ASIC’s new regime for facilitating withdrawals from ‘frozen funds’

Insights2 Sept 2020

We outline ASIC’s new relief measures for responsible entities of registered schemes to facilitate withdrawals from ‘frozen funds’ members facing financial hardship during the COVID-19 pandemic.

By Vince Battaglia and Harry New

In this article, we outline briefly ASIC’s new relief measures for responsible entities of registered schemes to facilitate withdrawals from ‘frozen funds’ members facing financial hardship during the COVID-19 pandemic. The measures represent ASIC’s updated and revised relief and guidance on ‘hardship’ and ‘rolling withdrawals’ since the Global Financial Crisis. During the Global Financial Crisis, ASIC granted hardship relief to responsible entities of frozen funds on a case-by-case basis only.

Key points

A ‘frozen fund’ is a registered scheme for which the responsible entity of the scheme has:
- suspended withdrawals (other than any hardship withdrawals) from the scheme; and
- ceased to allow the issue of new interests in the scheme,
  regardless of whether the fund was originally liquid or not liquid.

ASIC’s guidance addresses three conditional withdrawal relief options for frozen funds: generally applicable ‘hardship’ relief under a legislative instrument, individual or case-by-case ‘hardship’ relief, and individual or case-by-case ‘rolling withdrawal’ relief.
Hardship relief has specific requirements in relation to:
- the types of schemes to which it applies;
- cash requirements for the frozen fund;
- withdrawal amounts; and
- hardship criteria that investors must satisfy.

Responsible entities will need to comply with additional conditions under the terms of each relief option.
ASIC will list the responsible entities that rely on any form of its relief on its website.
The hardship withdrawal relief does not apply to time-sharing schemes, mortgage investment schemes, IDPS-like schemes and registered litigation funding schemes that involve representative proceedings.
Before relying on any of the relief, the responsible entity of the frozen fund will need to ensure that it complies with its general duties under the Corporations Act 2001, including always acting in the best interests of members as a whole.

Background

On 26 August 2020, ASIC announced that it has issued a new relief regime for the facilitation of withdrawals from frozen funds. The package of reforms include the following:

a new instrument of relief, namely the ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/778 (Hardship Relief Instrument);
a new ASIC Information Sheet 249 Frozen funds – Information for responsible entities (INFO 249), along with three webpage appendices setting out the details of the relevant relief provided to named responsible entities;
a revised ASIC Regulatory Guide 136 Funds management: Discretionary powers (RG 136); and
a webpage providing information for investors about the hardship relief regime.

Earlier this year, in its ASIC Interim Corporate Plan 2020-21, ASIC stated that it would take action to deal with an expected increase in applications for hardship and rolling withdrawal relief for frozen funds, including by establishing standard relief and potentially making a legislative instrument. See our earlier article about this matter.

Summary of relief options

ASIC’s updated guidance sets out three forms of relief:

hardship relief implemented under the Hardship Relief Instrument;
individual hardship relief for which responsible entities may apply if they cannot rely on the Hardship Relief Instrument; and
individual relief for ‘rolling withdrawal offers’ for which responsible entities of illiquid registered schemes may apply.

In the table below, we summarise briefly the general features of the three forms of relief for responsible entities of frozen funds.

	Relief under Hardship Relief Instrument	Individual hardship relief	Individual rolling withdrawal relief
Does a responsible entity need to apply for relief on a case-by-case basis?	No. This relief is implemented under the Hardship Relief Instrument and applies to give responsible entities relief where the criteria are met and the conditions are satisfied.	Yes, a responsible entity needs to apply for the relief. ASIC will consider applications on a case-by-case basis. ASIC has set out guidance specific to frozen fund relief in RG 136, and general guidance in relation to applications for individual relief in ASIC Regulatory Guide 51 Applications for relief (RG 51) and its website.
What does this relief allow a responsible entity to do?	According to RG 136, under this relief, a responsible entity has the discretion to facilitate a withdrawal request where the request satisfies at least one of hardship criteria (specified under the Hardship Relief Instrument). Under the relief, a responsible entity may grant up to four hardship withdrawals per calendar year to a member, up to a cap of $100,000 of their investment per calendar year.	If a responsible entity cannot rely on the Hardship Relief Instrument, it may apply to ASIC for individual relief to allow members suffering hardship to withdraw in priority to other members. ASIC states that it will consider granting individual relief in these circumstances. ASIC states that it will consider granting individual relief from the following provisions of the Corporations Act: • the duty to treat members of the same class equally under section 601FC(1)(d); • the withdrawal regime in Part 5C.6; and • section 601GC.	ASIC states that it will consider granting relief to allow responsible entities to implement 12-month rolling withdrawal offers. According to ASIC, the purpose of this relief is to allow responsible entities of illiquid schemes to provide all members with periodic withdrawal opportunities with administrative ease. ASIC states that it may consider granting relief from requirements under Part 5C.6 of the Corporations Act to allow a responsible entity to implement 12-month ‘rolling’ withdrawal offers.
What exemptions or modifications does this relief provide?	The Hardship Relief Instrument provides relief to eligible responsible entities from: • the duty to treat members of the same class equally under section 601FC(1)(d); • the withdrawal regime in Part 5C.6 of the Corporations Act, by introducing a new hardship withdrawal regime; • the requirement to set out adequate procedures for making and dealing with hardship withdrawal requests in the scheme constitution (with conditions); and • the requirement under section 601GC(1)(a) that a special resolution of members must approve a constitutional change to enable hardship withdrawals (with conditions).	ASIC states that it will consider granting individual relief from the following provisions of the Corporations Act: • the duty to treat members of the same class equally under section 601FC(1)(d); • the withdrawal regime in Part 5C.6; and • section 601GC.	ASIC states that it may consider granting relief from requirements under Part 5C.6 of the Corporations Act to allow a responsible entity to implement 12-month ‘rolling’ withdrawal offers.
What are the conditions for eligibility for the relief?	A responsible entity must: • have suspended or cancelled withdrawals; and • have ceased to allow the issue of new interests (including distribution reinvestments and issues to existing members); and • not be considered an ‘excluded scheme’ under the Hardship Relief Instrument.	ASIC states that a responsible entity must outline why it cannot meet specified key parameters of the Hardship Relief Instrument. ASIC has also set out specific factors it may consider in deciding whether to grant the relief in RG 136.	ASIC states that this relief is available to responsible entities of illiquid schemes (as defined in section 601KA). ASIC has also set out specific factors it may consider in deciding whether to grant relief in RG 136.
What are the conditions of relief?	Before relying on the relief, a responsible entity needs to: • submit a notice of reliance to ASIC; • publish a statement on its website (and send the statement directly to all of the fund’s members); and • make sure the scheme constitution expressly allows hardship withdrawals for members. To continue to rely on the relief, a responsible entity must:	ASIC states that it will generally include conditions on the relief to require the responsible entity to: • notify members that it has been granted relief and the effect of the relief; • not allow a hardship withdrawal unless it is satisfied of certain matters in relation to its cash resources; • act reasonably in exercising any discretion in relation to a hardship withdrawal; • keep records in relation to its decisions; and • provide quarterly data to ASIC in ASIC’s required form.	ASIC states that it will generally include conditions on the relief to require the responsible entity to: • provide all members with information on each withdrawal opportunity before it is open; • remind members about their ability to participate in the rolling withdrawal in member communications; • notify all members in writing of the outcome of each withdrawal opportunity and maintain a website with relevant and up-to-date information; • distribute all available cash to members for as long as withdrawal requests exceed available cash; and • provide ASIC with details for each withdrawal opportunity.
When does the relief cease?	The Hardship Relief Instrument specifies that the relief will cease to apply on 27 August 2025. In addition, a responsible entity will no longer be able to rely on the relief if it does not satisfy the relief conditions. A responsible entity must submit a notice of cessation of reliance to ASIC.	ASIC states that it will generally limit this relief to cease at the end of a defined period, or when the registered scheme ceases to be frozen (whichever occurs first).	ASIC states that it may limit the relief to a defined period or until the registered scheme becomes liquid.

Commentary

We consider the hardship relief set out in the Hardship Relief Instrument to be useful to fund managers, as (among other things), it does not require an individual relief application to be made and it sensibly permits the responsible entity to manage a unilateral amendment to the fund’s constitution to facilitate the relief.

The relief is subject to specific conditions, including a requirement about having sufficient cash resources in the fund. The relief may raise expectations from investors about a perceived entitlement to a withdrawal, which a responsible entity will need to manage with careful communication.

We echo ASIC’s warning to responsible entities that if a responsible entity of a frozen fund allows hardship withdrawals without reliance on relief, this will constitute a breach of the Corporations Act. ASIC has indicated that it may take action for noncompliance, and encourages responsible entities to apply for individual hardship relief. On its webpage that provides information for investors about the hardship relief regime, ASIC informs investors about their right to make a complaint, call a members’ meeting or apply for court orders. Investor complaints will also need to be managed, which may be challenging given the highly technical nature of the relief. Responsible entities should ensure that they apply a clear, fair, transparent and reasonable policy in considering applications for withdrawals on hardship grounds.

If you believe ASIC’s frozen fund relief may be relevant to you, let us know and we would be pleased to assist you.