Introduction and summary
The unlisted property fund industry is the latest to receive a new range of proposals aimed at improving disclosure to retail investors. ASIC has published its proposals in Consultation Paper 163: Unlisted property schemes: Update to RG 46 (CP 163) (released on 12 July 2011). This follows earlier proposals made by ASIC aimed at improving prospectus disclosure (Consultation Paper 155 Prospectus disclosure: Improving disclosure for retail investors (CP 155)). CP 163 sets out ASIC's proposed amendments to RG 146 Unlisted property schemes—improving disclosure for retail investors (RG 46).
An unlisted property scheme is defined in CP 163 as an unlisted managed investment scheme that has, or is likely to have, at least 50% of its non-cash assets in real property (not including infrastructure assets) and/or other unlisted property schemes.
Responsible entities of unlisted property schemes have been the subject of ongoing review by ASIC since the release of RG 46. CP 163 seeks to address issues ASIC has identified during its ongoing review. Specifically, ASIC has concerns regarding responsible entities' inadequate disclosures of:
- risks associated with the borrowing maturity profile and the extent of hedging;
- property development activities (timetables and funding);
- reasons for paying distributions from sources other than income, and the sustainability of doing this; and
- withdrawal rights and the risks associated with withdrawal arrangements promoted to investors.
ASIC was also concerned with the effectiveness of disclosure documents. ASIC found that several responsible entities had issued disclosure documents that incorrectly referenced other sections and documents, making it difficult for investors to adequately make comparisons between like products.
ASIC's proposals include:
- The introduction of disclosure benchmarks which responsible entities must address on an 'if not, why not' basis. The benchmarks address six key issues including: gearing policy; interest cover policy; interest capitalisation; valuation policy; related party transactions; and, distribution practices.
- Clarification and amendment to the existing disclosure principles to accord with the disclosure benchmarks and address some of the disclosure concerns ASIC has identified.
- Further guidance on how responsible entities can make their disclosures 'clear, concise and effective', by the introduction of an 'Investment Overview' like ASIC's proposed change to guidance on prospectus disclosure issued earlier this year.
ASIC has sought comment on its proposals (the deadline for submissions is 6 September 2011) with a view to releasing an updated RG 46 by December 2011 and requiring that responsible entities comply with the new guidance by 1 July 2012.
ASIC proposes to extend to unlisted property schemes its 'if not, why not' benchmark disclosure model used in Regulatory Guide 69 Debentures and unsecured notes: Improving disclosure for retail investors (RG 69) and Regulatory Guide 45 Mortgage schemes – improving disclosure for retail investors (RG 45). This model of disclosure provides concrete standards by which retail investors can assess financial products for which there are typically few external benchmarks. The benchmark disclosure model:
- identifies, for a particular financial product, the key risk areas potential investors should understand before making a decision to invest;
- sets a benchmark for how a product issuer should address these risks in establishing its business model and compliance procedures; and
- involves an issuer stating in the PDS and other disclosure whether it meets the benchmark, and if not, why not.
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The benchmarks set out above are in addition to the existing disclosure principles contained in RG 46 (which ASIC proposes to amend as set out below).
Amendments to Disclosure Principles in RG 46
ASIC proposes to amend RG 46 to clarify several issues and provide further guidance as to its expectations of responsible entities in applying the disclosure principles.
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Form of disclosure
ASIC proposes to provide additional guidance on how responsible entities can word and present PDSs and other disclosure documents in a 'clear, concise and effective' manner to help retail investors assess the offer and make informed investment decisions.
Clear, concise and effective
ASIC intends that RG 46 will be consistent with its guidance proposed in Consultation Paper 155 Prospectus disclosure: Improving disclosure for retail investors (CP 155), that is, a PDS will be clear, concise and effective if it helps retail investors make informed decisions because it:
(a) highlights key information;
(b) uses plain language;
(c) is as short as possible;
(d) explains complex information, including any technical terms; and
(e) is logically organised and easy to navigate.
ASIC also proposes to refer to the guidance in CP 155 on the use of communication tools that can help responsible entities to word and present PDS information in a clear, concise and effective manner.
ASIC proposes that an investment overview is included at the beginning of a document which highlights information key to the investor's decision to invest. This should contain disclosure of the benchmark and disclosure principle information. ASIC's stated aim is to 'change market practice' so that issuers provide retail investors with one balanced summary in the form of an investment overview.
ASIC has also stated that all disclosure and ongoing disclosure documents should be dated so as to allow investors to assess the currency of the data within such documents.
Some in the industry have endorsed ASIC's proposal because it would instil confidence in new and existing investors. However, ASIC's proposal has also been criticised because it makes the assumption that unsophisticated investors can understand and respond to quite subtle disclosures.
Most responsible entities as a matter of good practice (and arguably to comply with existing legal requirements) already make substantial disclosures in line with what ASIC has suggested (although not necessarily in the order and manner that ASIC proposes). However, the proposals are likely to impose an increased time and compliance cost burden on responsible entities to change disclosure processes and systems.