Alert

Who does this affect?

Responsible entities of unlisted property and mortgage schemes with any retail or platform investors

What do you need to do?

Cover ASIC’s new disclosure principles in product disclosure statements for new funds and some existing funds by 30 November and going forward, consider whether updated information should be given to existing investors

David Eliakim
Partner
T +61 2 9296 2061

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Sydney
Susan Hilliard
Barry McWilliams
Brian Murphy

Melbourne
John Malon

Canberra
Stephen Jaggers

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Authors
David Eliakim
Glenda Hanson

On 2 September 2008, ASIC released Regulatory Guides 45 and 46, stating its view that responsible entities of certain unlisted property or mortgage schemes should cover eight “disclosure principles” in product disclosure statements and ongoing disclosure. ASIC has accommodated some industry submissions in finalising the draft guides released in July, but there was little movement on timing - in many cases, responsible entities have less than three months to comply.

Which property funds are affected?

Regulatory Guide 46 applies to unlisted registered schemes in which retail clients invest (directly or through a platform) which have or are likely to have at least 50% of their non-cash assets invested in real property and/or other unlisted property schemes. It does not apply to listed funds, or those which only invest in listed property securities.

What are the disclosure principles for property trusts?

The required information falls into 8 categories. Some, but probably not all of these, will already be covered in existing unlisted property fund PDSs:

• Gearing ratio - using the formula total interest bearing liabilities/total assets

• Interest cover - using the formula EBITDA adjusted for unrealised gains and losses/interest expense

• Scheme borrowing, including certain specifics of debt maturities and loan covenants and, in some cases, refinancing prospects

• Portfolio diversification

• Valuation policy

• Related party transactions

• Source of distributions, and

• Withdrawal arrangements.

Disclosure about the fund’s “business model” and the “track record and experience of senior management” also seem to be required, although these do not appear in the list of 8 principles.

What has changed as compared with the policy proposals?

• The implementation date has moved from 31 October to 30 November 2008, and for some “closed” schemes (ie, where there are no near term withdrawal rights) to 31 March 2009

• The gearing ratio formula now refers to interest bearing liabilities rather than just liabilities, to focus the disclosure on external borrowings, and

• The interest cover formula now uses EBITDA less unrealised gains plus unrealised losses to more closely reflect the relationship between cash flow and interest payments.

Notably, despite certain industry submissions on the point, ASIC is still requiring disclosure of valuations on development properties on both an “as if complete” and “as is” basis.

What is ASIC asking responsible entities to do?

• Cover the principles in any new PDS dated after 30 November 2008

• For an existing PDS still in use at 30 November, issue a supplementary PDS or give updated information on a web site if the information is not materially adverse

• Provide investors in existing funds with an update covering the principles, by 30 November for “open” schemes and by 31 March 2009 for “closed” schemes

• Update investors on an ongoing basis on material changes to the disclosure principle information

• Include certain warnings where a rating is used in promotional material, and

• Consider whether compliance plans should be updated.

ASIC has provided more guidance on the legal basis for the proposed disclosure in the final Guides than in the July proposals. This will be useful in assessing whether these actions are mandatory or simply good practice.

What about mortgage funds?

Regulatory Guide 45 applies with effect from 30 November 2008 to unlisted registered schemes which invest at least 50% of their non-cash assets in mortgage loans and/or unlisted mortgage schemes. It has similar requirements, but refers to disclosure of information about “benchmarks” on liquidity, borrowing, portfolio diversification, related party transactions, valuation policy, lending principles - loan to valuation ratios, distribution practices and withdrawal arrangements. Unlike Regulatory Guide 46, there is an ‘if not why not’ approach to the disclosure requirements.