CMFAS RES5 Collective Investment Schemes Code question: scheme's units

CMFAS RES5Collective Investment Schemes Code

A scheme's units were priced and dealt at $4.985 per unit, but the correct NAV per unit should have been $5.000. Which statement is correct under the Code?

A The manager must compensate all affected participants, because any valuation error requires compensation
B The manager must compensate the scheme for its losses, but need not compensate any of the affected participants
C The error equals 3% of NAV per unit, so mandatory compensation is triggered
D The error is 0.3% of NAV per unit — below the 0.5% threshold — so mandatory compensation is not triggered

Show the answer and explanation

Answer: D. The error is 0.3% of NAV per unit — below the 0.5% threshold — so mandatory compensation is not triggered

($5.000 − $4.985) / $5.000 = $0.015 / $5.000 = 0.3% of NAV per unit. Because this is below the 0.5% threshold, mandatory compensation of participants and the scheme is not triggered (though if the manager chooses to compensate anyone it must do so even-handedly, and the error should still be reported).

Common mistake

The error is 0.3%, not 3% — divide the shortfall by the correct NAV per unit; 0.3% is below the 0.5% mandatory-compensation trigger.

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