media release

07-280 ASIC’s next steps towards better disclosure for unlisted and unrated debentures

Published

As part of its progress in implementing its ‘Three Point Plan’ for the unlisted and unrated debentures, ASIC has:

‘The release of ASIC’s finalised benchmarks is a major milestone in implementing the Three Point Plan for this market which we announced at a hearing of the Senate Standing Committee on Economics on 30 May 2007. We are grateful for the input we received in the consultation process. We will now work with debenture issuers, trustees and advisers to assist them to comply with the new regulatory guide’, ASIC Chairman, Mr Tony D’Aloisio said.

‘In addition, while our advertising guide is taking shape, we will benefit from a further short consultation on some issues and, hence, we have released it in draft form. Our objective is to have the guide in place in December 2007’, Mr D’Aloisio went on to say.

Regulatory Guide 69 Debentures – Improving disclosure for retail investors(RG 69).

Debenture issuers, industry and consumer groups together made over 60 submissions in response to ASIC’s consultation paper released on 23 August 2007. In its regulatory guide, ASIC has decided to proceed with a new disclosure regime built on an ‘if not, why not’ basis of reporting, but has modified some of the benchmarks in response to the submissions it has received.

Accompanying the regulatory guide are:

  • an outline of submissions received, together with reasons why ASIC may not have followed certain suggestions, and
  • a Regulation Impact Statement, justifying that the benefits outweigh the costs of compliance in this exercise.

A dedicated ASIC team will now work with all existing unlisted and unrated debenture issuers to discuss the benchmarks with them and their preparation for the enhanced reporting they will be required to provide to investors by 1 March 2008.

Any new issuers entering the market from 1 December 2007 will be required to disclose against the benchmarks from that date.

Consultation Paper 94 Debenture advertising and draft regulatory guide on debenture advertising (CP 94)

After considering submissions in response to the consultation paper, ASIC has decided to consult for a further period of one month on the issue of debenture advertising and has released a draft regulatory guide as part of the consultation paper to facilitate this further consultation.

In particular, ASIC is interested in assessing, with industry, the practical issues faced by publishers in screening and detection of advertisements. Comments on the draft regulatory guide are due by 30 November 2007.

ASIC will release a final regulatory guide in December and will expect debenture issuers and publishers to comply with the guide from early January 2008.

Investor research and education

In addition to the research work conducted to date, ASIC has appointed a market research organisation to conduct further and more detailed investor research to obtain better information about the characteristics, preferences and decision-drivers of investors in these products. This will also involve testing a draft investor guide among a sample of retail investors to evaluate its usefulness in helping investors assess investments using the enhanced disclosure.

ASIC expects to finalise its investor research by the end of the year and will then use the results to help develop education programs for retail investors, which will commence in March 2008 to coincide with enhanced reporting against the benchmarks by debenture issuers.

Background

ASIC’s new approach is built around the following benchmarks, which are designed to help retail investors and their advisers to assess risk and the risk-reward prospects of unlisted and unrated debentures:

1. Issuers should have a minimum of 20 per cent equity where more than a minor part of their debenture funds are invested in property development. In other cases, equity should be a minimum of 8 per cent.

2. Issuers should estimate their cash needs for the next three months and have cash or cash equivalents on-hand to meet this need.

3. Issuers should clearly disclose their approach to rollovers, including whether the ‘default’ is that debenture investments with them are automatically rolled-over.

4. Issuers should have their debentures rated for credit risk by a recognised credit rating agency. The other benchmarks apply even if the debentures are rated.

5. Issuers who on-lend funds should provide detailed disclosure of their loan portfolio.

6. Issuers who on-lend funds should disclose how many loans they have made to related parties and what assessment and approval process it follows for these loans.

7. Issuers who are involved in or lend money to property related activities should value those properties. Development property assets should be valued on an ‘as is’ and ‘as if complete’ basis. ASIC also expects issuers to disclose the cost of the property. All relevant valuations should be disclosed if a loan makes up more than 5 per cent of the issuer’s portfolio.

8. Issuers lending money to property development are required to maintain a 70 per cent loan to valuation ratio on ‘as if complete’ valuation. Issuers lending money to other property are required to maintain an 80 per cent loan to valuation ratio.

Requiring disclosure against these benchmarks (and reporting on ‘if not, why not’ basis), requiring those involved with issuers (e.g. trustees, advisers, valuers and auditors) to use those benchmarks in carrying out their responsibilities and educating investors and potential investors to understand those benchmarks and use them in their decision-making process make up the main principles of ASIC’s new approach to debentures.

End of release

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