneration policy and other measures ensure that conflicts of interest are mitigated and that undue influence upon the employees is prevented.

8. The valuation shall be performed impartially and with all due skill care and diligence.

9. Where the valuation function is not permitted by an independent external valuer, the competent authorities of the Member State of the AIFM may require the AIFM to have its valuation procedures and/or valuations verified by an external valuer or, where appropriate, by an auditor.

10. AIFMs are responsible for the proper valuation of AIF assets, the calculation of the net asset value and the publication of that net asset value. The AIFMs liability towards the AIF and its investors shall, therefore, not be affected by the fact that the AIFM has appointed an external valuer.

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