New EFSA Decree on the Valuation of

New EFSA Decree on the Valuation of the Assets of Investment Funds
In line with the special focus the Egyptian Financial Supervisory Authority ("EFSA") has been giving to funds in Egypt, EFSA has issued another Board of Directors' decision regulating the valuation of the assets of an investment fund (the "Decision").[1] This Decision comes specifically as an execution of a requirement imposed by Article 167 of the Executive Regulations of the Capital Market Law[2] on the Board of Directors of EFSA to issue the rules to be followed by Management Services Companies in determining the value of assets and securities of investment funds.
Management Services Companies
Management Services Companies ("MSCs") were originally introduced in 2007 by virtue of Ministry of Investment Decision No. 209 of 2007, which amended the entire chapter on Investment Funds in the Executive Regulations of the Capital Market Law. Ministry of Investment Decision No. 295 of 2007 then added management services as one of the licensable activities under the Capital Market Law. In 2009, the EFSA Board of Directors issued Decision No. 88 of 2009 to determine the terms and conditions for establishing MSCs. The role of MSCs, as determined by Article 167 of the Executive Regulations of the Capital Market Law, is to:
  • Prepare a daily statement on the number of existing investment certificates of open-ended funds, disclose such number and notify EFSA thereof;
  • Calculate the net asset value of open and closed-ended funds;
  • Record the transactions that take place over non-listed investment certificates;
  • Regularly (every three months at least) valuate the assets and non-listed securities in which investment funds invest their monies.
Independence and Valuation of Fund Assets
Management of investment funds typically comes with a classic conflict of interest between investors and fund managers; managers could be interested in inflating the value of the assets of the funds while investors are simply interested in the true value. In order to help resolve this conflict, a custodian and a management services company have been introduced in the governance structure of funds under Egyptian Law. Custodians are entrusted with safekeeping the documents representing the assets of the fund (except real estate funds) while management services companies are entrusted with calculating the value of such assets. Both entities are required to be independent from the fund and its manager (save for specific cases that are stated in the Executive Regulations). That way, investors are assured that the assets the manager claims to be owned by the fund are in fact owned by the fund and that their value is determined by an independent entity. To further stress on the independence requirement, the Board of Directors of EFSA issued Decree No 130 of 2014 setting out the rules for determining the value of different types of assets requiring that independent advisors are entrusted with this role. In particular, Article 2 of this Decree requires MSCs to appoint independent financial advisors to determine the fair value of the funds’ investments in: (i) non-listed companies, (ii) listed companies albeit in very special circumstances such as in cases where no market value is available or the share is inactive, (iii) listed companies in case where the fund has invested more than 15% of its assets therein, and (iv) non-listed companies where the value of the real estate assets of such company is more than 80% of the total company assets, in which case, the independent advisor is required to obtain two separate reports from two independent licensed real estate valuators. Article 2 further requires MSCs to contract two fully independent and licensed real estate valuators to determine the fair value of the real estate assets of real estate funds. MSCs may not use the reports of the independent financial advisors and real estate valuators if such reports are more than two months old. Article 3 provides further rules that MSCs are required to follow when determining the value of certain assets such as investment certificates of other funds, treasury bills, bonds and bank saving certificates, with reference to the Egyptian Accounting Standards.   [1] EFSA Board of Directors' Decision No. 130/2014 regulating the valuation of the assets of an investment fund, Egyptian Gazette, Issue No. 228, 11 October 2014. [2] This chapter has been amended again in its entirety by virtue of Ministry of Investment's Decision No. 22/2014 amending certain provisions of the Executive Regulations of the Capital Market Law.
In line with the special focus the Egyptian Financial Supervisory Authority ("EFSA") has been giving to funds in Egypt, EFSA has issued another Board of Directors' decision regulating the valuation of the assets of an investment fund (the "Decision").[1] This Decision comes specifically as an execution of a requirement imposed by Article 167 of the Executive Regulations of the Capital Market Law[2] on the Board of Directors of EFSA to issue the rules to be followed by Management Services Companies in determining the value of assets and securities of investment funds.
Management Services Companies
Management Services Companies ("MSCs") were originally introduced in 2007 by virtue of Ministry of Investment Decision No. 209 of 2007, which amended the entire chapter on Investment Funds in the Executive Regulations of the Capital Market Law. Ministry of Investment Decision No. 295 of 2007 then added management services as one of the licensable activities under the Capital Market Law. In 2009, the EFSA Board of Directors issued Decision No. 88 of 2009 to determine the terms and conditions for establishing MSCs. The role of MSCs, as determined by Article 167 of the Executive Regulations of the Capital Market Law, is to:
  • Prepare a daily statement on the number of existing investment certificates of open-ended funds, disclose such number and notify EFSA thereof;
  • Calculate the net asset value of open and closed-ended funds;
  • Record the transactions that take place over non-listed investment certificates;
  • Regularly (every three months at least) valuate the assets and non-listed securities in which investment funds invest their monies.
Independence and Valuation of Fund Assets
Management of investment funds typically comes with a classic conflict of interest between investors and fund managers; managers could be interested in inflating the value of the assets of the funds while investors are simply interested in the true value. In order to help resolve this conflict, a custodian and a management services company have been introduced in the governance structure of funds under Egyptian Law. Custodians are entrusted with safekeeping the documents representing the assets of the fund (except real estate funds) while management services companies are entrusted with calculating the value of such assets. Both entities are required to be independent from the fund and its manager (save for specific cases that are stated in the Executive Regulations). That way, investors are assured that the assets the manager claims to be owned by the fund are in fact owned by the fund and that their value is determined by an independent entity. To further stress on the independence requirement, the Board of Directors of EFSA issued Decree No 130 of 2014 setting out the rules for determining the value of different types of assets requiring that independent advisors are entrusted with this role. In particular, Article 2 of this Decree requires MSCs to appoint independent financial advisors to determine the fair value of the funds’ investments in: (i) non-listed companies, (ii) listed companies albeit in very special circumstances such as in cases where no market value is available or the share is inactive, (iii) listed companies in case where the fund has invested more than 15% of its assets therein, and (iv) non-listed companies where the value of the real estate assets of such company is more than 80% of the total company assets, in which case, the independent advisor is required to obtain two separate reports from two independent licensed real estate valuators. Article 2 further requires MSCs to contract two fully independent and licensed real estate valuators to determine the fair value of the real estate assets of real estate funds. MSCs may not use the reports of the independent financial advisors and real estate valuators if such reports are more than two months old. Article 3 provides further rules that MSCs are required to follow when determining the value of certain assets such as investment certificates of other funds, treasury bills, bonds and bank saving certificates, with reference to the Egyptian Accounting Standards.   [1] EFSA Board of Directors' Decision No. 130/2014 regulating the valuation of the assets of an investment fund, Egyptian Gazette, Issue No. 228, 11 October 2014. [2] This chapter has been amended again in its entirety by virtue of Ministry of Investment's Decision No. 22/2014 amending certain provisions of the Executive Regulations of the Capital Market Law.