As the result of the collapse of numerous responsible entities of registered management investment schemes (REs), the Australian Securities & Investments Commission (ASIC) released a consultation paper on 30 September 2010 proposing changes to certain financial requirements that should apply to Australian financial service licensees that act as REs.

The proposals:

  • restrict the provision of guarantees and indemnities by a RE to related parties
  •  require REs to prepare 12-month cash flow projections, and
  •  change the quantum of, and liquidity provisions in relation to, net tangible assets (NTA) of REs.

Guarantees and indemnities

To maximise the likelihood of REs surviving a collapse of their parent entity, a related entity or a third party, it is proposed that REs should be prohibited from providing guarantees and indemnities to those parties in certain situations. For example, a RE would be prohibited from providing a guarantee in its capacity as the responsible entity of a scheme. Further, if the RE is part of a tax consolidated group, it would be required to execute a tax sharing agreement to ensure that the RE is only liable for its portion of any group tax liability.

12-month cash flow projections

The consultation paper proposes that REs be required to prepare and provide, upon ASIC’s request, rolling cash flow forecasts including revenue and expense predictions over a minimum period of 12 months. The cash flow forecasts must be approved by the directors of the RE.

ASIC has noted that cash flow projections are an important tool for identifying risks to the business of a RE and for demonstrating that a RE can meet its anticipated expenses.

Under section 989B(3) of the Corporations Act 2001 (Cth), Australian financial services licensees are required to lodge an audit report with ASIC for each financial year. Under ASIC regulatory guide 166, the audit report (which is addressed to the licensee and ASIC) must contain certain positive assurance and negative assurance statements in respect of cash needs and cash flow forecast requirements. These audit requirements will continue to apply in respect of the 12- month cash flow forecasts.

Increasing the NTA requirements

In order to ensure that REs have adequate funds to meet their operating expenses, it is proposed that one of the two methods below is adopted to calculate the amount of the NTA that a RE is required to hold:

  • the greater of $150,000, 0.5% of the average value of scheme property (to a maximum of $5,000,000), or ten per cent of the RE’s average gross revenue (with no maximum), or
  • ten per cent of the RE’s average gross revenue with a minimum amount of $500,000 (with no maximum).

ASIC is proposing to amend Australian financial services licence conditions to achieve this. The amount of funds under management and NTA held by a RE will need to be submitted to ASIC annually, under the proposal.

NTA liquidity requirements

50 per cent of the NTA of an RE must be in the form of cash or cash equivalents (with a minimum of $150,000), while the balance must be in liquid assets.

Transition period

It is proposed that any changes will be effective for new REs from 1 July 2011. For existing REs, it is proposed that a transition period of 12 or 24 months from 1 July 2012 or 1 July 2013 respectively will be implemented.

Next steps

ASIC is seeking comments on the consultation paper until 15 November 2011 and it is anticipated that a new regulatory guide will be released in March 2011. Changes may be made to the current proposals as a result of public consultation.