Australia: ASIC proposes increased financial requirements for responsible entities


Following the global financial crisis and a number of high profile collapses of managed investment scheme operators, ASIC recently released Consultation Paper 140: Financial Requirements which proposed a number of amendments to the financial requirements applicable to responsible entities – the operators of registered managed investment schemes. The proposals put forward by ASIC are expected to increase (and in some cases significantly increase) the amount of regulatory capital currently held by existing responsible entities. ASIC is accepting responses to Consultation Paper 140 until 15 November 2010.

It is expected that a revised regulatory guide will be available in March 2011, with an implementation date of 1 July 2011. A transition period for existing responsible entities will also be implemented (with compliance required by either 1 July 2012 or 1 July 2013).

Current financial requirements

Currently, to comply with the financial requirements imposed by ASIC on AFS licence holders permitted to operate registered schemes, generally, a responsible entity must have:

  • positive net assets and be solvent
  • sufficient cash resources to cover the next 3 months' expenses with adequate cover for contingencies (cash needs requirement)
  • audit compliance with the financial requirements annually, and as requested by ASIC, and
  • net tangible assets (NTA) of 0.5 per cent of the value of the assets of the scheme, plus any scheme property not counted in calculating the value of the assets of the registered scheme it operates, with a minimum of $50,000 and a maximum of $5,000,000. A higher NTA requirement applies if the responsible entity has custody of scheme assets.

The amendments proposed by ASIC primarily impact on the cash needs requirement and the NTA requirement. The other requirements are expected to remain in place.

Amendments to cash needs requirement

A responsible entity currently may opt to select one of 5 options for demonstrating that it complies with the cash needs requirement, with one of the options being the preparation of a cash flow projection indicating that it will be able to meet its expenses for the next 3 months. Instead, ASIC intends to require all responsible entities to prepare rolling 12 month cash flow projections indicating anticipated revenue and expenses. ASIC intends that this measure "should, in many cases, result in a higher level of focus and governance around cash flow forecasts and cash planning than currently exists...[and] assist the directors of a responsible entity to identify potential cash flow problems at an earlier stage, providing the opportunity to take corrective action". Responsible entities will be required to obtain the approval of directors to each projection. Projections will need to be made available to ASIC upon request.

Amendments to NTA capital requirements

Instead of the current NTA capital requirement which prescribes a minimum of $50,000 and a maximum of $5,000,000, ASIC is considering requiring that responsible entities hold either:

  • the greater of:
    • $150,000
    • 0.5 per cent of the average value of scheme property (up to a maximum of $5,000,000), and
    • 10 per cent of the responsible entity's average gross revenue (no maximum applicable), or
  • 10 per cent of the responsible entity's average gross revenue with a minimum of $500,000.

Further, ASIC will require that 50 per cent of the required NTA be held as cash or similar (with a minimum of $150,000), and that the balance of the NTA be held as liquid assets. Responsible entities will be required to lodge their NTA figure and funds under management figures with ASIC annually.

Other related amendments proposed include eligible undertakings which form part of a responsible entity's NTA being limited to those provided by an ADI or as otherwise approved by ASIC,

ASIC cites the following reasons for the implementation of the increased NTA requirements:

  • responsible entities should maintain sufficient capital to ensure proper performance of their functions and an orderly wind up if the scheme should fail
  • the interests of responsible entities should be aligned with those of their investors
  • existing NTA requirements introduced in 2002 need to be revised in the wake of the GFC requirements, and
  • minimum capital requirements should be increased to a point which is consistent with other international regulatory regimes.

This represents a significant amendment given that the minimum NTA which a responsible entity is required to hold will increase from $50,000 to at least $150,000 or $500,000, depending on the alternative ultimately adopted by ASIC. Accordingly, this is likely to form a considerable barrier to entry in respect of start-up fund managers entering the market, and may cause existing fund managers of smaller funds to consider the viability of their operation. ASIC acknowledges that the implementation of such capital requirements may lead to some consolidation and rationalisation of fund managers in the market.

Related party transactions

ASIC also proposes restricting responsible entities from providing guarantees or indemnities to its related parties. This is aimed at assisting in quarantining a responsible entity from any financial distress in other parts of its corporate group.

Time for implementation

It is expected that a revised regulatory guide setting out the amended financial requirements will be available in March 2011, with new responsible entities being expected to comply with the new financial requirements as of 1 July 2011. A transition period for existing responsible entities will also be implemented (with compliance required by either 1 July 2012 or 1 July 2013).

ASIC is accepting responses to Consultation Paper 140 until 15 November 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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