Monday 25 June 2007 LAWFUEL – The Legal Newswire – ASIC today relea…

Monday 25 June 2007 LAWFUEL – The Legal Newswire – ASIC today released updated versions of Policy Statement 166 Licensing: Financial requirements [PS 166] and Pro Forma 209 Australian financial services licence conditions [PF 209]. ASIC has also withdrawn three guides for Australian financial services (AFS) licensees given clarifications to our policy and guidance. The updates The updated versions of [PS 166] and [PF 209] include a number of clarifications and additional illustrations consistent with existing policy.

There are two minor changes to ASIC’s policy on financial requirements as follows: • An amendment to the calculation of ‘surplus liquid funds’ to allow the addition of a percentage of non-current assets for certain AFS licensees who are eligible providers. • An amendment to the standard adjustments that need to be made by AFS licenses who underwrite (or sub-underwrite) financial products that are subject to statutory exposure periods. The changes respond to industry related queries about the application of ASIC’s financial requirements policy and some of the existing licence conditions. The amendments will help licensees and practitioners in applying ASIC’s policy and complying with their licence conditions and effectively reflect the commercial circumstances of certain businesses.

The changes come into effect immediately. An AFS licensee who wishes to take advantage of the changes to PF 209 must apply for a variation to its AFS licence using ASIC form FS03, requesting that the revised versions of all of the conditions and definitions in PF 209 apply under their licence. For more information on how to apply for a licence variation, see Part 1 of the AFS Licensing Kit. The attachment to this information release gives a summary of the nature and purpose of the amendments. Copies of the updated publications are available ASIC website via www.asic.gov.au/fsrpolicy or by calling the ASIC Infoline on 1300 300 630. The withdrawn guides ASIC has withdrawn the following three licensing guides: • Meeting the financial requirements for your AFS licence: Compliance with Policy Statement PS 166—An ASIC guide (January 2004)

• Responsible officers: Demonstrating compliance with organisational competency obligations—An ASIC guide (July 2003) • Small business and your AFS licence: Compliance with Policy Statements 164 and 181—An ASIC guide (December 2004) The guides are no longer needed as the key guidance they provide has been or will be incorporated into PS 166, the AFS licensing Kit (reissued in November 2005) and the planned update of Policy Statement 164 Licensing: Organisational capacities PS 164 which ASIC intends to issue by September 2007. ASIC released two consultation papers on updating PS 164 in November 2006, which give an indication of likely amendments to this policy. For further information contact: Name: John Price Job Title: Director Applications and Licensing Telephone: 03 9280 3639 Mobile: 0403 138 537 Name: Michael van Maanen ASIC Media Unit Telephone: 02 9911 2658 Mobile: 0412 500 351

ATTACHMENT TO [IR 07/28]: SUMMARY OF AMENDMENTS TO [PS 166] AND [PF 209] Policy Statement 166 Licensing: Financial requirements [PS 166] The following is a summary of the main amendments to [PS 166]. There are also some minor editorial amendments throughout [PS 166] to assist AFS licensees understand ASIC’s policy. Section F: Transacting with clients as principal [PS 166.104] to [PS 166.109A] have been rearranged and amended to clarify when the adjusted surplus liquid funds (ASLF) requirement is triggered. Section H: Definitions for calculating financial requirements Adjusted assets [PS 166.132(g)] has been amended to clarify, for calculating ASLF, the amount of assets that can be taken into account to offset an adjustment for a contingent liability if assets will be acquired when a contingent liability crystallises.

This is consistent with the conditions that have applied under [PF 209]. Adjusted surplus liquid funds (ASLF) [PS 166.136(c)] has been amended to clarify the standard adjustments that need to be made to address the risk that contingent liabilities from underwriting (or sub-underwriting) financial products may need to be satisfied within the current period for financial reporting purposes. The effect of this amendment is to extend the 5 business day period during which adjustments do not need to be made so that it does not begin until the first day on which it is lawful to accept applications for the financial products to which the underwritten offer relates.

This will mean that underwriters of financial products that are subject to, for example, statutory exposure periods will not need to make adjustments for contingent liabilities during the exposure period and during the first 5 business days after the end of the exposure period. Eligible undertaking A new paragraph [PS 166.169A] has been inserted to give an example of ASIC’s policy under [PS 166.169] to consider allowing a licensee to treat a financial commitment in a different form to the standard requirements as an eligible undertaking.

The new paragraph says we have allowed a licensee who is custodian of a superannuation entity to, in certain circumstances, treat an approved guarantee under s123 of the Superannuation Industry (Supervision) Act 1993 as an eligible undertaking. Surplus liquid funds or SLF The definition in [PS 166.182] has been amended to allow a licensee who is an eligible provider under paragraph (b) of the definition of eligible provider to add one quarter of its non-current assets (minus any intangibles and non-current liabilities) when calculating its SLF. This only applies to licensees who are listed on a licensed market or ASIC-approved foreign market and who have at least $50 million net assets (excluding intangible assets). Pro Forma 209 Australian financial services licence conditions [PF 209] The following is a summary of the main amendments to [PF 209]. The amendments reflect:

• the changes made to [PS 166] in May 2005 and as outlined above; • recent changes made to Policy Statement 160 Time-sharing schemes [PS 160]; • ASIC’s policy on securitisation entities under Class Order [CO 04/1526] Securitisation special purpose vehicles; and • ASIC’s policy on the underwriting issues of managed investment schemes by associates under Class Order [CO 05/26] Constitutional provisions about the consideration to acquire interests. There are also some minor editorial amendments throughout [PF 209] to clarify how the licence conditions apply and to assist AFS licensees to understand them. Base level financial requirements Condition 13(b) has been amended to clarify the operation of the two alternative tests under the solvency requirement described in [PS 166.25(b)]. Financial requirements for managed investments and custody services Conditions 14, 16 and 17 have been amended to reflect changes made to Section C of [PS 166] in May 2005. These conditions now refer to an ‘eligible custodian’, which includes an Australian ADI, certain market and clearing participants and sub-custodians appointed by them. Condition 19 has been amended to clarify that this condition only applies when the licensee provides a custodial or depository service. This is consistent with [PS 166.63].

Financial requirements for foreign exchange dealers Condition 20 has been updated to remove outdated references to foreign exchange dealers under the Banking (Foreign Exchange) Regulations (previously paragraph (b)(ii)) and to refer to the current versions of APRA’s prudential standards for calculating tier one capital in paragraph (c). Paragraph (d) has also been amended to align it with [PS 166.109A] and [PS 166.123B]. Financial requirements for holding client money or property Condition 21 has been amended to clarify that the reference to less than $100,000 of client money and property means the total value of the money and property for all clients. This is consistent with [PS 166.97]. Financial requirements for licensees transacting with clients Condition 22 has been amended to clarify when the adjusted surplus liquid funds (ASLF) requirement is triggered.

This includes clarifying that the ASLF requirement does not apply where the licensee has no liabilities that would be, or contingent liabilities that if crystallised that would be, included in calculating its adjusted liabilities other than liabilities under debentures issued under Chapter 2L of the Act. This change reflects the content of the policy in [PS 166.106(b)]. Condition 22(i) has been amended to clarify that liabilities may only be disregarded if they are adequately secured as defined in paragraph (a) or (b) of the definition of adequate secured. This reflects the existing terms of [PS 166.109(d)] and [PS 166.130]. Licensee responsibility for securitisation entity A new condition 60 has been added for licensees who accept responsibility for securitisation entities who intend to rely on Class Order [CO 04/1526] Securitisation special purpose vehicles.

Underwriting issues of interests in managed investment schemes by associates New conditions 61 and 62 have been added for licensees who intend to underwrite or sub-underwrite the issue of interests in a registered scheme where the responsible entity of the scheme relies on Class Order [CO 05/26] Constitutional provisions about the consideration to acquire interests. Terms and Definitions Adjusted assets and adjusted liabilities These definitions have been amended to clarify that adjusted assets and adjusted liabilities must be valued as they would appear on a balance sheet at the time of calculation made up for lodgement as part of a financial report under Chapter 2M of the Act if the licensee were a reporting entity.

This is consistent with [PS 166.132] and [PS 166.133]. Consequential amendments have also been made to the definitions of net tangible assets (NTA) and surplus liquid funds (SLF). Paragraph (f) of the definition of adjusted assets and paragraph (d) of the definition of adjusted liabilities have been amended to clarify that only the current assets and current liabilities of a trust are relevant to a trustee’s calculation of its ASLF. This is consistent with [PS 166.132(f)] and [PS 166.133(d)]. Paragraph (e) of the definition of adjusted assets has been amended to clarify the amount that may be added for eligible undertakings of unlimited amounts, and for eligible undertakings given by an entity that is an eligible provider under paragraph (b) of the definition of eligible provider.

This is consistent with [PS 166.132(e)]. A related amendment has also been made to the definition of eligible provider. Paragraph (g) has been inserted into the definition of adjusted assets to allow for assets that would be acquired in return for paying a contingent liability taken into account when calculating ASLF. This is consistent with [PS 166.132(g)]. The definition of adjusted liabilities has been amended to insert a new paragraph (e) to reflect [PS 166.133(e)] relating to counting the value of encumbered assets that secure liabilities of a third party. Under the amended definition, the value of encumbered assets must be counted like a liability of the licensee when calculating adjusted liabilities, to the extent of the liability. However the value of the encumbered assets are no longer an excluded asset.

Adjusted surplus liquid funds or ASLF This definition has been amended so that the standard adjustments are now set out in a separate definition—see definition of standard adjustments. Cooling-off period This definition has been amended to generally extend the cooling off period for timesharing schemes to 14 calendar days. This definition relates to condition 47 and reflects the policy adjustments set out in the latest version of Policy Statement 160 Time-sharing schemes [PS 160]. Derivative This definition has been expanded to include managed investment warrants—see definition of managed investment warrants. This amendment means that, if the licensee is authorised to deal or advise in derivatives, it will also be authorised to deal or advise in managed
investment warrants. Licensees who have this amended definition on their licence will no longer need a separate authorisation covering managed investment warrants. Eligible custodian This is a new definition, which is consistent with the definition in [PS 166.164A].

The definition relates to conditions 14, 16 and 17. Eligible provider This definition has been amended to align it with the definition in [PS 166.165]. Eligible undertaking This definition has been amended to clarify that eligible undertaking does not include an amount that would be repayable as a current liability or, for calculating NTA, as a liability by the licensee if the financial commitment were paid. This is consistent with the existing policy in [PS 166.168A]. This definition has also been clarified to recognise that, as set out in [PS 166.169], ASIC may approve an alternative form of financial commitment as an eligible undertaking. Financial asset This definition has been clarified to specify more clearly the kinds of assets that are part of a financial assets scheme.

Incidental property Paragraph (a) of this definition has been amended to replace ‘value of assets (net of liabilities)’ with the ‘value of the assets net of liabilities other than liabilities to members as members’. This clarification is intended to remove uncertainty where members’ funds are classified as liabilities under the Australian equivalents to International Financial Reporting Standards (AIFRS). Special custody assets This definition has been amended to align it with the definition in [PS 166.181]. Standard adjustments This is a new definition that sets out the standard adjustments to be made when calculating a licensee’s ASLF. These adjustments were previously set out in the definition of adjusted surplus liquid funds. Paragraph (c) has been amended to clarify the adjustments that need to be made to address the risk that contingent liabilities from underwriting (or sub-underwriting) financial products may need to be satisfied within the current period. This is consistent with [PS 166.136(c)].

Surplus liquid funds or SLF This definition has been amended to clarify existing policy that the value of any assets that are encumbered as a security against another person’s non-current liability will not reduce a licensee’s SLF if such a liability owed directly by the licensee would not so reduce its SLF. This definition has also been amended to allow a licensee who is an eligible provider under paragraph (b) of the definition of eligible provider to add one quarter of its non-current assets (minus any intangibles and non-current liabilities) when calculating its SLF. This only applies to licensees who are listed on a licensed market or ASIC-approved foreign market and who have at least $50 million net assets (excluding intangible assets).

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