Responsible Entities - ASIC has changed your Financial Requirements

30 November 2011

Are you a Responsible Entity (RE) of a managed investment scheme? Beware, ASIC has updated your financial requirements regarding NTA, liquidity and cash flow projections.

ASIC has released a new Class Order (CO 11/1140) and re-released a draft of RG 166 & PF 209 outlining changes to financial requirements that will apply from 1 November 2012.

The Changes:

1. Net Tangible Assets (NTA)

The NTA requirements will differ depending essentially, on whether you have outsourced custody for your schemes.
If you have outsourced your custody function, the NTA of your RE must be at least the greater of:

$150,000; or

0.5% of the average value of scheme property of the registered schemes and IDPSs operated by the RE – capped at $5 million; or

10% of average RE revenue (no cap).

If you have not outsourced your custody function, you must hold NTA equal to the greater of:

$5 million; OR

10% of average RE revenue (no cap).

You can also meet the NTA requirements if the RE is beneficiary of an eligible undertaking of an eligible provider for an unlimited amount (this is like having an unlimited bank guarantee).

What has changed? – The 10% revenue requirement is new while the $150,000 NTA requirement is being increased from $50,000.

2. Liquidity

You must hold at all times in liquid assets at least the greater of:

$150,000; or

10% of average RE revenue (no cap); or

0.5% of the average value of scheme property of the registered schemes and IPDSs operated by the RE – capped at $5 million; and

Half the liquid assets (subject to a minimum of $150,000) must be in cash or cash equivalents.
Cash or cash equivalents include:

cash on hand;

demand deposits and money deposited with an Australian ADI that is available for immediate withdrawal;

short-term, highly liquid investments that can be readily converted to known amounts of cash that are subject to an insignificant risk of changes in value;

the value of any eligible undertaking provided by an eligble provider; and

a commitment to provide cash from an eligible provider that can be drawn down within 5 business days and has a maturity of at least 6 months.

Liquid assets include:

cash or cash equivalents (other than a commitment to provide cash from an eligible provider that can be drawn down within 5 business days and has a maturity of at least 6 months); and

assets that the licensee can reasonably expect to realise for their market value within 6 months.

What has changed? – These liquidity requirements are all new.

3. Cash Flow needs
Cash flow projections must be:

rolling and cover at least 12 months (this means that in practice you must project out at least 13 months ahead, updated monthly);
approved by directors at least quarterly;
able to show that the cash or cash equivalents will always be equal to, or greater than, the amount the RE is required to hold in cash or cash equivalents over the 12 month period;
updated in certain circumstances;
supported by documented calculations and assumptions; and
able to show that the RE has the financial resources to meet its liabilities over the 12 month period.

What has changed? – Cash flow projections have increased from 3 months to 12 months.

Your ASIC-regulated auditor will need to ensure your compliance with these obligations and include certain comments to this effect in their annual report to ASIC.

You have less than 12 months to implement these changes. Do not hesitate to contact us for assistance.

Author: Chris Wallace
Partner: Paul Derham

Responsible Entities - ASIC has changed your Financial Requirements by Holley Nethercote Commercial Lawyers is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.5 Australia Licence.