Changes to ASIC financial requirements for responsible entities of managed investment schemes

ASIC has released new financial requirements for responsible entities of managed investment schemes in an effort to ensure that ‘schemes wanting to take on the responsibility of managing investors’ money are backed up by responsible entities (REs) with appropriate financial substance.’ The changes have arisen from a consultation process (CP 140) that commenced in September 2010. The changes will be implemented through ASIC Class Order [CO 11/1140] and will be effective from 1 November 2012.

Changes to cash flow projection requirements

REs will now have to prepare 12 month rolling cash-flow projections (currently 3 months) which must be approved at least quarterly by directors.  Material assumptions used in calculating cash projections must be set out in writing.

Additionally, REs are required to update the cash flow projection when:

• the projection ceases to cover the next 12 months
• there is a material change or
• the RE has reason to suspect that an updated projection would show that it does not have sufficient financial resources to meet its liabilities or it does not hold the requisite proportion of its net tangible asset (NTA) in cash or cash equivalents.

Changes to NTA requirements

ASIC has adopted option 1 for NTA requirements in CP 140. Under the revised NTA capital requirements, REs which do not undertake custody of scheme assets (i.e. scheme assets are held by custodians which are eligible to hold scheme assets), must hold NTA at the greater of:

• $150,000
• 0.5% of the average value of scheme property* (capped at $5 million) or
• 10% of the RE’s average revenue* (with no maximum).

This is a significant increase on current NTA requirements which generally only require REs to hold NTA equal to 0.5% of the value of scheme assets with a minimum requirement of $50,000 and a maximum requirement of $5 million.

Previously, REs that held up to $10 million in funds under management only needed to hold $50,000 in NTA. Under the new requirements, REs that hold up to $30 million in funds under management will need to hold at least $150,000.

At the higher end, the NTA requirement for REs with more than $1 billion in funds under management is currently capped at $5 million. Under the new requirements, the NTA requirement can exceed this to the extent that an RE’s average revenue is greater than $50 million.

Additionally, for REs that take custody of scheme assets, NTA of the greater of $ 5 million or 10% of the RE revenue* must be maintained. Currently, REs undertaking self custody are only required to maintain NTA of $5 million.

In addition to increasing NTA for REs, ASIC has also introduced a liquidity requirement for NTA requirements to ensure that an RE has adequate cash on hand to address unexpected and immediate requirements. Under the new liquidity requirements:

• 50% of the NTA capital requirements must be held by the RE in cash or cash equivalents and
• all of the NTA capital requirement must be held as liquid assets.

Audit opinion

Finally, ASIC has also introduced a further requirement for REs to lodge for each financial year (or any other period directed by ASIC) an audit report from a registered company auditor which opines on whether the RE has met its financial requirements under its licence including, but not limited to, the cash flow projection and the NTA requirements.

ASIC Report 259 provides a summary of the consultation process, industry submissions and ASIC’s response. ASIC has also updated RG 166 and PF 209 to reflect these changes.

ASIC is giving REs until 1 November 2012 to comply with the new financial requirements, with relief for extension beyond this date to be granted only in ‘exceptional circumstances’.

What you need to do

If you are a responsible entity, before 1 November 2012 you need to:

• Update scheme compliance plans and financial compliance procedures to reflect these changes, and arrange for rolling 12 month cash-flow projections to be prepared, updated and reviewed quarterly, or upon a material change occurring to the scheme.
• Ensure that you will hold the requisite level of cash, cash equivalents and liquid assets to comply with the new requirements.

*These terms are defined in the Class Order.