Thinking | 10 July 2008

ASIC proposes increased scrutiny of unlisted property and mortgage scheme disclosure

It appears that unlisted mortgage scheme and property scheme sectors will be the subject of increased scrutiny following the release yesterday by ASIC of consultation papers and draft disclosure guidelines in relation to disclosure by issuers of interests in unlisted mortgage schemes and unlisted property schemes.

In the context of unlisted mortgage schemes, ASIC has proposed benchmark based disclosure requirements which would require disclosure against eight benchmarks on an “if not, why not” approach. The eight benchmarks reflecting areas of significant potential risk in the context of unlisted mortgage schemes are liquidity, scheme borrowing, portfolio diversification, related party transactions, valuation policy, lending principles (loan-to-value ratios), distribution practices and withdrawal arrangements.

ASIC has also proposed eight disclosure principles that responsible entities of unlisted property schemes will be required to comply with. The principles reflect key areas that have been identified by ASIC that should be prominently disclosed to new and existing investors in property schemes to enable them compare risks and returns associated with investments in property schemes. The “if not, why not” approach has not, however, been applied to property schemes. The eight areas in relation to which ASIC has required disclosure are gearing ratios, interest cover, scheme borrowing, portfolio diversification, valuation policy, related party transactions, distribution practices and withdrawal rights.

Under the proposals, responsible entities of unlisted property schemes and unlisted mortgage schemes will need to ensure compliance with the new disclosure requirements from 31 October 2008. Responsible entities of unlisted mortgage schemes will need to report against the benchmarks to existing investors by, and ensure that new fundraising documents comply with the benchmarks from, 31 October 2008. Responsible entities of unlisted property schemes will need to comply with the proposed disclosed principles in both new PDSs and in ongoing disclosures for their unlisted property schemes from 31 October 2008. It is also proposed that existing investors in unlisted property schemes be provided updated disclosure that complies with the new disclosure principles.

This increased focus on disclosure no doubt comes in light of the recent market turmoil that has led to the high profile collapses of a number of LPTs and the suspension of redemption and liquidity facilities in numerous unlisted registered mortgage and property schemes. This has raised questions about the extent to which the unlisted property scheme sector has been, and will be, impacted by changing market conditions.

It will be important to understand how the proposed disclosure principles will sit with existing mandated disclosure requirements under the Corporations Act and relevant ASIC regulatory guides. The disclosure requirements that currently apply are prescriptive, although general in nature and do not distinguish between different types of investments or sectors. The proposed disclosure principles will introduce an added layer of regulation that responsible entities of unlisted property schemes and unlisted mortgage schemes must comply with.

Interestingly, these proposals raise questions about whether PDSs for existing schemes that did not include disclosure of these specific areas are in some way defective as these areas have been identified by ASIC as being key risks and features of unlisted mortgage and property schemes. It is foreseeable that investors who suffer loss may rely on the views expressed by ASIC in the consultation paper and proposed guidelines to argue that an existing PDS was defective under the current disclosure requirements.

These proposals come in light of the Government’s well publicised commitment to introduce simpler, shorter and more reader-friendly disclosure documents. Responsible entities of unlisted property schemes and unlisted mortgage schemes will need to carefully assess the disclosure that they will be required to make under the proposals and give careful consideration as to how they will manage the proposed new disclosure requirements with their existing disclosure obligations, including the requirement that disclosure documents be “clear, concise and effective”.

Comments on the consultation paper and draft regulatory guides will be sought until 5 August 2008, with the final regulatory guides expected to be released in September 2008.

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Harry New

Harry leads our financial services team and focuses extensively on financial services law and corporate advisory.

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