What you need to know
- ASIC has written to the boards of responsible entities reminding them of their legal obligations and duties, especially in relation to managing scheme liquidity.
- ASIC asks that boards advise ASIC if any registered schemes become non-liquid or a decision is made to suspend redemptions.
- ASIC also outlines relief it would make available to responsible entities to enable them to assist members if a scheme becomes non-liquid.
ASIC communication
ASIC's letter was dated 20 March 2020.
In addition to listing out the duties owed by responsible entities and their officers to members including the duties to act in the best interests of scheme members and other licensee and responsible entity duties imposed under the Corporations Act 2001 (Cth), ASIC focuses on the issues arising from scheme liquidity.
ASIC expects that responsible entities are actively monitoring the levels of redemptions and application for interests in each scheme.
It also expects that responsible entities and their boards are actively reviewing the terms on which redemptions are made and if a material mismatch arises between redemption terms and liquidity of underlying assets, steps be taken to address this (for example by moving to less frequent redemptions).
If a scheme becomes non-liquid, consideration must be given to whether redemptions should be suspended. ASIC also expects responsible entity boards to consider whether suspending all member related cash flows (such as distributions) would be necessary in order to act in the best interests of all members. ASIC expects boards to take both a short term and a long term view.
ASIC also expects ongoing monitoring of the valuation of scheme property and its impact on unit prices and consideration of buy and sell spreads.
If a responsible entity board forms a view that a scheme is non-liquid or decides to suspend redemptions, ASIC requests it be notified immediately.
ASIC also outlines the relief that it may make available to facilitate a responsible entity to assist scheme members if a scheme becomes non-liquid. The relief, which would be made available on a case by case basis, would allow partial investor access to funds in case of hardship and also, rolling withdrawal relief to simplify the procedure for periodic withdrawal offers (out of available cash).
Responsible entities will only be able to access this relief by making an application to ASIC. We expect that class relief under ASIC instrument will be made available more broadly if a number of responsible entities seek those reliefs from ASIC.
How does this compare to the position during the global financial crisis?
ASIC's communication to responsible entities is very much an early stage reaction to events that are unfolding as a result of the coronavirus pandemic.
It is too early to determine the extent the economic impacts of the coronavirus pandemic will have on scheme liquidity, and to what extent those impacts will be similar to the financial events of the global financial crisis, requiring a similar response.
Issues which arose during the global financial crisis that had a significant impact on the operation of managed investment schemes in Australia included:
- Significant investment by schemes in structured debt instruments like CDOs on which there were defaults
- Major corporate collapses particularly as borrowing covenants were breached as asset valuations collapsed
- Fund and investment structures that depended on margin loans or similar geared products on which there were defaults as the value of underlying securities fell
- Suspension of fund redemptions, particularly across mortgage funds and hedge funds, as the underlying investments ceased to be capable of being realised or withdrawn.
As responsible entities and managers become aware of impacts on their individual structures, a co-ordinated industry approach to seeking ASIC relief may be the most effective means of managing adverse impacts on investors and ensuring that all investors are treated fairly.
Authors: Lisa Simmons, Partner; Con Tzerefos, Partner; Jonathan Gordon, Partner and Corey McHattan, Partner.
