02 Feb 2012

New improved disclosure for agribusiness managed investment schemes

by Matthew Daley, Matt Anderson

Responsible entities of agribusiness managed investment schemes must comply with the new policy on and from 1 August 2012.

The disclosure requirements for agribusiness schemes have been significantly increased

The risks associated with investing in agribusiness schemes have been apparent since 2008 when several operators of agribusiness schemes failed, resulting in retail investors experiencing significant losses. In light of this ASIC has formulated five new benchmarks and five new disclosure principles that will apply to all agribusiness schemes (being managed investment schemes that engage in primary production activities, including forestry plantations and non-forestry activities, such as horticultural enterprises) in which retail investors invest, either directly or indirectly, so that investors better understand what they are getting into before they invest.

On 30 January 2012, ASIC released Regulatory Guide 232 Agribusiness managed investment schemes: Improving disclosure for retail investors (RG 232), together with an investor guide, outlining the five new benchmarks and five new disclosure principles. ASIC's new policy aligns with ASIC's strategic priority to promote and engender a more confident and informed investor/financial consumer and its endeavour to hold "gatekeepers" in the financial sector to account.

In summary, responsible entities of agribusiness schemes will be made to disclosure the new benchmarks and disclosure principle information discussed below, in any product disclosure statements (PDSs) dated on or after 1 August 2012.

Why in ASIC's view, do agribusiness schemes pose particular risks?

ASIC sees agribusiness schemes as posing particular risks because they do not typically use the traditional unit trust structure and generally for tax reasons are structured so that investors operate the scheme in their own right.

Benchmark 1: Fee structures

In satisfaction of this benchmark, the responsible entity should disclose the fee structure that applies to the agribusiness scheme. The agribusiness scheme should be structured so that either:

(a) investors are required to pay annual fees to the responsible entity that are sufficient to fund the operation of the scheme for the relevant financial year; or

(b) the upfront fees investors pay when they invest are sufficient to cover the operation of the scheme until the money from the sale of produce is available.

Any fees received by the responsible entity from investors in the scheme must be held separately from the other assets of the responsible entity and only used by the responsible entity to meet any expenses that are incurred in the operation of the scheme.

Benchmark 2: Responsible entity or related party ownerships of interests in the agribusiness scheme

Subject to certain limited exceptions, the responsible entity (and its related parties) should own less than 5%, in aggregate, of the value of the interests in the agribusiness scheme. The responsible entity should disclose its policy on ownership of interests in the agribusiness scheme by the responsible entity or any related parties. This will enable investors to understand the impact, if any, on the scheme if the responsible entity is not able to meet its share of any fees charged to the scheme's members.

Benchmark 3: Annual reporting to members

The responsible entity shall provide scheme members with a report, at least annually, that contains relevant scheme-specific information. A responsible entity typically makes statements in a PDS about how funds will be used and how the scheme will operate. As these statements are relied on by investors when choosing whether to invest, the investor should be given the opportunity to monitor the responsible entity's performance against the statements provided.

Benchmark 4: Experts

Where a responsible entity engages an expert to provide a professional opinion on the agribusiness scheme, and the opinion is to be disclosed to investors, the responsible entity should only engage an expert that is independent. In addition the responsible entity should disclose other things, such as a summary of the instructions to the expert, the expert's qualifications to the opinion, the expert's experience in the field and the extent of work that is undertaken by the expert for the responsible entity.

Benchmark 5: Appointing and monitoring service providers

The responsible entity should only engage key service providers who are necessary for the operation of the agribusiness scheme where:

(a) the engagement is approved by the board of the responsible entity in writing and in accordance with a documented policy;

(b) the agreement is reviewed annually as against set performance criteria/measures; and

(c) it is certified by the board of the responsible entity that the engagement is on an arm's length basis.

Disclosure against the benchmarks: "If not, why not"

Responsible entities of agribusiness schemes in which retail investors invest should address the benchmarks in their disclosure on an "if not, why not" basis. These benchmarks follow the "if not, why not" model of disclosure recently deployed in implementing new disclosure benchmarks for the infrastructure and over-the counter contracts for difference sectors (Regulatory Guide 231 Infrastructure entities: improving disclosure for retail investors and Regulatory Guide 227 Over-the-counter contracts for difference: Improving disclosure for retail investors) .

Agribusiness schemes must disclose within the first few pages of any PDS or ongoing disclosure, whether they meet the benchmarks imposed and if not, why not. "Why not" means explaining in the relevant disclosure documents how the responsible entity/issuer will deal with the concerns underlying the relevant benchmark.

New disclosure principles

Responsible entities of agribusiness schemes in which retail investors invest should apply the following disclosure principles in all but exceptional circumstances:

1. Investor financing arrangements

If the responsible entity or a related party offers or arranges finance for the scheme's investors, the responsible entity should clearly and prominently disclose in the PDS: the details of the financier; the amount, if any, the responsible entity will receive in relation to the financing; and that the investor will remain liable to repay the amount lent under the finance agreement should the scheme fail. Further, the responsible entity should provide an investor with a copy of the finance agreement before the finance facility is entered into.

2. Track record of the responsible entity in operating agribusiness schemes

The responsible entity should disclose the experience and resources it has available to operate agribusiness schemes and whether its existing schemes have produced positive returns for investors, including providing details on the number and types of schemes the responsible entity currently operates and if these schemes are generating positive returns for investors.

3. Responsible entity's financial position

The responsible entity should disclose a summary of its financial position and arrangements in any PDS, including any unfunded obligation it has in respect of the agribusiness scheme in question. The responsible entity should further disclose details on any funding it relies on and any guarantees and indemnities it has entered into.

4. Land, licenses and water

The responsible entity should disclose the arrangements it puts in place to secure access to resources and the infrastructure to be used in the agribusiness scheme. The risks associated with these arrangements should also be set out.

5. Replacement of the responsible entity

The responsible entity should disclose whether there are any restrictions on the ability of any replacement responsible entity to access the resources required to continue the operation of the agribusiness scheme. The responsible entity should also disclose any fees or payments that may be incurred as a result of the change of responsible entity and any resultant effect the change of responsible entity may have on the investors, or any agreements that have been made in relation to the scheme.

Advertising standards

The new benchmarks and disclosure principles addressed above are to be supported by any advertising material used in relation to the agribusiness scheme. In addition to the new benchmarks and disclosure principles, RG 232 sets out certain new standards for advertising. These relate to repayment of principal investments, returns on investments and investment ratings and consistency with PDS disclosure. ASIC expects responsible entities to comply with these standards as of 30 January 2012 (being the date of publication of RG 232).

Transition period: Implementation of benchmarks/disclosure principles

Responsible entities must comply with the new policy on and from 1 August 2012. Therefore, any new PDS dated on or after 1 August 2012, should clearly and prominently address the benchmarks and apply the disclosure principles and any existing PDS should, by 1 August 2012, either: include the benchmarks and disclosure principles information on a website clearly referred to in the PDS; or update the PDS to include that information.

In respect of existing closed agribusiness schemes, the responsible entities will be encouraged as a matter of best practice to disclose the new disclosure principle information, as part of their ongoing disclosure obligations to existing investors.

All disclosure documents relating to agribusiness schemes will be reviewed by ASIC for a period of six months as from 1 August 2012 and ASIC will assist responsible entities in ensuring disclosure expectation are understood. At the end of the transition period, ASIC will continue to review disclosure documents on a risk -based approach. ASIC will also have the ability to use its stop order powers if it considers a PDS does not comply with the PDS requirements.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.