Yesterday ASIC released its long anticipated new financial requirements for responsible entities of registered managed investment schemes in the form of Class Order [CO 11/1140]. Draft amendments to Regulatory Guide 166: Licensing: Financial requirements and Pro Forma 209: Australian financial services licence conditions have also been released.
The new financial requirements are more onerous than the current requirements imposed on responsible entities through Australian financial services licence conditions. They reflect the outcome of ASIC’s consultation under Consultation Paper 140: Responsible entities: Financial requirements.
The effective date for the new financial requirements is 1 November 2012.
What are the new requirements?
Cash needs requirement: Responsible entities must prepare rolling cash flow projections covering at least the next 12 months (increased from 3 months). The responsible entity’s board of directors must approve the cash flow projection at least quarterly.
Other requirements applicable to the projections are based on the requirements under the current “reasonable estimate projection” (Option 1) cash needs requirement, although there is no cash buffer specified. The responsible entity must also demonstrate compliance with the new cash or cash equivalents liquidity requirement (see below).
A responsible entity must demonstrate, based on the projected cash flows, that it will have access to sufficient financial resources to meet its liabilities over the projection period.
Net tangible assets requirement: The new requirements significantly change responsible entities’ net tangible asset (NTA) requirements. In particular, the $5 million NTA cap has been removed and a new concept of “average RE revenue” has been introduced. The previous minimum NTA requirement of $50,000 that applied in some circumstances has been increased to $150,000.
A responsible entity must hold at all times NTA of at least:
- if scheme property is held through complying custody arrangements, the greater of:
- 0.5% of the average value of scheme property, capped at $5 million; or
- 10% of average RE revenue; or
- if scheme property is not held through complying custody arrangements, the greater of:
- $5 million; and
- 10% of average RE revenue.
The 10% of average RE revenue component of the NTA requirement is uncapped. This means that a responsible entity with average RE revenue in excess of $50 million will face an increased NTA requirement. The definition of “RE revenue” is very broad. In addition to the responsible entity’s revenue (within the meaning given by accounting standards), it includes “any amount paid or payable out of scheme property for the performance of the obligations imposed on the licensee as a responsible entity in connection with the registered schemes it operates, even if those obligations are performed by another entity (including asset management, investment management, property management, scheme administration and custodial and trustee services)”. This could be of particular concern to organisations that provide responsible entity services to fund managers and other responsible entities who retain only a small proportion of the fees charged to the schemes they operate.
The “average RE revenue” concept appears to contemplate responsible entities being able to prepare rolling calculations of estimated revenue to date and future revenue each day. This might be administratively burdensome. The process for calculating the “average value of scheme property” appears to contemplate monthly valuations and forecast valuations of scheme property.
Liquidity requirement: Responsible entities must hold at all times:
- in cash or cash equivalents, the greater of:
- $150,000; and
- 50% of the amount of the NTA requirement calculated above (assuming complying custody arrangements are in place); and
- in liquid assets, the amount of the NTA requirement calculated above (assuming complying custody arrangements are in place).
The concepts “cash or cash equivalents” and “liquid assets” are both defined. Cash or cash equivalents include, for example, the value of any “eligible undertaking” provided by an “eligible provider”. “Liquid assets” include, for example, assets which the responsible entity can reasonably expect to realise for their market value within 6 months.
While a number of concepts in the current financial requirements have been retained, some defined terms have changed significantly. Responsible entities should carefully review the new conditions to assess the impact of the new financial requirements.
In particular, “adjusted liabilities” (a component of NTA) will now include the maximum potential liability of any guarantee provided by the responsible entity, other than:
- a guarantee limited to an amount recoverable out of scheme property; or
- a guarantee of the obligations of another member of a stapled group.
Responsible entities should carefully examine the terms of guarantees. Assessing the “maximum potential liability” of some guarantees could be difficult.
Responsible entities who intend to rely on “eligible undertakings” from “eligible providers” will also need to be aware of the narrowed list of “eligible providers” under the Class Order. In particular, listed companies will no longer qualify unless approved by ASIC.
Although the minimum NTA for custodians will generally continue to be $5 million, responsible entities and custodians will now need to be conscious of the new NTA definition when determining whether a custodian has the required NTA. This may require review of custody agreements, for example.
Where to from here?
Responsible entities have until 1 November 2012 to comply with the new financial requirements. If you require any assistance with these new requirements, please get in touch with any of the key contacts listed.