As the impact of COVID-19 is felt across global markets, issuers of interests in managed investment schemes and other financial products need to mindful of how market conditions and government measures may be impacting the current disclosure made to investors. This article looks at some of the major issues for managed investments schemes, particularly for those Product Disclosure Statements (PDS) which remain on issue. Of course, in addition to any disclosure implications, responsible entities need to be aware of the scheme's constitution, and continue to comply with a wide range of duties, including the duty to exercise their powers and carry out their duties in the best interests of scheme members.
As a baseline, a PDS must be up to date at the time it is given and must not otherwise be "defective" under the Corporations Act 2001 (Cth). At this stage of COVID-19, some of the relevant sections that issuers should be focusing on, and possibly updating, include significant risks, underlying assumptions, liquidity and redemptions, asset allocations and fees and costs. Of course, issuers need to continually be mindful of how the changing landscape of COVID-19 may continue to impact the information provided to investors, as well as the impact it may have on scheme assets, and the responsible entity itself, and continually monitor and update investors as appropriate.
Of course, for any newly issued PDSs, or PDSs which are reissued during this period, careful consideration of how the product is likely to perform during a COVID-19 environment (having regard to the underlying assumptions made), and appropriate COVID-19 risk disclosure should, as a minimum, be considered and disclosed appropriately.
Examples of matters which may require updating
Significant risks disclosure
We envisage that issuers will need to carefully consider the current risk disclosure made to investors. If, for example, it is anticipated that a scheme's expected earnings will be affected as a result of COVID-19, or the scheme is not expected to perform the way it was intended, issuers should consider whether further risk disclosure is required for investors. For example, issuers of interests in property schemes may need to consider whether the inability of tenants to pay rent will impact the scheme earnings, equity based schemes may need to disclose valuation issues where the underlying stocks the schemes invest in have been suspended from trading and schemes that have a high exposure to the travel or retail industry would need to consider the impact on its earnings.
Issuers should also consider whether a specific COVID-19 risk disclosure should be made to investors which would be similar in nature to the "GFC disclosure" we saw in the previous economic global financial crisis. In this regard, we imagine a generic disclosure that COVID-19 is rapidly changing, it may have a significant impact on the way the scheme performs and the fact that at this stage, it is difficult to ascertain what the impact may be, may be appropriate.
Liquidity and withdrawals
A managed investment scheme that is "liquid" (for the purposes of the Act) may as a result of COVID-19, no longer be. This will impact a scheme's ability to continue to offer withdrawals from the scheme as well as any disclosure made in the PDS regarding the liquidity of the scheme and an investor's ability to withdraw. By way of background, a scheme is "liquid" if "liquid assets" account for at least 80% of the scheme property (where "liquid assets" are, broadly speaking, assets that the responsible entity reasonably expects can be realised for their market value within the period specified in the scheme's constitution for satisfying withdrawal requests (which may be 21 days or more or less, depending on the nature of the assets)).
The liquid nature of a scheme may be impacted by a number of items. For example, where it is believed that the number of withdrawals from a product are likely to increase as a result of COVID-19's market impact to such an extent as to impact the liquidity of the scheme, issuers should consider what changes ought to be made to liquidity references contained in its PDSs (particularly around how liquidity issues are managed, including suspension triggers). This was picked up recently in the letter ASIC sent to industry, where ASIC reminded responsible entities that they have a duty to continue to actively monitor the levels of withdrawals and applications and consider whether these are consistent with the liquidity of the underlying assets of the scheme. Of importance, ASIC reminded responsible entities that in assessing the liquidity of the scheme, it needed to consider both the short term and whether the scheme will remain liquid in the longer term to meet future withdrawal requests.
Of course, in circumstances where COVID-19 may have impacted the ability to value scheme assets or to realise scheme assets, this may have a similar impact on a scheme's liquidity. Such impact may also mean that unit pricing may be suspended (which will impact the ability to process withdrawal requests).
Issuers will also need to consider how withdrawals (and unit pricing) have been described in PDSs and whether there is any need to further update this disclosure so investors understand the risk that the scheme may need to suspend withdrawals (or the calculation of unit prices) in response to COVID-19 (subject of course to the scheme constitution providing an appropriate mechanism for such suspension). As an aside, responsible entities should consider whether ASIC's powers to grant hardship relief to investors where withdrawals have been suspended or a scheme otherwise becomes non-liquid is appropriate, which we discuss further below.
Fees and costs section
Given the current market volatility, it is not surprising that schemes are incurring significantly increased trading activity. This is also the case as issuers sell assets to fund liquidity for investors seeking to redeem their investment. This increase in activity may mean that schemes are bearing higher transactional and operational costs, which may impact the current buy / sell spread disclosure made to investors. Of course, if an issuer becomes aware that any fees or cost estimates (including the indirect cost ratio) disclosed in the PDS are no longer accurate, it will need to consider the materiality of such changes, how the amounts are described in the PDS (in particular, the buy / sell spread) and whether it is required to update the relevant amounts stated in the PDS.
Asset allocation statements
Issuers should also take care when altering asset allocations to offset exposure to riskier asset classes and only do so in line with the allocations specified in the PDS. If an issuer is required to make investments outside the specified allocation, then it should consider amending its PDS first (assuming of course, the PDS has not otherwise given it the flexibility to move outside the relevant allocations).
Issuers should also consider the impact that COVID-19 may have had (and may continue to have) on any assumptions made in terms of a product's performance. As such, to the extent that any underlying assumptions are now outdated or do not otherwise consider the impact of COVID-19 (or a pandemic generally), then to the extent issuers are able to reasonably estimate the impact, such economic forecasts (and other financial information) should be updated to take into account this impact.
Mechanisms for updating a PDS
Once an issuer has identified the information that needs to be updated, consideration will also need to be given as to the mechanism for updating the PDS.
The quality and nature of the update will need to be weighed against the criteria for updating a PDS via a website. Where the relevant updates include materially adverse information to investors, issuers will need to consider replacing the PDS or issuing a supplementary PDS. Of course, issuers of shorter PDSs will not be able to issue a supplementary PDS and will either need to issue a new shorter PDS or be comfortable that the updated information properly sits within the relevant incorporated by reference materials.
When issuing a supplementary PDS, issuers should also ensure that they can readily identify those applications that are made after the issued date of the supplementary PDS so as to be comfortable that the applicant has received the supplementary PDS.
In addition to updating PDSs, issuers may also need to issue a significant event notice (SEN) to product holders. A SEN should be issued where there has been a significant event affecting a matter, being a matter that would have been required to be disclosed in a PDS if the PDS had been prepared the day before the event occurred. The SEN must include all information that is reasonably necessary for a product holder to understand the nature and effect of the event. If the change is an increase in fees, then the SEN needs to be issued 30 days before the change takes place. Issuers should of course also consider their continuous disclosure obligations (as they apply to ED securities) where the SEN requirements do not apply to its products.
Additional requirements for listed funds
Responsible entities of listed registered schemes will also need to consider any additional disclosures to the market. Under ASX Listing Rule 3.1, once an entity becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the entity's share price, the entity must immediately disclose that information to the ASX.
ASIC relief for "frozen" funds
Responsible entities which find themselves in the position of suspending withdrawals or otherwise declaring a scheme as non-liquid should consider ASIC's powers to grant hardship relief to investors. A responsible entity may apply to ASIC seeking relief from the withdrawal provisions and equal treatment provisions under the Act to facilitate partial investor access to funds in cases of hardship. The criteria for hardship includes:
- severe financial hardship;
- unemployment; or
- compassionate grounds, which includes investors requiring access to funds in order to help pay for medical costs or funeral expenses.
ASIC can also provide relief to responsible entities of non-liquid schemes by allowing them to implement a 12-month "rolling" withdrawal offer. The "rolling" withdrawal offer generally will apply for one calendar year and apply to all withdrawal opportunities during that year.
In light of the economic impact caused by COVID-19, issuers of financial products should be vigilant in ensuring that disclosures in PDSs remain up to date. Given the changes currently being experience, issuers should be aware that posting updated information on their website may not be an available option. Meanwhile, responsible entities of non-liquid schemes should consider applying for relief from ASIC in the event withdrawal issues arise.
Thanks to Nick Killalea for his help in writing this article.