INSIGHT

Impact of COVID-19 on investment funds

By Marc Kemp, Penny Nikoloudis, James Kanabar
Banking COVID-19 Financial Services Funds

In brief

As the COVID-19 pandemic creates turbulence in global financial markets and propels investors into a race for liquidity, we are beginning to see investment funds grappling with some of the issues they had confronted in 2007–2009 during the global financial crisis (the GFC). But this is more than a financial crisis – the social distancing, lockdown and government stimulus measures being implemented in response to the pandemic are likely to have a profound effect on investment funds. Our funds team explores some of the immediate issues for retail and wholesale funds.

Introduction

This Insight does not purport to be an exhaustive list of all issues facing fund managers. The true economic impact of COVID-19 is only just starting to be felt and, depending on the severity and duration of the pandemic and of further government-imposed restrictions both here and overseas, together with the nature of any governmental intervention designed to avoid economic catastrophe, it is possible that every aspect of fund operation may be affected. However, based on what we currently know, our experience during the GFC and discussions we have been having with clients across asset classes, the issues we have identified are those we expect to be among the most pertinent at the fund level. We have covered unlisted retail funds and wholesale (private) funds but have not specifically covered listed funds, as we understand the ASX is currently considering COVID-19-related issues affecting all listed entities.

Together with our colleagues across the firm, we have been receiving questions (and have been involved in consulting with Treasury and other relevant parties) on a broad range of issues, the impact of which is not limited to but may affect funds. We recommend accessing our dedicated COVID-19 hub, which is structured as a set of detailed Q&As; is updated regularly (daily, at this stage); and that we will use to provide further updates and more targeted responses to questions affecting funds, as issues emerge and/or are clarified.

What are the immediate issues for unlisted retail funds?

Liquidity and redemptions

It is still early days, but we have not yet seen Australian open-end retail funds suspend (or 'freeze') redemptions in response to COVID-19, as we had seen with unlisted funds (primarily property, mortgage, enhanced cash and hedge funds) during the GFC, or as we are currently seeing with property funds in the UK. Nor have we seen funds declaring that they are 'non-liquid' for Corporations Act 2001 (Cth) purposes and therefore unable to accept redemption requests. Such steps may need to be taken as the pandemic progresses, particularly if it becomes too difficult to value underlying assets reliably, or if there is a run on redemptions by investors in need of cash, including superannuation funds seeking liquidity in response to the new early release of superannuation rules. During the GFC, following the freeze on redemptions by a number of funds, the Australian Securities and Investments Commission (ASIC) made an urgent modification of the Corporations Act to allow responsible entities (REs) to apply for relief to enable them to return some capital to certain members in exceptional circumstances of hardship. If funds were to again become frozen, we would expect that ASIC would again provide hardship relief.

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  • If the RE is to have the right to suspend redemptions, that right must be set out in the fund's constitution. The right may be drafted so that it can be exercised only in a limited range of circumstances or for a limited period, or it may confer a broad discretion on the RE. In all cases, the power to suspend redemptions may only be exercised consistently with the RE's duties, including the duty to act in the best interests of the members as a whole (both transacting and non-transacting members). REs should also check that the right to suspend withdrawals has been disclosed to investors in the fund's product disclosure statement (PDS), and whether there are any restrictions in any contractual arrangements including with platforms. In Regulatory Guide 134 Funds Management – Constitutions (RG 134), ASIC has cited as examples of where a suspension power may be exercised situations where there is an unexpected demand for withdrawal requests or where circumstances make it difficult to determine the withdrawal price.
  • Alternatively, a fund that is 'liquid' for the purposes of section 601KA of the Corporations Act may determine that it is no longer liquid and, therefore, is unable to continue to offer an ongoing redemption facility to investors. A fund will be 'liquid' if 'liquid assets' account for at least 80% of the scheme property of the fund. 'Liquid assets' are, in broad terms, assets that the RE reasonably expects can be realised for their market value within the period specified in the fund's constitution for satisfying withdrawal requests. In RG 134, ASIC has indicated that this period should generally be no longer than 21 days. However, property, mortgage and credit funds typically provide for a longer period to reflect the nature of those assets.
  • ASIC recently stated that, as part of its focus on resilience in the funds management industry, it would be reviewing the definition of 'liquid assets' because it considered this to be too broad and to allow inherently illiquid schemes to call themselves liquid. Any decision by an RE in the current market to suspend redemptions or determine that a fund is non-liquid should take into account these comments by ASIC.
  • In 2017 ASIC issued Regulatory Guide 259 Risk management systems of responsible entities (RG 259), which (among other things) requires REs to have a liquidity risk management process for each scheme operated by the RE, which should include stress testing or scenario analysis. ASIC expects that this will include REs assessing available liquidity management tools and considering whether they are appropriate to use (eg redemption fees, suspension of redemptions, redemption gates, in specie transfers, swing pricing, minimum or maximum limits on withdrawals on a partial or staggered basis). A decision by an RE to suspend redemptions or declare a fund to be 'non-liquid' should therefore be made consistently with its liquidity risk management process.
  • An RE that suspends redemptions or determines that a scheme is no longer liquid will need to satisfy all disclosure obligations, both to existing investors and to any new investors (in the PDS).
Unit pricing

REs may also be permitted to suspend unit pricing altogether, thereby suspending the processing of all transactions that require a unit price (ie applications and redemptions). REs typically have the discretion to suspend unit pricing where the RE determines that the value of the fund's assets or liabilities cannot be calculated reliably, and to process transactions would give rise to inequities between transacting and non-transacting investors. An extreme example of where unit pricing may be suspended is if the ASX ceased to operate as a result of the pandemic.

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  • The RE would need to be permitted under the fund's constitution and unit pricing policy to suspend unit pricing. The RE should also check that any such right has been disclosed to investors in the fund's PDS and whether there are any restrictions in any contractual arrangements including with platforms.
  • The power to suspend unit pricing may only be exercised consistently with the RE's duties, including the duty to act in the best interests of the members as a whole (both transacting and non-transacting members).
  • An RE that suspends unit pricing will need to satisfy all disclosure obligations, both to existing investors and to any new investors (in the PDS).
Buy/sell spreads (or transaction costs)

Reports last week confirmed that a number of fund managers have significantly increased their buy/sell spreads for fixed income funds to reflect the increased transaction costs involved in selling the assets of those funds to provide liquidity for investors seeking to realise their investments. In the reported cases, the increased spreads were implemented without prior notice given to investors. There are inconsistent practices in the market regarding adjustments to buy/sell spreads, as the relevant rules vary depending on the size of the fund, the rationale for the increase and how the spread has been described in the PDS and the fund's constitution. The rules also apply differently to registered schemes and superannuation funds. Buy/sell spreads are intended to ensure that members who are not transacting at a particular time are not disadvantaged by the fund bearing costs associated with the need to acquire and dispose of assets to satisfy applications or redemptions. Buy/sell spreads are therefore adjusted by the RE only when the RE considers this to be in the members' best interests. In the COVID-19 environment, where costs of transacting are fluctuating dramatically, and REs need to be able to implement any changes to buy/sell spreads without delay in order to protect the interests of all members, we consider that ASIC relief should be provided to ensure that a consistent set of rules applies to all REs.

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  • If buy/sell spreads are to be adjusted, the RE will need to ensure that the adjustment is being made so that the spread is a genuine estimate of 'the costs of acquiring or disposing the scheme property'. This is the language used in the relevant ASIC class order that permits a net asset value (NAV)-based formula for calculating unit prices to provide for an adjustment for transaction costs (through the buy/sell spread).
  • If buy/sell spreads are to be adjusted, the RE must only do so if this is in the best interests of all members of the fund (whether or not they are transacting).
  • The rules on whether prior notice needs to be given to members will vary depending on:
    • whether the fund has more or fewer than 100 members (for funds with 100 or more members, the continuous disclosure obligations s.675 of the Corporations Act apply, and for funds with fewer than 100 members, the significant event notice obligations in s.1017B of the Corporations Act apply);
    • in the case of a fund with fewer than 100 members, whether the buy/sell spread can be characterised as a fee or charge (in which case, 30 days' prior notice is required); and
    • whether the PDS, constitution or the unit pricing policy requires prior notice to be provided to members.
  • If prior notice is required to be given to members, it may be in the members' best interests to suspend redemptions during the notice period.
  • If the fund's PDS is to remain on issue, it will need to be updated to reflect the change to the buy/sell spread to ensure that the PDS remains up to date at the time it is given to new investors. The manner of updating the PDS will also depend on the existing disclosure in the PDS and whether the change is materially adverse.
  • To further complicate matters, under the new version of RG 97 that is scheduled to apply to PDSs dated on or after 30 September this year, buy/sell spreads will need to be disclosed in the fees and costs summary in the PDS (to align with the disclosure that currently applies for superannuation funds).
Simple MISs and shorter PDSs

A simple MIS includes a registered scheme that is or was offered because it invests at least 80% of its assets under one or more arrangements by which the RE can reasonably expect to realise the investment, at the market value of the assets, within 10 days. Interests in a simple MIS may only be issued using a shorter PDS whose form and content comply with Schedule 10E to the Corporations Regulations. When markets are functioning normally, this requirement poses little difficulty. But at times of market dislocation, the RE's assessment of what it might reasonably expect becomes more difficult. For example, a simple MIS that is a fund of funds may need to anticipate that downstream funds will suspend withdrawals – if it would be reasonable to expect that a suspension will be implemented, preventing an investment from being realised at market value within 10 days, the scheme may no longer be an MIS if, as a result, less than 80% of its assets may be realised at market value within 10 days. Similarly, some asset classes may, in the current environment, take a longer period of time to realise at market value.

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  • There is no flexibility in the 80% requirement: if a scheme's assets fall below the 80% threshold, it is no longer a simple MIS and the shorter PDS regime no longer applies. The RE must stop issuing interests under that PDS. If it wishes to continue issuing interests, it will need to prepare a long-form PDS. The RE will also need to inform members as soon as is practical that it is no longer a simple MIS.
  • It is worth noting that the mere fact a managed investment scheme ceases to be a simple MIS does not mean that it ceases to be liquid – the definitions differ (see above for the meaning of 'liquid assets'). For example, the 10-day period that applies to a simple MIS may be longer in a liquid scheme. Members may therefore still be able to withdraw from a scheme in circumstances where the scheme is unable to issue new interests, resulting in a net decrease in scheme property.
  • Given the seriousness of the situation confronting REs of simple MISs, there may be merit in ASIC considering a temporary modification of the simple MIS definition: eg by decreasing the 80% threshold, lengthening the 10-day realisation period or providing for a reasonable 'cure period'. It is likely that the existing shorter PDS would still need to be updated in these circumstances as the liquidity profile of the fund would have changed, but the updated disclosure could remain in the form of a shorter PDS and would not need to be converted to a longer-form PDS for what may be a temporary period.
PDSs and new investors

A PDS must at all times be up to date. The unprecedented events of the past few weeks may mean that information in an existing PDS has inadvertently become out of date and needs to be updated.

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  • If a PDS is to remain on issue, it will need to be reviewed to ensure that the COVID-19 situation has not resulted in disclosures in the PDS ceasing to be up to date. Relevant sections may include the fund's target asset allocation, risks disclosure, redemptions and unit pricing.
  • For new PDSs issued, or rolled over, during this period, COVID-19 risk disclosures will need to be included (see our comments in relation to wholesale funds below, under 'Disclosure').
RE financial requirements

An RE must satisfy certain minimum financial requirements, including a 12-month cash flow projection and a net tangible assets (NTA) requirement, which incorporates a liquidity aspect. The pressure on liquidity created by COVID-19 may affect the RE's ability to satisfy its own financial requirements.

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  • REs should review their ability to continue to comply with their financial requirements: in particular, their cash needs and NTA requirements in light of their own liquidity situation, and the value and liquidity of the assets on which they are relying to satisfy their NTA requirements.
Capitalising distributions

REs and trustees of certain schemes may be seeking to retain cash. Liquid schemes (and unregistered schemes that offer redemptions) may consider suspending redemption rights (see above). An alternative may be to limit cash distributions. Unfortunately, trusts are less flexible than companies in this respect. Suspending distributions may not be an option if it results in income being taxed in the hands of the RE or trustee.

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  • The RE or trustee must carefully consider what other options are available under the constitution. Alternatives might include the following:
    • Issuing units in lieu of cash. But this could only be done unilaterally if the constitution permits. An alternative might be to encourage unitholders to participate in a distribution reinvestment plan (again, assuming the constitution provides for this) – though, of course, that may be less effective, particularly in circumstances where market uncertainty places a premium on liquidity.
    • Applying distributions to make a capital contribution to the trust (without issuing units). Again, this is a power that the constitution would need to give the RE or trustee – it is not a power the RE or trustee would ordinarily have under general trust law (and, in our experience, it is not a power many older constitutions confer).
  • In either case, even if the RE or trustee sought to imply a power to issue units in lieu of cash, or to apply distributions to make a capital contribution, it would likely be constrained by the typical provision limiting the liability of a unitholder to pay any additional amount to the trust.
  • Careful consideration of these issues, and of the terms of the relevant constitution, is important before making any decision to capitalise distributions.
Service providers and material contracts

Both REs of registered schemes and trustees of unregistered schemes are likely to rely on third party service providers, from investment managers and advisers, custodians, IT providers and registries, to property, development and facility managers and trust administrators. All of these providers may be affected by COVID-19. For example, a custodian that is usually able to carry out an instruction to sign an agreement may be less able to do so when its authorised signatories are working from home; and an investment manager may be unable to provide the services it was engaged for if its key personnel are ill.

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  • Some of these matters may be relatively easily dealt with by planning ahead – eg allowing extra time for signing if your custodian's personnel are working from home. Others are more problematic, and may prompt an RE or trustee to consider more drastic measures, for example the key personnel or force majeure terms of an investment management agreement. In either case, relying on these clauses typically involves notice being given; and even if the RE or trustee does not wish to enforce its rights, it should consider whether it needs to take any preliminary steps to avoid losing them (even if it decides not to enforce them). Force majeure clauses, in particular, can be tricky to navigate: see our FAQs on COVID-19 and enforcing contractual obligations.
  • Even if the scheme is receiving uninterrupted services, it may be prudent for the RE or trustee to consider what it might do if services were affected, including by asking material service providers what they are doing to cope with COVID-19, and whether their business continuity plans are likely to be effective, and by reviewing material contracts to assess what protections they provide. This is important particularly for REs, which are statutorily liable for the actions (or inaction) of agents or other persons they have engaged to do anything in connection with the scheme.

What are the immediate issues for wholesale (private) funds?

Extending fundraising periods, investment periods and fund lives

A number of clients managing closed-end funds have raised questions regarding the extension of fundraising periods (ie delaying the final close date) and investment periods.

Fundraising

Fundraising is proving understandably tricky in the current climate, due to a combination of factors, including:

  • extreme uncertainty and market turbulence;
  • institutional investors' hesitance to make new, long-term capital commitments, particularly in light of concerns regarding net outflows of assets under management. By way of example, superannuation funds, such a key source of capital for Australian wholesale fund managers, may be hit by the double whammy of reduced inflows resulting from rising unemployment and increased outflows arising from amendments to the SIS Regulations to allow members to access a portion of their superannuation savings on compassionate grounds, as noted in our colleagues' recent insight the Impact of COVID-19 on superannuation; and
  • practical considerations, not least investors' inability to meet face-to-face with managers as part of the due diligence process, and uncertainty about the ability to execute certain documents (in particular, deeds) electronically.
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  • In our experience, some form of investor or investor advisory committee (LPAC) consent is almost always required to extend the fundraising period, either because the fund documents expressly require approval or because the extension requires an amendment to the fund documents. In the latter case, depending on the specifics of the amendment provision, the more bullish managers may consider that the required amendment does not impose additional obligations on / is in the best interests of investors and therefore can be made unilaterally. As ever, the devil will be in the detail of the construction of the relevant provisions.
  • For funds that have not yet reached first close, sponsors should consider building flexibility into the final close date concept (noting that investors may resist anything approaching broad and nebulous manager discretion).
  • It is worth considering whether any proposed amendments to constituent documents are subject to financier notification or consent. In our experience, changes of this nature do not typically require consent but may require advance notification.

Investment period

At the risk of stating the blindingly obvious, the current climate makes investment tricky (and, in some cases in the short term, impossible), and managers of closed-end funds nearing the end of their investment period, and with committed funds still available to deploy, may need to consider extending the fund investment period.

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  • Again, extensions will almost always require investor or LPAC consent and, if amendments are required to fund documents (amendments may not be necessary where the documents contain an in-built extension mechanism), consider if financier notification or consent is required.
  • Particularly in light of the impact of any extension of management fees and carry, and the fact an extension will increase the likelihood of investors being required to provide additional funds, lessons from the GFC are that clear and early engagement with investors, including a clear enunciation of the commercial rationale and benefits of the extension to investors, will be key.

Fund life

Finally, for closed-end funds approaching the end of their term, managers may consider extending the life of the fund, to avoid the need to dispose of assets in the current climate.

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  • Fund documents typically contain a mechanism for extending the life of the fund for one or two additional periods but those extensions almost always require investor or LPAC consent.
  • If the extensions have already been used, managers will need to seek investor or LPAC consent (as required) to amend fund documents (and, if so, should consider if financier notification or consent is required).
  • In a similar context, we have seen managers roll certain investments into a separate fund (with the same investors in the same proportions as the original fund), but that approach presents a number of legal and tax issues to be worked through, and would require lengthy and detailed engagement with investors.
Disclosure

Disclosure in relation to COVID-19 is a not an issue specific to wholesale funds or even to funds in general – it is an issue with which a wide array of our clients, across sectors and practice groups (and particularly those who are subject to continuous disclosure obligations under the ASX Listing Rules), are grappling. In the context of wholesale funds, unsurprisingly the question has arisen predominantly in the context of fundraising – should managers say anything to investors about the risk of the pandemic and, if so, what?

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  • There are arguments against COVID-19-specific disclosure – wholesale investors are sophisticated and should understand the risks of COVID-19 without being told; it may be difficult (or even impossible) to ascertain with any certainty the likely impact on a fund at this stage; and the offering documents of well-advised managers will contain appropriate disclaimers noting that investors are responsible for conducting their own diligence, seeking their own advice and arriving at their own investment decision (the wholesale version of 'investments may go down as well as up'). However, most of those arguments could also be used against including a general investment risks disclosure and yet that disclosure is ubiquitous.
  • There is no one-size-fits all disclosure but, as a minimum and in an effort not to be an outlier (given the market trends we are seeing), it would be prudent for managers to include a generic COVID-19 risk factor in any offering documents (which may acknowledge that the situation is uncertain and rapidly evolving, and that it is difficult to know what effect the pandemic may have), with more bespoke disclosure for funds whose investment strategy exposes them to specific risk above and beyond the general commercial consequence of the pandemic – to pick two obvious examples, funds that own and lease commercial real estate, and those that hold investments in the hospitality or travel sectors.
  • Managers should also consider what impact, if any, COVID-19 could have on the assumptions built into any financial modelling provided to investors as part of the fundraising process. Where the assumptions do not take the pandemic into account – for example, because it is too early to quantify its effects with any precision – it would be advisable to say so.
  • Managers will need to check whether disclosure obligations in fund constituent documents or, more likely, investor side letters, are enlivened by the pandemic or the governmental response. For example, we often see side letter provisions requiring investor notification where another investor defaults on a capital call, or upon the occurrence of any event that will, or is likely to, have a material adverse effect on the fund.
Investor default and liquidity

In our experience, investor default in a wholesale fund context is extremely rare, if not unheard of. However, the events of the last few weeks have, in many ways, been unprecedented in modern times and, particularly if current global lockdowns run for a considerable period and as the economic impact begins to be felt, institutional investors in certain sectors may come under increasing financial pressure.

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  • Default provisions tend to be lengthy and complex, and afford managers a broad range of discretionary remedial power, including forcible redemptions or transfers and the redirection of distributions. Managers should spend time considering those provisions (and, if necessary, obtain legal advice) to ensure they are across their powers and the limitations. Given managers will need to take into account the duties they owe to investors in exercising any default remedies (both at law and by virtue of the fund documentation), responding to a default will not be a straightforward matter and will likely require significant investor engagement and tough decisions, so any time spent preparing will be well spent.
  • Institutional investors will also be interested in default regimes – not just those who might be at risk of defaulting but all investors, given default regimes will typically allow a manager to call for additional funds from non-defaulters in order to make up any shortfall.
  • Investors may also be considering seeking liquidity, either through a redemption (if permitted) or a secondary sale. Again, we are seeing managers start to look at the detail of the relevant provisions in their constituent documents in order to ascertain what they can, cannot, must and must not do in each scenario. If the lessons of the GFC are anything to go by, we expect open-end fund managers and investors alike will be paying close attention to redemption gate and lock-up provisions.
Valuations

At risk once more of stating the obvious, asset valuations have a material impact at all stages and on all aspects of the life of a fund. Current market volatility and uncertainty, coupled with a proliferation of legislative and regulatory responses that may affect valuations of affected assets, are creating a number of challenges for wholesale fund managers. Given the effect of valuations on investment price (for open-end funds, where interests are issued at NAV) and on fees and carry, and based on our experience during the GFC, this is an issue on which we expect institutional investors to be focused. Managers are often required to provide up-to-date valuations as part of their periodic reporting (including in quarterly reports), which serve an important purpose in informing investors of the value of their investments, which can, in turn, impact investment decisions and asset allocations; and so, this is also an issue that may rear its head quite quickly.

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  • Fund sponsors are almost always required to value assets in accordance with detailed valuation policies (either their own or industry standard, such as those produced by the International Private Equity & Venture Capital Valuation Guidelines Board (the IPEV Board)). Managers will need to consider how those policies apply in the current circumstances, to pre-empt questions or objections that investors may raise.
  • The IPEV Board has provided special guidance on applying the IPEV Valuation Guidelines when estimating fair value at 31 March 2020, reaffirming the position taken during the GFC that 'fair value [is] the best measure of valuing private equity portfolio companies and investments in private equity funds'. IPEV's position is that fair value does not equal a 'fire sale' price but instead represents 'the amount that would be received in an orderly transaction using market participant assumptions in the current market environment… based on what is known and knowable at the measurement date'.
  • Managers of open-end funds may consider suspending the processing of all transactions that require a unit price (ie applications and redemptions). As noted above, such action may become necessary as the pandemic progresses, particularly if it becomes too difficult to value underlying assets reliably, or if there is a run on redemptions by investors in need of cash. In order to implement a suspension, managers will need either the requisite authority under the fund documents or to seek an amendment to those documents (which, as noted above, will almost always require investor or LPAC consent).
Investor communications

Given institutional investors are likely subject to their own extreme pressures and uncertainties, lessons from the GFC suggest they will seek more regular and detailed communication from their managers, and managers are more likely to consult with or seek investor or LPAC consent, even in circumstances where it is not strictly necessary do so under the terms of the fund documents. Managers will also need to consider how to hold investor and LPAC meetings in a world where face-to-face meetings are not an option.

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  • Our experience during the GFC was that regular, clear and prompt communication from managers is of paramount importance as a way of providing reassurance and reducing the likelihood of confrontation with investors.
  • More formally, and as noted above, fund documentation typically requires managers to consult with or seek consent from investors or LPACs regarding a range of issues.
  • We are already starting to field questions on whether investors / LPACs should be consulted with or whether consent should be sought, which suggests practices that emerged during the GFC may recur.
  • While the inability to hold face-to-face meetings may be a consideration, in our experience wholesale fund investor and LPAC meetings – save, perhaps, for certain annual meetings – are almost always held electronically (and that is expressly permitted by the fund documents).

What other issues arising from COVID-19 are relevant to funds?

As noted above, our dedicated COVD-19 hub considers and responds to a broader range of issues that are not specific to, but may also impact, funds (and their operators and investors). The following may be of particular interest to certain fund managers and investors:

  • we have been consulting with Treasury and others to seek clarification on the ability to validly execute agreements and deeds electronically (as crazy as it seems in 2020, a deed signed on animal skin is more unquestionably valid than one signed electronically). Our colleague Diccon Loxton has produced a helpful webinar on the status quo, which can be accessed via our online learning portal;
  • Parliament has passed temporary relief measures relating to insolvency – see our summary of those changes, currently due to apply for six months;
  • for managers of, and investors in, real estate funds, our summary of the effect on landlords and tenants, and our summary of the effect on development projects;
  • our summary of the impact of the pandemic on contractual obligations, including reliance on force majeure clauses; and
  • on Sunday (29 March), Treasury announced changes to Australia's foreign investment review regime. These changes, principal among them a reduction of all de minimis monetary thresholds to $0 and an extension of application review timeframes from 30 days to up to six months (with priority given to urgent applications for investments that 'protect and support Australian business and Australian jobs'), will endure 'for the duration of the current crisis'. Partner Wendy Rae and others at Allens have been involved in discussions with FIRB (both directly and through the Law Society) that are ongoing. Based on discussions to date, we have summarised the proposed changes and their implications.

Will COVID-19 affect upcoming regulatory change and the approach of our regulators?

We expect that our regulators will fundamentally shift their approach to recognise that they and funds alike need to focus their efforts on the immediate challenges of COVID-19. Similarly, the Government's focus is also likely to be on COVID-19, rather than previously slated reforms for the sector – and, indeed, those reforms won't be able to be considered by Parliament until 11 August 2020 (now the next sitting day).

Fund managers can expect five key changes:

  • Many regulatory reform measures will be suspended. Fund managers will be able to pause or slow their preparations for a large number of upcoming regulatory changes, but we will need to await further announcements from the regulators on some specifics. This includes the regulatory reform agenda previously intended to go before Parliament in the coming months – such as Treasury's Exposure Draft Bills to implement the last of the Financial Services Royal Commission recommendations (a number of which had been proposed to commence on 1 July 2020). Although the Government has not made an official announcement on the status of these reforms, in practice they will not be able to be considered by Parliament until its next sitting day (at the earliest) – which has been postponed to 11 August 2020.
  • Supervision activities will be refocused. The regulators will switch their supervision focus to managing the response to COVID-19, and other serious or time-critical issues. ASIC regards outstanding customer remediation as being in this category and will work with businesses to accelerate payments.
  • Relief from regulatory obligations may be available. ASIC has said it may provide relief or waivers in response to difficulties faced by fund managers in the current environment.
  • New regulatory measures may be introduced to respond to COVID-19. We expect the regulators will be actively considering whether any COVID-19-specific measures are required for funds.
  • AFCA will consider COVID-19 circumstances when dealing with complaints. AFCA has stated it will take into account the unprecedented circumstances fund managers are operating in when considering complaints (including if firms are not in a position to quickly act on requests for information). It has also said that it will fast-track COVID-19-related complaints. Fund managers will need to be prepared to prioritise those complaints.