Australian Securities and Investments Commission (ASIC) has updated its product disclosure statement (PDS) content requirements for unlisted property managed investment schemes, as set out in ASIC Regulatory Guide 46: Unlisted property schemes: Improving disclosure for retail investors (RG 46).
RG 46 will include six new benchmarks and amendments to the existing "disclosure principles".
Compliance with the changes will be required by 1 November 2012 in respect of new and existing investors.
The PDSs for these property schemes will be required to include disclosure against six specific benchmarks. The PDS will need to state that the scheme meets each benchmark or, if not, the reasons why not and the alternative arrangements used by the responsible entity of the scheme to deal with the issues underlying that benchmark.
The new benchmarks that will need to be addressed are:
- Gearing policy: maintain and comply with a written policy governing the level of gearing on a loan-by-loan basis. The disclosure principles in RG 46 already require disclosure of the gearing ratio of the scheme.
- Interest cover policy: maintain and comply with a written policy governing the level of interest cover on a loan-by-loan basis. The disclosure principles in RG 46 already require disclosure of the interest cover ratio of the scheme.
- Interest capitalisation: the interest payable by the scheme will not be capitalised. The disclosure principles in RG 46 already require disclosure of various details in respect of scheme borrowings.
- Valuation policy: obtain initial and periodic independent professional valuations in accordance with a written policy. For development property, the initial valuation must be conducted both on an "as is" basis and an "as if complete" basis.
- Related party transactions: maintain and comply with written policies on related party transactions. Such policies would need to be consistent with the requirements of the Corporations Act 2001 (Cth) and ASIC Regulatory Guide 76: Related Party Transactions. The disclosure principles in RG 46 already require disclosure of various details in respect of related party transactions.
- Distribution practices: the scheme will only pay distributions from operational income (excluding capital, borrowings and support facilities).
The concept of disclosure against benchmarks is not new. It has been adopted by ASIC in respect of prospectuses for unlisted unrated debenture issues since 2008 and is seen as a way of facilitating product comparisons. Schemes that fully address the benchmarks will be well placed to take advantage of such comparisons.
Benchmarks 3, 4 and 6 introduce new substantive requirements in relation to how schemes will be operated. Accordingly, responsible entities will need to consider as soon as possible whether they will try to meet these benchmarks. Failure to comply with the benchmarks will mean the responsible entities will be required to disclose to investors why the scheme does not comply, the risks for investors in not complying and the alternative arrangements the scheme has in place to address these risks. In relation to benchmark 4, for example, it may be difficult to persuade potential investors that independent valuations are not required.
Benchmarks 1, 2, 4 and 5 require certain policies to be in place and complied with, but do not prescribe the content of such policies. Given that it should be relatively straightforward to put these policies in place, we anticipate that most responsible entities will elect to do so. Accordingly, responsible entities should assess their current policies now and attend to any necessary changes.
In addition to the six new benchmarks, ASIC has updated the existing disclosure principles in RG 46 which require PDSs to contain specific information. The following are the key changes to the disclosure principles:
- n relation to the payment of distributions, the PDS will need to disclose the source of current and future distributions (eg operational income or capital) and whether forecast distributions will be stable over the next 12 months
- in relation to investors' ability to withdraw their investment from the scheme, the PDSs will need to disclose whether and in what circumstances the scheme's Constitution permits investors to withdraw and any significant risk factors or limitations that may affect the ability of investors to withdraw or the unit price at which withdrawal will be made
- the PDSs for closed-end schemes will need to comply with a new disclosure principle by disclosing the scheme's net tangible assets on a per-unit basis in pre-tax dollars. ASIC acknowledges that such disclosure already occurs regularly in respect of open-ended schemes.
Timing and transition
In order to comply with the new requirements by 1 November 2012:
- all new PDSs issued must comply with the new RG 46
- all existing PDSs still in use must be accompanied by a supplementary PDS complying with the new RG 46
- all current scheme investors must be updated with the benchmark information. This may be done via the scheme's usual method of communicating with investors (such as in writing or via the scheme website).
Responsible entities who respond quickly and address the issues underlying the benchmarks prior to 1 November 2012 will be well placed to take advantage of the increased comparability the benchmarks will provide.
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.