Focus: Funds Management – ASIC finalises disclosure requirements for unlisted property schemes
14 October 2008
In brief: In our Focus: Funds Management – July 2008, we looked at ASIC's proposals to improve disclosure to retail investors for unlisted property schemes. ASIC has now released its final regulatory guide that sets out what information must be applied to upfront and ongoing disclosures from 30 November 2008. Partner Anna Lenahan and Lawyer Gary Lo discuss the finalised disclosure principles and what needs to be done to comply with them.
- Who do the disclosure principles apply to?
- The disclosure principles
- Initial update to existing investors
- PDS disclosure
- Ongoing disclosure
- Compliance plans
- Consequences of non-compliance
- Next steps
How does it affect you?
- The Australian Securities & Investments Commission (ASIC) has finalised the eight disclosure principles for unlisted property schemes.
- ASIC considers the disclosure principles to reflect information that is required to be disclosed under the Corporations Act 2001 (Cth). It has warned that it may exercise its stop order powers if it finds that a scheme has failed to comply.
- An initial update of the information covered by the disclosure principles must be provided to investors by 30 November 2008 for open schemes, and by 31 March 2009 for closed schemes.
- By 30 November 2008, any product disclosure statement that is dated before 30 November 2008 but remains in use must be updated with the disclosure principle information by either:
- issuing a new or supplementary PDS; or
- if the omission of disclosure principle information from the PDS would not be materially adverse to investors, disclosing the information on a website referred to in the PDS.
- Any product disclosure statements issued on, or after, 30 November 2008 must clearly and prominently disclose the disclosure principle information.
- The disclosure principle information should be included in ongoing disclosures to investors.
In July 2008, ASIC released a consultation paper and a draft regulatory guide aimed at improving the disclosure made to retail investors of unlisted property schemes. ASIC cited the current economic conditions and its finding that listed property schemes were more likely than unlisted property schemes to disclose the information required by investors as the main reasons for requiring improved disclosure in this area.
ASIC has now released the finalised guide, Regulatory Guide 46, Unlisted property schemes – improving disclosure for retail investors (the Regulatory Guide). Due to the broad support that ASIC received from respondents during the consultation process, it has made very few changes from the draft regulatory guide. The most significant change is that the first deadline for implementation of the new disclosure principles has been extended by one month, to 30 November 2008.
For the purposes of the Regulatory Guide, an 'unlisted property scheme' is a registered unlisted managed investment scheme that has (or is likely to have) at least 50 per cent of its non-cash assets invested in real property and/or in unlisted property schemes, and in which retail investors invest directly or indirectly.
ASIC has clarified that the Regulatory Guide does not apply to serviced strata schemes or timeshare schemes.
In summary, the finalised disclosure principles (which are substantially the same as those outlined in the original draft issued by ASIC) are as follows:
|Disclosure principle||What needs to be disclosed|
|Gearing ratio||The scheme's gearing ratio (calculated by dividing the scheme's total interest bearing liabilities by its total assets). Responsible entities should now disclose what the gearing ratio means in practical terms and how investors can use the ratio to determine the scheme's level of risk.|
|Interest cover||The scheme's interest cover (EBITDA minus unrealised gains plus unrealised losses/interest expense) and how investors can use it to assess the scheme's ability to meet interest payments. The calculation of interest expense is to take into account any interest hedging arrangements.|
|Scheme borrowing||Depending on the maturity of the scheme's borrowings, either the total amount owing or, for each debt, the amount owing and the maturity profile in 12-month increments. Responsible entities should also disclose whether amounts owing rank ahead of investors' interests, any breaches of loan covenants and, in certain circumstances, the loan's maturity profile, the undrawn amount and the prospects of refinancing.|
The geographic location and sector of the properties in the scheme's
portfolio by number and value, the most recent valuation and related information
for each significant property, the portfolio lease expiry profile, the occupancy
rate and details of each of the top five tenants that each constitutes 5 per
cent or more by income across the investment portfolio. Issuers should also
include a clear description of any assets that are not direct property assets
(including their value) and the responsible entity's investment strategy (having
regard to the above matters), including its strategy on investing in other
unlisted property trusts.
If the scheme involves property development, the responsible entity will also need to disclose the project timetable, funding arrangements, pre-sale and lease pre-commitments, and development status.
|Valuation policy||The valuation policy which, at a minimum, should cover how often valuations are obtained, how often independent valuations are obtained and whether the valuations are in accordance with industry standards. If a property under development is valued on an 'as if complete' basis, the 'as is' basis and the risks associated with an 'as if complete' valuation should also be disclosed. Any failure to comply with a previously disclosed valuation policy also needs to be disclosed.|
|Related-party transactions||If the responsible entity enters into related-party transactions, it should disclose details of investments in, and loans, guarantees and fees to, any related party. A responsible entity should also disclose its policy on related-party transactions and how compliance with the policy is monitored.|
|Distribution practices||If a scheme is making (or forecasting) distributions, the responsible entity should disclose the source of the distributions and whether the source is expected to differ from sources of previous distributions. If distributions are not solely sourced from realised income, the responsible entity should disclose the reasons for making distributions from other sources and whether distributions sourced other than from realised income are sustainable over the next 12 months.|
If investors are given withdrawal rights, the responsible entity should
disclose the maximum withdrawal period allowed under the scheme's constitution,
any significant risks that may impact on the investor's ability to withdraw and
a clear explanation of how to withdraw. If withdrawals from the scheme are to be
funded from an external liquidity facility, the material terms of this facility,
including any rights the provider has to suspend or cancel and any material
changes to withdrawal rights (such as if the responsible entity knows that
withdrawal requests will be suspended), should also be disclosed.
Responsible entities should also clearly disclose if investors have no withdrawal rights.
ASIC requires that an initial update of the information covered by the disclosure principles be provided to investors by 30 November 2008 for open schemes, and by 31 March 2009 for closed schemes. For the purposes of the initial update, an open scheme is one that gives investors withdrawal rights at any time from 30 November 2008 to 31 March 2009.
ASIC states that this initial update could be in:
- a regular report (eg a quarterly report);
- a periodic statement under section 1017D of the Corporations Act; or
- on the scheme's website, if it is already used to communicate with investors.
In addition to covering the disclosure principle information, the initial update must advise investors how the responsible entity intends to update them on the status of the disclosure principle information and of material changes from time to time.
By 30 November 2008, any product disclosure statement (PDS) that is dated before 30 November 2008 but remains in use, must be updated with the disclosure principle information by either:
- the issue of a new or supplementary PDS; or
- if the omission of disclosure principle information from the PDS is not materially adverse to a reasonable investor, disclosing the information on a website referred to in the PDS (provided that the PDS states that non-materially adverse information may be updated on the website).
Any PDS issued on, or after, 30 November 2008 must clearly and prominently disclose the disclosure principle information. ASIC considers that one way of prominently disclosing information is to set it out in the first few pages of the PDS. If the information is too lengthy, a summary of the information can be provided in the first few pages of the PDS, with a clear reference to where more detailed disclosure is located in the PDS.
ASIC also recommends the use of consumer-friendly tools such as tables, diagrams and other comparative features.
Responsible entities need to take the disclosure principle information into account when considering their ongoing disclosure obligations. This includes:
- disclosing material changes to the disclosure principle information, or a significant event that affects the disclosure principle information, as soon as practicable and using the most efficient and effective method of communication (eg through the scheme's website);
- including the disclosure principle information in any periodic statements that are issued to investors under s1017D of the Corporations Act; and
- considering the disclosure principle information in complying with any continuous disclosure obligations that the responsible entity may have.
In addition, ASIC considers it to be good practice to:
- keep a consolidated updated disclosure document that applies the disclosure principles, and to keep this document on the scheme's website (if it is used for updating investors); and
- include an update on the status of the disclosure principle information in the quarterly report if this is the normal means used to update investors on key information.
Advertising for unlisted property schemes should be consistent with the corresponding disclosures in the PDS. If investment ratings are used, they should be properly explained, they should not create a misleading impression and it should be stated that investment ratings are only one of many factors investors need to take into account when deciding whether to invest.
ASIC considers 'advertising' to include the promotion of a scheme on the scheme's website.
Compliance plans must set out measures to ensure that the disclosure principles are applied and that the advertising obligations are complied with. Compliance committees and compliance plan auditors should also be aware of the disclosure principles when carrying out their duties.
ASIC considers the disclosure principles reflect information that is required to be disclosed under the Corporations Act. It has indicated that, from 30 November 2008, it will monitor unlisted property schemes' compliance with the disclosure principles. ASIC has also indicated that if a PDS for an unlisted property scheme does not materially comply with the disclosure principles, it may exercise its stop order powers under s1020E of the Corporations Act.
If you are the responsible entity of an unlisted property scheme, you will need to:
- review the scheme's PDS that is currently in use, and will still be in use on 30 November 2008 for compliance with the disclosure principles;
- if the PDS does not comply with the disclosure
- consider whether the disclosure principle information not included in the PDS should be disclosed in a new or supplementary PDS, or whether it can be disclosed on the scheme's website; and
- ensure the appropriate disclosure is made by 30 November 2008;
- issue an investor update to existing investors regarding the disclosure principle information by 30 November 2008 for open schemes, and 31 March 2009 for closed schemes;
- apply the disclosure principle information to new PDSs issued on, or after, 30 November 2008;
- take the disclosure principles into account when considering, and making, ongoing disclosures from 30 November 2008;
- ensure that the scheme's compliance plans contain measures regarding compliance with the disclosure principles; and
- ensure that the scheme's compliance committees and compliance auditors are aware of the disclosure principle requirements.
We are available to assist in relation to all of these compliance obligations. Please contact us if you would like to discuss your requirements with us further.
- Robert PickPartner,
Ph: +61 3 9613 8721
- John BeckinsalePartner,
Ph: +61 7 3334 3520