PFA Regulatory Update – March 2021
Some of the latest regulatory issues applying to unlisted property funds.
Looming issues for wholesale trustees
In November 2020, ASIC released an Information Sheet (INFO 251) which clarified its position on ‘authorised representatives’ acting as trustees of unregistered managed investment schemes rather than AFSL holders. This has previously been an area of uncertainty for trustees of unregistered property funds offered to wholesale investors.
ASIC also clarified its position on trustees of unregistered wholesale funds using the ‘intermediary authorisation’ AFSL exemption: trustees have used this exemption to put in place intermediary authorisation arrangements with an AFSL holder, which in turn appoints the trustee as its authorised representative to issue interests in its fund. ASIC’s position is that this is not permitted.
In summary:
(a) the trustee of an unregistered scheme cannot rely on the ‘authorised representative’ exemption to issue, vary or dispose of interests in unregistered schemes; and
(b) under the ‘intermediary authorisation exemption’, the person who issues, varies or disposes of an interest in an unregistered scheme cannot also be the person who makes the offer to arrange for the issue, variation or disposal of the interest.
ASIC takes action against mortgage fund as part of ‘true to label’ push
ASIC commenced civil penalty proceedings against the responsible entity of a prominent fund which invests in loans secured by first mortgages over real estate, as well as cash, deposits and other assets, for not being ‘true to label’.
This fund offers different investment options, including accounts which allow investors to withdraw their funds giving short notice. ASIC alleges that these offers are misleading or deceptive, or likely to mislead or deceive because the responsible entity actually has 12 months to satisfy withdrawal requests.
ASIC’s action is a salient message to all trustees of property schemes to ensure accurate representation across marketing and promotional materials regarding the illiquid nature of property schemes, and to accurately and fully disclose any liquidity options for investors.
The financial regulator also alleged that the responsible entity of the fund claimed capital invested in the fund would be “stable” – a claim which ASIC says misleads investors regarding the real potential for loss of capital.
ASIC also alleged that the responsible entity promised the fund would deliver a “specified rate of return, when in fact none of the investment options in the fund were required to provide any particular rate of return”.
Unlisted property funds should review promotional material and disclosure documents to ensure that the products would be considered by ASIC to be ‘true to label’.
ASIC consultation on treatment of lease assets
In December 2020, ASIC released a consultation paper on the treatment of lease assets for the purposes of AFSL holders complying with their financial requirements.
As a result of AASB 16, which applies to all leases on an AFSL holder’s balance sheet from 1 January 2019, a lessee must categorise a right-of-use asset as an asset on its balance sheet with a corresponding liability for the lease rental. The right-of-use-asset will usually be categorised as an intangible asset which is excluded from being recognised as an asset for satisfying the financial requirements of an AFSL holder.
ASIC issued a temporary no-action position in relation to this issue and the consultation paper proposes to formalise this permanently by removing a right-of-use-asset from the definition of an ‘excluded asset’ for the purposes of calculating the net tangible assets, adjusted surplus liquid funds and surplus liquid funds.
The PFA supports this change.
Final changes to Target Market Determination for upcoming Design and Distribution Obligations
Implementing the Design and Distribution Obligations regime (DDO) shapes as the big regulatory issue for 2021, with the DDO commencing from 5 October 2021.
After releasing RG274 in December 2020, ASIC has set out its expectations in relation to implementing the regime, including the preparation of Target Market Determinations and putting in place product governance arrangements. Legal experts have been urging industry to progress preparations for the DDO regime promptly in anticipation of its commencement as there is not much time left.
PFA has submitted an example draft Target Market Determination for unlisted property funds to ASIC for feedback and intends to share this with members in due course.
Which regulatory issues are most impacting you? PFA welcomes any feedback from members regarding regulatory issues they would like to see canvassed with ASIC.