ASIC today released new disclosure benchmarks and principles for infrastructure entities to improve investor awareness of the risks associated with investing in these products.
The risks of investing in infrastructure entities were highlighted during the global financial crisis. The response of retail investors to loss of capital experienced during the crisis indicated that existing disclosure did not effectively communicate an understanding of the characteristics and risks of infrastructure entities to investors.
Regulatory Guide 231 Infrastructure entities: Improving disclosure for retail investors (RG 231) outlines nine benchmarks and eleven disclosure principles that apply to infrastructure entities, aimed at addressing the risks peculiar to infrastructure entities.
ASIC Chairman Greg Medcraft said, ‘It is one of ASIC’s priorities to ensure that investors and financial consumers are confident and fully informed before they invest in financial products. Improved investor understanding of the infrastructure sector and effective disclosure of investment risk is particularly important because there is an increasing tendency for infrastructure to be funded by capital raised from the general public.
‘These disclosure benchmarks and principles, developed after an extensive period of industry consultation, respond to concerns of many retail investors that they did not properly understand the complex business and operational characteristics or risks associated with infrastructure entities’, said Mr Medcraft.
RG 231 is the next in a series of ‘if not, why not’ disclosure benchmarks for sectors that pose particular risks to consumers to ensure they are informed and can be confident when making investment decisions. It follows Regulatory Guide 227 Over-the-counter contracts for difference: Improving disclosure for retail investors (RG 227) which provided benchmarks for the over-the-counter contracts for difference sector.
Infrastructure entities must disclose whether they meet the benchmarks and if not, why not. ‘Why not’ means explaining how a responsible entity deals with the business factor or the issue underlying the benchmark. The benchmarks relate to topics such as corporate structure and management, remuneration of management, classes of units and shares, substantial related party transactions, cash flow forecast, base-case financial model, performance and forecast, distributions and updating the unit price.
Infrastructure entities are also required to disclose against 11 disclosure principles addressing key relationships, management and performance fees, related party transactions, financial ratios, capital expenditure and debt maturities, foreign exchange and interest rate hedging, base-case financial model, valuations, distribution policy, withdrawal policy, and portfolio diversification.
In addition to the benchmarks and disclosure principles, RG 231 also outlines the standards ASIC expects responsible entities to meet when advertising infrastructure entities to retail investors. These standards are consistent with draft guidelines for the advertising of financial products and financial advice, released in November 2011.
Responsible entities of infrastructure entities must disclose the benchmark and disclosure principle information in any existing and new disclosure dated on or after 1 July 2012.
ASIC has also published an investor guide for retail investors and financial consumers on the MoneySmart website to provide more information about this product class.
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