Most responsible entities that exercise discretions in calculating unit prices would by now be aware of the new requirements they will need to meet from 1 May 2007. By way of background, after extensive negotiations between the managed funds industry and ASIC, ASIC in December 2005 issued Class Order 05/1236 (the Class Order) to permit and regulate the use by responsible entities of pricing discretions. Relief under the Class Order is conditional on a number of requirements set out below.
The relevant Corporations Act 2001 (Act) provisions contained in section 601GA mandate the inclusion in the constitutions of managed investment schemes of ‘adequate provision’ for the consideration to be paid to acquire an interest in the scheme and the right of members to withdraw from the scheme. ASIC has previously interpreted this requirement to mean that the relevant issue price or withdrawal price must be independently verifiable, such that the responsible entity would not be permitted to exercise discretion.
What types of discretions are covered by the Class Order?
The requirements of the Class Order apply to discretions which affect unit prices directly, as well as indirectly. These include discretions relating to:
estimating an allowance for transaction costs;
selecting a valuation method;
determining entry or exit (application/withdrawal/switching) fees;
determining the total net asset value of the scheme, where this is to be used in valuing an interest;
allocating assets, liabilities, revenue and expenses between classes;
rounding off the issue price or withdrawal amount;
determining the time at which asset values and liabilities will be calculated;
estimating future liabilities for which provision should be made;
including future benefits as assets and estimating their values; and
determining policies on depreciation of assets.
What are the requirements under the Class Order?
In order for the relief under the Class Order to be available, the responsible entity (or its nominee) must:
act reasonably in exercising the discretion;
exercise the discretion in a way that is consistent with ordinary commercial practice, unless impracticable to do so;
exercise pricing discretions in accordance with a current documented policy;
ensure that the documented policy does not involve the creation of other discretions and is the only policy applicable to the exercise of a particular discretion at any one time;
inform members that they may obtain copies of the documented policies and written explanations at no extra charge;
provide a copy on request and at no charge of any documented policy or written explanation to any member of the scheme or any person who has received (or should have received) the scheme’s PDS; and
the scheme’s PDS must also include statements to the effect that copies of the documented policy or written explanation are available from the RE at no charge; and
document instances of situations where it exercises a discretion in relation to which there is no documented policy at the time of exercise or in a way that involves a departure from an existing policy.
Timing for compliance
Under the Class Order, compliance with the conditions of relief was not required until 1 May 2006. However, ASIC has taken a “no action” position whereby it agreed to not take enforcement action for a breach of the requirements under the Class Order until 1 May 2007 provided the responsible entity:
takes reasonable steps to comply with the conditions of the Class Order as soon as reasonably practicable; and
continues to report to ASIC any significant breach of the law arising out of the exercise of unit pricing discretions under s 912D of the Act.
What should responsible entities now be doing?
The Class Order requires the formalisation and documentation of all responsible entity discretions in relation to unit pricing. This will require review of all scheme documentation, identification of discretions, review of existing policies and procedures relevant to unit pricing. Responsible entities should now, if they have not already:
consider and identify what pricing discretions they exercise;
review existing operational documents in relation to pricing discretions to ensure they comply with the requirements of the Class Order and consider whether any amendments are required;
review existing PDSs, consitutions and compliance plans and consider whether they need to be supplemented or replaced to deal with unit pricing discretions;
consider when and how to notify investors about accessing unit pricing policies; and
consider whether any relief or clarification from ASIC is required.
Please contact any member of the Hall & Wilcox Financial Services team if you require assistance in complying with the Class Order.
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