Responding to uncertainty and market volatility 7 min read
In response to the COVID-19 pandemic, ASIC has provided relief reminiscent of the GFC to allow hardship withdrawals from frozen funds. The COVID-19 version of hardship relief goes further than its GFC predecessor in many respects.
On 26 August 2020, ASIC issued ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/778 (the Instrument) which provides conditional relief to responsible entities of 'frozen' registered managed investment schemes (MISs), allowing them to facilitate withdrawals for investors who find themselves in hardship.
ASIC has also issued INFO 249: Frozen Funds – Information for responsible entities, which provides guidance on the Instrument, individual hardship relief and 'rolling' withdrawal relief, as well as revised Regulatory Guide 136 Funds management: Discretionary powers to include guidance on relief applications by operators of frozen funds.
Put simply – uncertainty and market volatility. While we have yet to see a GFC-esque run on frozen funds, it is clear the COVID-19 pandemic has significantly impacted all areas of the Australian economy, and managed funds are no exception. Perhaps fearing the worst, ASIC wrote to responsible entities back in March 2020, reminding them:
- to monitor their schemes' liquidity and value;
- of the option of applying for 'rolling' hardship relief; and
- their overriding duty to members.1
Six months on from that letter and with COVID-19 seemingly here to stay for at least the near future, much of that uncertainty still hangs over all of our heads. Perhaps sensing this, ASIC published an article in August 2020 warning responsible entities about the importance of accurate valuations in satisfying their obligations to members.2 It is on the back of this warning that ASIC issued the Instrument and its corresponding relief.
Perhaps conscious of the difficult decisions many fund managers are facing, and consistent with ASIC's focus on protecting and promoting the interests of members – something which is also reflected in its Corporate Plan for 2020 to 2024 released the week after the Instrument3 – ASIC clearly hopes this Instrument will encourage responsible entities to make the right decisions. Indeed, in announcing the Instrument, ASIC Deputy Chair Karen Chester said: ‘At times of extreme market volatility, responsible entities of some managed funds may need to suspend redemptions and freeze funds to protect the interests of the members as a whole’.4
To be eligible to request a hardship withdrawal, an investor must meet the requirements of at least one 'hardship criterion' – severe financial hardship, unemployment for over three months, compassionate grounds or permanent incapacity. It is for the responsible entity of the frozen fund to be satisfied the investor meets the hardship criteria.
The amount any investor can withdraw under hardship withdrawal relief is limited to $100,000 of their investment per calendar year. There is also a limit of four withdrawals per investor per calendar year.
Any responsible entity that wishes to offer hardship withdrawals from a scheme should remember it remains subject to a duty to act in the best interests of members. Before facilitating hardship withdrawals, the responsible entity should consider whether it is appropriate to do so in its particular circumstances.
Practically, in order to rely upon the Instrument, there are various steps the responsible entity must take, including (amongst other conditions):
- notifying ASIC and scheme members of its intention to rely on the relief;
- before making a hardship withdrawal, being satisfied it has adequate cash to fulfil future hardship withdrawal requests and to continue the day-to-day operations of the scheme over the following six months; and
- providing quarterly data to ASIC.
ASIC may consider granting individual relief if a responsible entity is not eligible to rely upon the Instrument.
During the GFC, ASIC implemented a number of measures designed to provide relief to frozen funds.5 Between 2008 and 2011, ASIC provided relief to responsible entities seeking to permit withdrawals for members facing hardship.6 At a high level, the relief offered by ASIC was targeted primarily at retail mortgage funds (although relief was also granted to other asset classes to a lesser extent, including unlisted property funds) and was only granted on a case-by-case basis.7
Accordingly, the measures available during the GFC, despite being quite similar to those in the Instrument, also differed in several material aspects from ASIC's latest relief.
As mentioned above, the Instrument does not provide 'rolling' withdrawals relief, which was a key relief measure during the GFC, but is on a case-by-case basis on substantively the same terms as during the GFC.
- be open for 12 months;
- have nominated dates on which withdrawals will be paid (eg quarterly);
- be available to all members; and
- allow members to lodge a withdrawal request at any time, including a standing withdrawal request to participate in all future withdrawal dates.
Although 'rolling' withdrawal offers facilitated better access to investors' money which was stuck in frozen funds during the GFC, as of August 2020 there were no funds relying on the relief.11 It is yet to be seen whether the lack of 'rolling' withdrawal relief will have any relevance during the COVID-19 pandemic.
As noted above, the Instrument provides relief to frozen funds. For the purposes of the Instrument, a registered scheme will be a frozen fund if the responsible entity has:
- suspended withdrawals (other than hardship withdrawals) from the scheme; and
- ceased to allow the issue of new interests in the scheme (including issues to existing investors and under dividend reinvestment plans).
INFO 249 provides that the relief under the Instrument is available to both liquid or illiquid frozen funds (as defined under section 601KA of the Corporations Act 2001 (Cth)). However, this feels somewhat inconsistent with the above definition of 'frozen fund', given an illiquid scheme would commonly not have withdrawals to suspend.
A responsible entity of a frozen fund that facilitates hardship withdrawals without obtaining relief will be in breach of the Corporations Act and potentially also the scheme's constitution. There are three key aspects of the relief which are worth highlighting in this regard:
1. Hardship withdrawals
The Instrument notionally amends the Corporations Act to create a hardship withdrawals regime. This includes the power to permit hardship withdrawals and imposes restrictions on the circumstances in which they are permitted.
2. Equal treatment
Without relief, by facilitating hardship withdrawals, a responsible entity may breach its duty to comply with the equality of treatment duty in section 601FC(1)(d) of the Corporations Act. The Instrument provides relief in this regard.
However, it is important to remember that the Instrument does not exempt the responsible entity of a frozen fund from its obligation to act in the best interests of the members of the frozen fund as a whole.
As noted above, a responsible entity may be in breach of the scheme's constitution if it facilitates hardship withdrawals. Accordingly, the Instrument provides responsible entities of frozen funds with the power to amend the scheme's constitution to include a hardship withdrawal provision. The Instrument defines a process for making these amendments – which includes a requirement to provide members with an opportunity to request a meeting to consider the proposed amendments.
In conjunction, the Instrument also includes a technical exemption from s601GA(4) of the Corporations Act.
Whether this turns out to be an important factor in addressing any liquidity and resilience issues that arise during the COVID-19 pandemic remains to be seen, but ASIC is clearly readying itself for that possibility.
See, eg, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2008-releases/08-214-asic-facilitates-withdrawals-from-frozen-funds and https://asic.gov.au/about-asic/news-centre/find-a-media-release/2009-releases/09-269mr-asic-grants-conditional-relief-to-improve-access-to-capital-for-investors-in-frozen-mortgage-funds/
This included introducing the concept of 'rolling' withdrawals: see RG 136 and https://asic.gov.au/about-asic/news-centre/find-a-media-release/2009-releases/09-269mr-asic-grants-conditional-relief-to-improve-access-to-capital-for-investors-in-frozen-mortgage-funds/
$100,000 and four, respectively: see, ibid.
See section 601KA of the Corporations Act 2001 (Cth)