To help you navigate and respond to the fallout from the COVID-19 crisis, our Funds Management team has put together practical answers to the critical questions every fund manager, responsible entity and trustee should ask now. We have also included links to more detailed information about some topics to assist you.

We encourage you to contact our Funds Management lawyers with your queries and for advice on what steps you should take next. We are here to help.

Liquidity and asset valuations

Is my fund liquid?

The COVID-19 pandemic may impact the ability of your fund to sell ordinarily liquid assets for fair value. As a trustee you have duties and obligations to your fund and these may require you, in the interests of all investors, to not sell assets. If your fund becomes illiquid you need to consider whether to suspend redemptions to protect the interests of all investors. You must also consider whether changes need to be made to processes around applications, distributions and distribution re-investments. If your fund is a registered scheme, you may be required to notify ASIC of any decision to treat the fund as illiquid or to suspend withdrawals.

You can click here for more information about liquidity and withdrawal rights during the COVID-19 pandemic. You can also read more about unit pricing in these volatile times here.

Are my fund's asset valuations current?

The value of your fund’s assets may have changed materially, so you must consider whether you should obtain new valuations to ensure unit price calculations are fair and equitable. See here for ASIC’s expectations for REs exercising discretions when determining the value of fund assets.

APPLICATIONS, REDEMPTIONS AND DISTRIBUTIONS

Can I continue to process applications for redemptions?

You must consider your trustee duties when striking the unit price applied to process applications and withdrawals. If the fund’s assets are not traded on an exchange where there is price transparency, then the value of the assets may have changed materially due to the COVID-19 pandemic. If that is the case, then you need to consider whether you can process both applications and redemptions.

Failing to do so could mean transactions are processed at unit prices which are not fair and equitable, and it may not be in the best interest of investors for you to continue processing applications and redemptions for some time. Furthermore, if your fund becomes illiquid, you need to consider whether to suspend both applications and redemptions.

You can read more about unit pricing in volatile times here.

Will there be any impact on my fund’s ability to provide distributions or continue to offer a distribution reinvestment plan?

You will need to let investors know if your fund is no longer able to pay distributions. If you would typically offer distribution reinvestment, then you must ensure you are able to calculate a unit price which is fair and equitable having regard to all investors.

ASSET MANAGEMENT AND FUND STRUCTURE

Is my fund compliant with the borrowing covenants under its loan agreements?

If the value of your fund’s assets has decreased, then loan covenants, particularly in relation to financial ratios, may be breached. You should test the covenants in your fund’s loans and consider whether you need to seek advice from us on your options in engaging with the lender.

My fund is a mortgage fund, is there any specific action I should take about the assets I manage?

You should actively review your loan portfolio to identify any loans in arrears or default, and immediately commence management of these loans. You may want to consider whether any loans in the portfolio can be varied or extended if this would be in the best interest of investors.

My fund has a fixed term and prior to the covid-19 pandemic I would have been Preparing to sell the asset(s). Can I extend the term until the market conditions normalise?

This will depend on the provisions in your fund’s constitution and what you told investors in the fund’s offer document. It is likely an extension would need to be approved by investors and for registered schemes this would require you to hold an investor meeting pursuant to the Corporations Act. For unregistered funds, it is possible you will have more flexibility to extend the term without investor approval, but this must be assessed on a case-by-case basis.

Can I change my fund’s investment strategy?

This will depend on your fund’s constitution and the disclosure in the offer document. It is likely your constitution will allow your fund to invest in a broad range of investments; however, it may be misleading and deceptive for the fund to invest otherwise than in accordance with the strategy disclosed in the offer document. Depending on the extent of the change to the investment strategy, it may be prudent to obtain investor approval.

Can I wind up my fund early or otherwise restructure the fund?

This will depend on the provisions in your fund’s constitution. The constitution will contain provisions about how to wind up the fund, and if the fund is a registered scheme you will also need to comply with the provisions of the Corporations Act. The constitution may also provide for restructure of the fund or may need to be amended to introduce restructure provisions which may require investor approval.

DISCLOSURE AND REPORTING

Do I need to update my fund’s offer document?

The COVID-19 pandemic may have impacted the disclosures made in your fund’s offer document. You must consider whether your offer document remains up-to-date and ensure it does not contain information which is misleading or deceptive. Areas to consider include investment strategy, liquidity, applications, withdrawals, fees and risks. If you are the responsible entity (RE) of a registered property fund or of a registered mortgage fund, then you will also need to update your RG 46 (ASIC Regulatory Guide 46: Unlisted property schemes: Improving disclosure for retail investors) disclosures and RG 45 (ASIC Regulatory Guide 45: Mortgage schemes: Improving disclosure for retail investors) benchmark reporting, as relevant.

Click here for more information about updating offer documents so as not to be misleading or deceptive.

My fund is a registered scheme, how do I update my fund’s offer document?

You may do this in several ways: by issuing a new product disclosure statement, a supplementary product disclosure statement, or a website update. Your choice will depend on the nature of the information you are updating. For example, if the updated or new information is not materially adverse to investors, then your update may be made by a notice on your website.

Click here for more information about how to update your PDS for COVID-19.

What are my continuous disclosure obligations?

Registered funds with 100 or more members which are unlisted must meet the continuous disclosure requirements of the Corporations Act. If those provisions apply to your fund, then you must consider whether the current circumstances might have a material effect on the price or value of fund units. We expect that may be the case, even though the position is likely to change rapidly. However, the Treasurer has recently issued a temporary change which means these obligations are relaxed for the next six months and the objective test in relation to disclosure obligations is replaced.

Previously, the disclosing entity had to disclose information a ‘reasonable person’ would expect, if it were generally available, to have a material effect on the price or value of the units. However, from now until 25 November 2020, the disclosing entity will only be in breach of its disclosure obligations if the entity knows or is reckless or negligent with respect to whether that information would, if it were generally available, have a material effect on the price or value of the units.

Click here for more information about the continuous disclosure obligations and some traps for REs.

COMPLIANCE AND ADMINISTRATION

What do I need to do if I have breached the conditions of my Australian financial services licence (AFSL)?

If you have a registered fund, then you need to assess and treat any actual or potential breaches in accordance with your compliance plan for the fund. You will need to consider whether the reporting requirements of the Corporations Act require you to report the breach to ASIC or an overseas regulator (if your fund is offered overseas).

If you have an unregistered fund, then you must continue to meet the conditions of your AFSL and consider whether you are required to report the breach to ASIC.

You will need to submit any breach reports to ASIC via the ASIC Regulatory Portal. The new portal replaces previous submission channels. ASIC’s guidance on breach reporting can be found here.

Is there relief available from the conditions of my AFSL, for example, in relation to my financial requirements, breach reporting or updating of cashflows?

The impact of the COVID-19 pandemic may have caused you to breach your statutory duties as an AFS licensee. You may be unable to comply with all conditions on your AFSL. For example, if the COVID-19 pandemic is likely to impact your revenue, then you must prepare updated cashflows. While the new Coronavirus Economic Response Package Omnibus Legislation provides some relief to directors in relation to insolvent trading, to date equivalent relief has not been afforded to AFS licensees in relation to breaches of licence conditions. We are closely monitoring this issue, and you can click here for a recent article which looks at what the legislation means for the funds management industry.

My fund is also offered overseas (for example in New Zealand or Singapore). What do I need to do?

You must consider your obligations under the relevant mutual recognition scheme as these may include ongoing notification requirements for any changes to the fund which may have been caused by the COVID-19 pandemic.

What ‘back-office’ issues should I consider?

Questions you should ask yourself include:

1. Are my business continuity plan, disaster recovery plan and complaints handling procedures in order and adequately resourced?
2. How will my fund transition to an electronic environment? For example, can I accept digital signatures and scanned copies of verification documents for Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF) purposes? Have investors agreed to receive financial reports and other fund information electronically or do I still need to post these documents to investors?
3. Will my business continue to be able to post documents to investors and other stakeholders if required during any lockdown period?
4. What is the financial health of my fund’s service providers?
5. Has the COVID-19 pandemic situation triggered any responsibilities, obligations or other issues under my fund’s agreements (eg investment management agreement, distribution agreements, registry, administration and custody agreements)?
6. Do any of the fund’s material contracts contain force majeure or material adverse change clauses? If so, what are the impacts of these clauses, if any? Click here for an article exploring commercial contracts and force majeure.

Also, click here for an article highlighting some specific challenges, tips and traps for AFS licensees in the current situation.

TRUSTEE, RESPONSIBLE ENTITY AND DIRECTOR DUTIES

What are my trustee, RE and director duties?

Although COVID-19 has created the most uncertain of times, there is no relaxation of the statutory and common law duties imposed on trustees and REs and their directors (other than the six-month moratorium on insolvent trading which is discussed in this article). Therefore, in continuing to operate your fund as a trustee you must continue to act in the best interest of investors and treat them equally and fairly, whilst your directors must continue to exercise reasonable diligence and vigilance and act to protect the value of fund assets. As an AFS licensee, you must also ensure your financial services are provided efficiently, honestly and fairly. Click here for an article explaining the the 'efficiently, honestly and fairly' standard for financial services.

Please click here to view our Guideline for Trustees and Responsible Entities.

Do I need investor approval of the decisions I propose to make in relation to my fund?

As the trustee, you are likely to have broad powers under the fund's constitution to do all things possible under the law as though you were the absolute owner of the assets of the trust acting in your personal capacity. The COVID-19 pandemic has created unprecedented circumstances and whether you need investor approval may be a question of fact based on the circumstances at the time. You should also consider whether to approach the court for appropriate sanction. We can offer you advice on these issues as matters arise.