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SUSPENSION OF DETERMINATION OF NAV

Introduction

Following in our “Investing Basics” series today we would like to share a new Article on investment funds, this time focusing on a complex and dynamic issue; “The Suspension of the Determination of the Net Asset Value”.

The determination of the net asset value (“NAV”) plays a crucial role in ensuring transparency of the information provided to the investors. The NAV, represents the per-share value of a fund’s assets minus its liabilities, it is fundamental to investor decision-making and the overall operation of the fund.

However, there are certain circumstances where the determination of NAV may be suspended, leading to significant implications for the investors, the directors of the fund and fund managers. In this article, we will delve into the reasons behind such suspensions, the regulatory frameworks governing them, and their impact on stakeholders within the investment landscape. Understanding the nuances of NAV suspension is essential for investors and professionals alike, as it can affect liquidity, valuation, and investor confidence during periods of market volatility or operational challenges.

What could be suspended?

The directors of a fund may declare a suspension of:

  • the determination of NAV;
  • the subscription for or the purchase of the fund’s shares or interest;
  • the redemption of shares at the option of investors (either in whole or in part); and/or
  • the payment of any amount to a redeeming investor in connection with the redemption of shares, in each case for the whole or any part of any period in which the fund has suspended or restricted the withdrawal or redemption. 
Reasons and Circumstances to Suspend

Normally, the directors of a fund (or the general partner, manager, etc.) may declare a suspension of the determination of the NAV for, among others, any of the following reasons: 

  • When any stock exchange, commodities exchange, futures exchange, or over-the-counter market on which a significant portion of the fund’s investments is listed, quoted, traded, or dealt in is closed (other than customary weekend and holiday closings) or trading is restricted or suspended.
  • When circumstances exist that make it impractical for the fund to dispose of investments without materially prejudicing investors, in the opinion of the directors.
  • When there is a breakdown in the means normally used to ascertain the value of investments or NAV, or when the value of investments or other assets cannot be reasonably or fairly ascertained promptly and accurately, in the opinion of the directors.
  • When the fund cannot find banks willing to provide bank accounts or banking services, or if existing bank accounts are closed or operations are suspended by their banks.
  • When there is an emergency (including cyber-security threats) that prevents the fund from liquidating its investment positions without serious prejudice to the fund and its investors.
  • When the fund is unable to repatriate funds for redemption payments, or if fund transfers involved in the realization or acquisition of investments or payments due on redemption of shares cannot be effected at normal exchange rates.
  • When the business operations of the manager, administrator, or their delegates in respect of the fund are substantially interrupted or closed due to events such as pestilence, acts of war, terrorism, insurrection, revolution, civil unrest, pandemic, epidemic, riots, strikes, or acts of God.
  • When such suspension, delay, or extension is required by law or legal process, or if the issue, redemption, or transfer of shares would violate applicable law, in the opinion of the directors.
  • When the fund is invested in managed funds, and the redemption of interests in a relevant managed fund is suspended or restricted.
  • When the fund expects to issue a notice to convene an extraordinary meeting of investors shortly.
  • During a soft wind-down of the fund.

Any such suspension would usually take effect at such time as the directors declare it but it is unlikely that it would be later than the close of business on a business day next following the declaration. 

The suspension of the determination of the NAV remains in effect until the directors declare the suspension to be at an end, except when the suspension terminates in any event on the first business day on which both the condition giving rise to the suspension have ceased to exist, and no other condition under which suspension is authorised exists. 

It is common practice for the directors to mail a notice of the suspension of the determination of NAV to each investor of the fund. Where possible, all reasonable steps will be taken to bring any period of suspension to an end as soon as possible. 

Prospective investors should always be aware that situations involving uncertainties as to the valuation of the fund’s assets could have an adverse effect on the NAV if judgments regarding appropriate valuations regarding the fund’s assets should prove incorrect. 

If a fund fails to suspend the determination of the NAV, it may end up with redeemed investors that remain unpaid. If redemptions are due and remain unpaid, these investors become creditors of the fund and can petition for the fund to be wound up.

We have explored the suspension of the determination of the NAV in this Article but for specific guidance on the features and regulations on any of any fund and how your business may be impacted by these measures, please contact your usual Vale Law attorney or any of:

Shelley Do Vale: shelley.vale@valelaw.ky
Santiago Mtnez-Carvajal: sc@valelaw.ky