Responsible entities (REs) of registered managed investment schemes will be subject to revised minimum financial standards from 1 November 2012, namely:
a new net tangible asset (NTA) requirement
a NTA liquidity requirement
new compliance measures for ensuring that REs meet their cash needs requirements, and
an obligation to obtain an audit opinion on both the NTA and cash needs requirements.
The changes are contained in a new Class Order (CO 11/140) and discussed in a draft revised Regulatory Guide 166. In bringing in these changes, ASIC’s aim is to both increase the financial resources available to an RE during the life of the scheme, and to provide some assurance that if the RE fails there are sufficient financial resources for an orderly transition to a new RE or to wind up the scheme.
Responsible entities need to be reviewing these changes, and taking the necessary steps to ensure they meet the new requirements by November 2012.
At present, a responsible entity which appoints a separate custodian to hold scheme assets must have NTA of 0.5% of the value of scheme assets, subject to a minimum of $50,000 and a maximum of $5 million. If the responsible entity is also the custodian, generally it must have NTA of $5 million.
Under the new requirements, a responsible entity that is not a custodian must have NTA of at least the greater of:
0.5% of the “average value of scheme property” (up to a maximum NTA of $5 million), and
10% of “average RE revenue”, with no cap.
A responsible entity that is also a custodian must have NTA of at least the greater of:
10% of “average RE revenue”, with no cap.
Average value of scheme property
The “average value of scheme property” is defined in the Class Order as the greater of two amounts. These are the current value of scheme property, and an average of historical and forecast values in three different circumstances. The latter depends on the length of operation of the licensee in respect of the particular scheme.
Average RE revenue
“RE revenue” means:
the licensee’s revenue as defined by accounting standards. In other words, revenue not only from RE activities, but also from other activities which may be conducted by the licensee entity such as wholesale investment management, broking, financial product advice etc, plus
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. This definition specifically includes amounts payable for services such as asset or investment management, scheme administration, custodial and trustee services (but excluding certain audit fees).
“Average RE revenue” is an average of historical and forecast RE revenue in four different circumstances depending on the length of operation of the licensee in respect of the particular scheme.
The new NTA requirement may generally be expected to result in the following:
a manager having funds under management (FUM) of less than $30 million requiring NTA of $150,000
once a manager hits FUM of $1 billion, their NTA will be capped at $5 million, and
when a manager has FUM exceeding around $3.2 billion (assuming an ICR of 150 basis points that represents all RE revenue), they will be required to have NTA that exceeds $5 million based on RE revenue.
However, in a particular case, a higher NTA requirement may be triggered at lower FUM figures than those referred to above, particularly if the RE has significant non-scheme revenue (e.g. from wholesale mandates).
Depending on factors such as the materiality of non-scheme revenue and the nature of activities that generate such revenue, it may be worthwhile for financial services organisations (in order to minimise their NTA requirements) to investigate structuring (or restructuring) their operations so that the RE’s sole activity is to operate the registered schemes. Other revenue-generating activities could therefore be undertaken by another entity in the group (with its own AFSL if necessary).
NTA liquidity requirement
At present, REs are not required to ensure that their NTA is held in any particular form of asset.
Under the new requirements, an RE must hold at all times the greater of:
50% of its NTA requirement (calculated as if the RE has outsourced the custody function), in “cash or cash equivalents”. This includes cash in hand, deposits with an Australian ADI, certain short term, highly liquid investments and bank guarantees.
An RE must hold 100% of its NTA requirement in “liquid assets”, being “cash or cash equivalents” (other than bank guarantees) or assets that the licensee can reasonably be expected to realise for their market value within 6 months. These must be free from encumbrances and, in the case of receivables, free from any right of set-off.
Cash needs requirement
At present, REs must comply with one of a number of options that generally involve it projecting, over a rolling 3 month period, the financial resources it will have available to meet its liabilities either from its cash flows or certain third parties.
Under the new requirements, an RE must prepare rolling projections of cash flows over at least the next 12 months, and demonstrate that it will have access to sufficient financial resources to meet its liabilities that are expected to be payable over that period. The directors of the RE must approve the projections at least quarterly.
The RE must also demonstrate, based on these projections, that it will hold at all times during the period an amount, in cash or cash equivalents, equal to or greater than the amount referred to above under “NTA liquidity requirement” required to be held in cash or cash equivalents.
As part of its annual financial audit, the RE must lodge an audit opinion as to whether during any part of the financial year the RE:
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