19 Jul 2011
Room for improvement: new rules for unlisted property scheme disclosure documents
by Jacqueline Christie
Less than three years after rewriting the disclosure rules for unlisted property schemes, ASIC is at it again.
It has released a raft of new disclosure requirements for public comment, including:
- a set of benchmarks against which a scheme will have to report on an "if not, why not" basis;
- a more detailed set of disclosure principles governing the information to be included in PDSs;
- a more structured approach to "clear, concise and effective" PDSs, incorporating many of the features already flagged for prospectuses.
The changes have been prompted by ASIC's review of disclosure practices in the industry following its 2008 publication of Regulatory Guide 46- Unlisted property schemes—improving disclosure for retail investors.
That review found that a number of key disclosures were not adequately addressed. These included:
- the risks associated with the borrowing maturity profile and the extent of hedging;
- details about property development activities (primarily timetables and funding);
- the basis of valuations and the risks associated with "as if complete" valuations;
- reasons for distributions being made from sources other than income and the sustainability of these distributions over the next 12 months, and;
- withdrawal rights and the risks associated with withdrawal arrangements promoted to investors.
The Commission's proposals to address these issues are contained in Consultation Paper 163, which is open for comment until 6 September. ASIC will then issue new regulatory guidelines before the end of the year.
ASIC has already implemented an "if not, why not" benchmark disclosure system for debentures, unsecured notes and mortgage schemes. It is also proposing to implement benchmark disclosure for infrastructure entities.
Such a system has three elements:
- ASIC identifies key risk areas that potential investors should understand before deciding whether to invest in a particular type of financial product;
- ASIC sets a benchmark for how a product issuer should address those risks, and;
- the issuer's disclosure documents indicate whether the issuer meets the benchmark and, if it doesn't, why it doesn't (including how it addresses the issue in another way).
For unlisted property schemes, ASIC has identified six benchmark risk areas, and proposed benchmarks:
- Gearing policy - that the responsible entity maintains and applies a written policy that governs the level of gearing at an individual asset level;
- Interest cover policy - that the responsible entity maintains and applies a written policy that governs the level of interest cover at an individual asset level;
- Interest capitalisation - that the interest expense of the scheme is not capitalised;
- Valuation policy - the responsible entity maintains and applies a written valuation policy that requires independent valuations by registered valuers both before a property is purchased and if the directors believe that a fall in value will trigger a material breach of a loan covenant;
- Related party transactions - that the responsible entity maintains and applies written policies on related party transactions, including the assessment and approval processes for such transactions and arrangements to manage conflicts of interest,and;
- Distribution practices - that the scheme will only pay distributions from the realised income of the scheme.
Unlisted property schemes already have to comply with ASIC's disclosure principles set out in Regulatory Guide 46. ASIC now proposes to beef up the content of most of those principles.
All eight principles – covering gearing ratio, interest cover ratio, scheme borrowing, portfolio diversification, valuation policy, related party transactions, distribution practices and withdrawal arrangements – will be affected.
Among ASIC's key proposed changes that will have the most impact are:
- gearing ratios, which will need to be disclosed on an asset basis rather than scheme basis, if there is a significant difference across the assets;
- disclosure of the impact on debt covenants of a 10% drop in asset value or operating cashflow;
- specific disclosure of material terms of the scheme's debt facilities and of related party transactions; and
- a requirement to classify a property scheme as a development/construction scheme if more than 20% of its assets are in development.
Clear, concise and effective
In line with its proposed changes for prospectuses, ASIC wants structural and other "clear, concise and effective" improvements to unlisted property PDSs.
Its existing policy on these PDSs does contain some "clear, concise and effective" guidelines. These take the form of suggestions, particularly as to the form of key information about the product. ASIC's subsequent review of PDSs has revealed considerable variation in the application of those suggestions, particularly in relation to the location and prominence of information. ASIC is concerned that, as a result, investors would find it difficult to compare the relative risk and return profile of different unlisted property schemes.
Accordingly, it proposes to give guidance that a PDS "should include an investment overview within the first few pages that highlights information that is key to a retail investor’s investment decision". That investment overview should include disclosure of the benchmark and disclosure principle information.
The revised policy would also indicate ASIC's view that the statutory requirement to be clear, concise and effective in a PDS would require a PDS to:
- use plain language;
- be as short as possible;
- explain complex information, including any technical terms, and;
- be logically organised and easy to navigate.
As noted above, the deadline for comments on ASIC proposals is 6 September. The proposed commencement date for the benchmarks and revised disclosure principles is 1 July 2012.