ASIC Issues Consultation Paper 140 Responsible Entities: Financial Requirements


On 30 September 2010, Australian Securities and Investment Commission (ASIC) released Consultation Paper 140Responsible Entities: Financial Requirements (CP140).  ASIC has stated that one of the reasons for the issue of CP140 is that the financial requirements for Responsible Entities (RE) have not been reviewed since their implementation in 2002.  It is also a response to the issues that arose, and continue to arise, in relation to a number of REs and managed investment schemes which collapsed during the recent financial crisis, in particular a number of agricultural schemes.

CP140 sets out ASIC’s proposals on the financial requirements to apply to REs of registered managed investment schemes, in particular the net tangible asset (NTA) capital requirements.

The three main proposals are to:

  • restrict when REs may give a guarantee or indemnity;
  • require REs to maintain a rolling 12-month cash flow projection; and
  • amend the NTA capital requirements.

ASIC has stated that the purpose of the proposals is to:

  • ensure an RE has adequate financial requirements to meet its operating costs (e.g. the costs of ensuring compliance with the Corporations Act) throughout the life of its schemes;
  • align the interests of REs and scheme investors by ensuring REs are entities of substance and that shareholders in REs have sufficient equity in the business to have a real incentive to ensure its success;
  • limit the risk that an RE will become insolvent because it has assumed liability for the debts of others, including members of its corporate group (e.g. under a guarantee, indemnity or tax-sharing arrangement);
  • ensure Australia provides comparable investor protection to other leading financial centres and comparable regulatory regimes; and
  • provide some level of assurance that, if the RE does fail, there is sufficient money available for the orderly transition to a new RE or to wind up the scheme.

Conversely, ASIC has noted that the proposals do not seek to:

  • prevent REs from becoming insolvent due to poor business models or cash flow problems;
  • prevent schemes failing due to poor business models or cash flow problems; or
  • provide compensation to scheme members.

Guarantee and indemnity restriction

CP140 proposes limiting and restricting the circumstances when an RE may provide a guarantee or indemnity.  The aim is to reduce the risk to REs associated with financial issues that affect other entities (whether related or not).

The proposal is to prohibit REs from giving guarantees in their capacity as RE of the scheme, or in their personal capacity if they manage more than one scheme.

The proposal would also restrict an RE from providing an indemnity in its capacity as RE of a scheme other than where that indemnity relates to that scheme’s default.

Where the RE is part of a tax consolidation group, it would be required to execute a tax sharing arrangement that ensures the RE can only ever be liable for its portion of any group tax liability.

Rolling 12-month cash flow projections

ASIC proposes replacing the current 3-month cash flow projection requirement with a rolling 12-month cash flow projection.

NTA capital requirements

ASIC proposes to alter the minimum NTA capital requirements applicable to REs.

Currently, two different options are proposed:

1. An RE is to hold the greater of:

  • $150,000;
  • 0.5% of the average value of scheme property (subject to a $5 million maximum); and
  • 10% of the RE’s average gross revenue.

2. An RE is to hold 10% of the RE’s average gross revenue with a minimum of $500,000 and no maximum.

If, however, the RE’s average gross revenue is below a minimum percentage of the average value of scheme property, then that minimum percentage (set between 1 and 2%) will be used to calculate the NTA.

CP 140 defines “gross revenue” to mean the revenue of the RE and includes any fees paid by the schemes of the RE to the RE or third parties in relation to the performance of the RE’s obligations for the schemes, even if some of those obligations may be actually performed by third parties. The gross revenue measure aims to deal with operating risks associated with REs who engage in activities that are unrelated to their scheme operation activities, or REs that hold high levels of scheme assets.

Where an RE does not use a scheme custodian with $5 million NTA, then that RE would still be required to hold a $5 million NTA, subject to the current exemptions in ASIC Regulatory Guide 166 Licensing: Financial requirements.

For REs with a higher operating risk (such as significant counterparty or market risk), ASIC maintains the discretion to determine higher NTA requirements.

ASIC has also proposed amendments to what may be included in the NTA, providing that only eligible undertakings provided by an ADI or approved by ASIC may be included.  Previously accepted undertakings, such as undertakings by listed entities on the basis of specified net asset levels, will no longer be accepted.

Importantly, an RE will be required to hold 50% of the NTA (subject to a minimum of $150,000) as cash or cash equivalents, and the balance held in liquid assets.  A liquid asset is defined as:

  • money in an account, or money on deposit with a bank that is available for withdrawal immediately, or otherwise on maturity of a fixed term that does not exceed six months; or
  • a bank bill with a maturity not exceeding six months; or
  • an asset the RE can reasonably expect to realise for its market value within six months,

and must be free from encumbrances or any right of set off.

Implementation period

The reforms are expected to commence:

  • new REs – on 1 July 2010; and
  • existing REs – ASIC has proposed a transition period of either 12-months (until 1 July 2012), or 24-months (until 1 July 2013).


Developments are occurring which aim to improve the financial strength of REs, but it is important that you question prospective REs and do your due diligence.

One Investment Group has always ensured that each of its REs has a robust financial structure, appropriate for the funds it manages.  Even prior to the release of CP140, One Investment Group’s REs have;

  • Refused to provide guarantees or indemnities, other than for the benefit of schemes and with appropriate limitation of liability clauses;
  • Maintained rolling 12-month cash flow projections; and
  • Ensured their NTA capital requirements exceed the minimum requirements.