As reported in our article How should responsible entities manage liquidity in the COVID-19 environment?, on 20 March 2020 ASIC wrote to responsible entities reminding them of their liquidity requirements in the current market environment (the “RE Correspondence”). In the RE Correspondence, ASIC signalled it would grant relief for non-liquid schemes in the case of investor hardship. This article considers in what circumstances this relief might be granted.
Hardship relief
The effect of the COVID-19 pandemic on the economic environment increases the risk that a previously liquid scheme becomes non-liquid. Should a scheme become non-liquid, a responsible entity would need to determine whether redemptions should be suspended to protect the interest of all members of that scheme.
If a decision to suspend redemptions is made, no members will be able to withdraw from the scheme. This is because, under the Corporations Act, a responsible entity must treat all members equally and is unable to make exceptions on suspended withdrawal requests.
However, during the 2008 financial crisis, ASIC provided relief to allow responsible entities with non-liquid funds to return some capital to certain members experiencing financial hardship. In the RE Correspondence, ASIC indicated it would consider providing this hardship relief to responsible entities on a case-by-case and rolling basis. Responsible entities are able to apply for one or both types of relief.
ASIC considerations in granting relief
ASIC Regulatory Guide 136 Funds Management: Discretionary Powers (RG 136) refers to ASIC’s powers to grant hardship relief and outlines the factors ASIC may consider when determining whether to grant relief, including:
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The reasons why, and for how long, the scheme has been frozen.
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Whether retail client investors would have had a reasonable expectation when they invested in the scheme that they could redeem on the basis that the fund is liquid.
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The amount of available cash relative to the amount of registered scheme assets and funds under management.
Relief granted during the GFC
During the Global Financial Crisis, rolling withdrawal hardship relief was generally granted by ASIC with various conditions. These conditions were typically:
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A limit on the number of hardship withdrawals a single member could make.
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A cap on the dollar amount each member could withdraw.
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That the responsible entity acts reasonably in making discretionary decisions and documents why a decision to permit or refuse a hardship withdrawal was made.
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That in each case, the responsible entity is satisfied: a) The member has experienced hardship or is likely to experience hardship, and; b) Following the withdrawal, the scheme property would include sufficient liquid assets for the day to day operation of the scheme.
If you need our assistance
Our Funds Management and Financial Services Team is well placed to assist you if you need assistance applying for ASIC relief. Please contact Brendan Ivers, Justin Gross or Jack Peterson for more information.
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