Infrastructure investments are the latest financial products to receive an ASIC makeover.
New guidance released last week sets out ASIC expectations for disclosure to retail investors in infrastructure entities (Regulatory Guide 231 Infrastructure entities: Improving disclosure for retail investors). The guidance covers both the content and the structure of infrastructure fundraising documents.
The key points are:
- the fundraiser must disclose whether it meets a set of benchmarks prescribed by ASIC;
- it must also comply with a number of "disclosure principles" (covering issues such as fees, related party transactions, distribution policy, etc);
- the new requirements apply to all infrastructure entities with retail investors from 1 July this year – even if the entity is no longer raising funds.
The new rules apply to "infrastructure entities", which ASIC defines as:
"a listed or unlisted registered managed investment scheme, company or stapled structure investment that has been offered to retail investors on the basis that its primary strategy or investment mandate is to invest in any of:
(a) the physical plant, property or equipment of infrastructure assets;
(b) the right to operate infrastructure assets; or
(c) other unlisted entities which, either directly or indirectly, primarily invest in the assets referred to in paragraph (a) or (b) above."
"Infrastructure assets" include roads, railways, ports, airports, telecommunications facilities, electricity generation, gas or electricity transmission or distribution, water supply or sewerage, and hospitals.
There are nine benchmarks and 11 disclosure principles.
The prospectus or PDS must indicate whether the entity meets the benchmarks, on an "if not, why not" basis. An infrastructure entity is under no obligation to adopt the benchmarks in operating its business, but the "if not, why not" disclosure will require some explanation of how the relevant issue is dealt with in another way.
The benchmarks cover:
corporate structure and management – do they comply with ASX's corporate governance guidelines?
incentive-based remuneration of management – is it based on the performance of the infrastructure entity?
are all units and shares fully paid and do they have the same rights?
substantial related party transactions – does the entity comply with ASX Listing Rule 10.1?
cash flow forecast – has the entity prepared a 12-month cash flow forecast for the current financial year and internal (and unaudited) cash flow forecasts for newly acquired significant infrastructure assets? Note that there is no requirement to disclose the forecast, but instead to disclose whether such a forecast has been prepared and approved by the directors.
base-case financial model – is the entity’s base-case financial model subject to checking by an assurance practitioner? Again, there is no requirement to disclose the base-case financial model, but rather to disclose the existence of, and process for review of the model.
performance and forecast – how have operating assets performed against publicly disclosed forecasts?
in the case of unit trusts, whether distributions will be paid from borrowings
in the case of unlisted unit trusts, whether unit prices are reviewed after assets are revalued.
Reporting on the 11 disclosure principles will require more work than the benchmarks, in that they need more than an "if not, why not" response:
management and performance fees
related party transactions
capital expenditure and debt maturities
foreign exchange and interest rate hedging
the entity’s base-case financial model
A number of the benchmarks and disclosure principles relate to forward looking statements, and entities should be mindful of Regulatory Guide 170 Prospective financial information when making any disclosures against these benchmarks and principles.
ASIC wants both the benchmark and disclosure principle material to be disclosed towards the beginning of fundraising documents:
- there should be a table summarising the benchmark disclosure within the first 15 pages of the document;
- the information required by disclosure principles should appear "as soon as practicable" after the benchmark table.
This policy applies to all infrastructure fundraising documents for retail investors dated on or after 1 July 2012. Importantly, it will also apply to infrastructure entities which have already raised money by that date (or are in the process of raising money):
- where the entity has fundraising documents on issue on 1 July, those documents should be updated (eg. by issuing a supplementary PDS or prospectus, as applicable);
- where the entity has already raised money, it should address the benchmarks and disclosure principles in a communication to its retail investors by 1 July 2012;
- for all entities, ongoing disclosure is required after 1 July 2012 as material changes occur. ASIC recommends a review at least annually.
ASIC states that this new policy addresses, at least in part, what it describes as "legislative inadequacies". In other words, it believes that the existing statutory disclosure requirements don't address some unique risks and characteristics of infrastructure entities.
ASIC states that the form of disclosure by infrastructure entities also varies widely and this makes it difficult for retail investors to compare different infrastructure offerings – a situation which the use of standardised benchmarks and disclosure principles is intended to address.
ASIC also believes that standardised benchmarks and disclosure principles will strengthen the transparency and robustness of infrastructure entity governance, and encourage more prudent business models in the future.
It remains to be seen whether the new disclosure model will in fact enhance disclosure and whether it is consistent with the statutory requirement for "clear, concise and effective" fundraising documents. Nevertheless, all infrastructure entities should now be preparing a communication strategy to comply with the new policy.
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