Focus: ASIC's proposed changes to disclosure rules for unlisted property schemes
18 July 2011
In brief: New disclosure benchmarks and clarification of existing disclosure principles applying to unlisted property schemes are some of the changes the Australian Securities and Investments Commission has proposed to disclosure rules for unlisted property schemes offered to retail investors. Partner Penny Nikoloudis (view CV), Senior Associate Georgina Perry and Lawyer Evan Bendelstein examine the proposed changes and the effect that the changes, if implemented, could have on responsible entities of unlisted property schemes.
- Who do the new disclosure rules apply to?
- Why the disclosure requirements have changed
- What needs to be disclosed
How does it affect you?
- Consultation Paper 163 (CP 163) proposes the introduction of six new disclosure benchmarks against which responsible entities of unlisted property schemes must disclose on an 'if not, why not' basis and proposes amendments to the eight existing disclosure principles in ASIC Regulatory Guide 46 (RG 46) that apply to disclosure to retail investors in unlisted property funds.
- The disclosure requirements proposed in CP 163 are relevant to responsible entities of unlisted property schemes. The proposed changes relate both to product disclosure statements and general ongoing disclosure requirements. Additionally, advertising materials should support, and should not undermine, the principles in CP 163.
- The release of CP 163 follows the release of similar proposals by the Australian Securities and Investments Commission (ASIC) to improve disclosure to retail investors in relation to hedge funds, mortgage funds and infrastructure funds.1
- The proposed disclosure regime in CP 163 would create increased and ongoing disclosure requirements for responsible entities of unlisted property schemes.
CP 163 applies to responsible entities of unlisted property schemes. An unlisted property scheme is defined in CP 163 as an unlisted managed investment scheme that has, or is likely to have, at least 50 per cent of its non-cash assets invested in real property2 and/or other unlisted property schemes.
Following a review of disclosure statements issued by responsible entities of unlisted property schemes, ASIC has stressed that improved disclosure from responsible entities is required to ensure that prospective retail investors in unlisted property schemes have disclosed to them:
- the risks associated with the borrowing maturity profile and the extent of hedging;
- details about property development activities (primarily, timetables and funding);
- the basis of valuations and the risks associated with 'as if complete' valuations;
- reasons for distributions being made from sources other than income and the sustainability of these distributions over the next 12 months; and
- withdrawal rights and the risks associated with withdrawal arrangements promoted to investors.
While ASIC notes that most responsible entities of unlisted property schemes have provided disclosure in accordance with RG 46, it found that there were several recurring issues in disclosures relating to unlisted property schemes. In particular, ASIC identified as problematic inaccurate cross-referencing and disclosure documents that made references to other documents for the purposes of providing further information, where those other documents did not comply with the disclosure principles in RG 46. According to ASIC, these disclosure practices have resulted in inconsistent levels of disclosure and rendered it difficult for prospective investors to compare financial products.
The proposed changes can also be seen as a direct response by ASIC to the issues the unlisted property sector has faced in recent times, including freezes on withdrawals and significant levels of debt.
The introduction of more intensive and effective disclosure requirements for unlisted property schemes is consistent with ASIC's recent approach to enhancing disclosure requirements for other categories of financial products (including hedge funds, mortgage funds, infrastructure funds, debentures and unsecured notes) and for prospectus disclosure.
ASIC's intention in releasing CP 163 is to improve 'the level, comparability and consistency of disclosure provided to retail investors'. To achieve this goal, CP 163 proposes the introduction of six new disclosure benchmarks, as well as proposing amendments to the eight existing disclosure principles outlined in RG 46, and revised guidance on how responsible entities can word their PDS disclosure in a 'clear, concise and effective' manner.
This enhanced and ongoing proposed disclosure regime may present significant time commitments and compliance costs for responsible entities of unlisted property schemes. Even entities with a strong record of disclosure will be required to modify their disclosure practices to take into account the specific requirements of the benchmarks and amended principles, including the requirement to ensure this information remains up-to-date on an ongoing basis.
New benchmark disclosures
ASIC's proposals contained in CP 163 seek to extend to unlisted property schemes an 'if not, why not' benchmark disclosure model. According to ASIC, the benchmark disclosure model:
- identifies, for a particular financial product, the key risk areas potential investors should understand before making a decision to invest;
- sets a benchmark for how a product issuer should address these risks in establishing its business model and compliance procedures; and
- involves an issuer stating in the PDS and other disclosures whether it meets the benchmark, and if not, why not.
The six benchmarks aim to address key issues that ASIC thinks should be highlighted in disclosure relating to unlisted property schemes and discussed in a manner that allows prospective retail investors to make an informed decision about whether to invest in unlisted property schemes.
Disclosure under the benchmark model requires responsible entities to state whether they meet the relevant benchmark. Where they do not meet the benchmark, they are required to explain why not. The six new disclosure benchmarks are as follows:
- Gearing policy – The responsible entity maintains and applies a written policy that governs the level of gearing at an individual asset level.
- Interest cover policy – The responsible entity maintains and applies a written policy that governs the level of interest cover at an asset level.
- Interest capitalisation – The interest expense of the scheme is not capitalised.
- Valuation policy – The responsible entity maintains and applies a written valuation policy that requires:
- valuers to be independent and appropriately registered;
- procedures to be followed for dealing with any conflicts of interest;
- rotation and diversity of valuers; and
- for each property, independent valuation to be obtained, before the property is purchased and within two months after directors form the view that there is a likelihood that a decrease in the property value may have caused a material breach of a loan covenant.
- Related party transactions – The responsible entity maintains and applies written policies on related party transactions, including the assessment and approval processes for such transactions and arrangements to manage conflicts of interest.
- Distribution practices – The scheme will only pay distributions from the realised income of the scheme.
ASIC proposes that disclosure against the benchmarks is addressed up-front in a product disclosure statement, updated in ongoing disclosures as material changes occur, and supported in, and not undermined by, advertising material.
Material changes to information that a responsible entity has disclosed against a benchmark should be communicated to investors as soon as practicable by the most effective means possible (including by providing updates on the issuer's website). Additionally, ASIC has suggested that responsible entities should provide investors with updated benchmark information at least every six months.
Clarification of existing disclosure principles
In addition to introducing new disclosure benchmarks, CP 163 proposes amendments to the eight existing disclosure principles contained in RG 46. In doing so, ASIC has also identified some areas under each principle that it believes could benefit from additional disclosure.
The eight principles provide detailed and specific disclosure guidance in relation to:
- scheme gearing ratio;
- scheme interest cover ratio;
- scheme borrowing;
- portfolio diversification;
- related party transactions;
- scheme distribution practices; and
- withdrawal arrangements.
These disclosure principles apply to upfront disclosure in PDSs, as well as ongoing disclosures. In RG 46, ASIC has recommended that responsible entities update investors on the status of the disclosure principle information at least every six months.
Clear, concise and effective disclosure
ASIC proposes to revise its guidance to responsible entities of unlisted property schemes about clear, concise and effective disclosure. This revised guidance is intended to be consistent with ASIC's guidance in 'Consultation Paper 155: Prospectus disclosure: Improving disclosure for retail investors'.
ASIC proposes that a PDS will generally be clear, concise and effective it if helps retail investors make informed decisions because it:
- highlights key information (eg through an investment overview);
- uses plain language;
- is as short as possible;
- explains complex information; and
- is logically organised and easy to navigate.
ASIC has invited submissions on CP 163, with comments due by 6 September 2011. It has signalled that the updated regulatory guide is to be released in December 2011.
It is anticipated the responsible entities that are affected by the proposed changes will have to disclose against the revised disclosure principles and new disclosure benchmarks from 1 July 2012.
- We have reported previously on these proposals relating to disclosure requirements for hedge funds.
- Real Property' does not include infrastructure assets.
- Penny NikoloudisPartner,
Ph: +61 2 9230 4805
- Mark CerchéPartner,
Ph: +61 3 9613 8872
- Derek HeathConsultant,
Ph: +61 2 9230 4233
- John BeckinsalePartner,
Ph: +61 7 3334 3520