After Shield and First Guardian ASIC demands new tools

Managed Investment Schemes (MISs), their Responsible Entities (REs) and investment platforms will all face significant new obligations under proposals being put to the Government by the Australian Securities and Investments Commission (ASIC).

The regulator has referenced the recent collapse of the Shield and First Guardian funds as clear pointers as to why the Government needs to tighten up the legislative settings around investment funds.

In doing so, ASIC has also made clear recent lost opportunities to address the problem via the wholesale/retail investor test.

The formal announcement from ASIC chair, Joe Longo launching Report 823 noted that ASIC sees “enormous opportunity for public and private markets to thrive and grow” and added that Australia and ASIC want to be “backers, not blockers” while emphasising the need for effective regulatory tools.

Report 823 is ASIC response to the February discussion paper on evolving capital markets. Its release comes at the same time as the Assistant Treasurer and Minister for Financial Services, Daniel Mulino, grapples to respond to the Shield and First Guardian funds collapse issues.

Core to the report is the fact that ASIC has delivered a legislative reform wish-list.

And atop that list is the recommendation that wholesale fund operators be held to the same regulatory requirements as their retail counterparts in terms of not only being required to inform ASIC of the operation of wholesale funds but to provide recurrent data on those funds.

As well, ASIC has urged that the Government legislate to extend the retail fund requirement for annual audited financial reports to include wholesale funds.

“This potential reform would provide better levels of transparency and assurance about the financial position, assets and risks of wholesale funds and their assets for investors, including superannuation funds, and the market.

“Investors need transparency and accountability, especially, in structures where misconduct can be hidden. This reform would also promote consistent treatment of public and large private companies, superannuation trustees and retail funds,” the ASIC report said.

It also recommended the Government amend the wholesale client tests to increase the current financial thresholds, stating the reform would “avoid undermining the original policy intent of the tests to protect clients with lower financial literacy and resources”.

The report then expanded on its recommended policy approach, stating “we believe the following reform ideas require serious consideration and [ASIC] will continue to engage with government:

• Extending the RE statutory duties to include wholesale fund operators: The statutory duties that apply to REs under Chapter 5C of the Corporations Act 2001 (Cth) codify common law fiduciary obligations. These duties include core investor protections, such as requiring fund operators to act honestly, with care and diligence and in the best interest of members, and to treat members equally or fairly. We consider these protections fundamental and similar fiduciary duties should apply to wholesale fund operators. It should not be possible to contract out of them. The PC report and our surveillance findings revealed repeated poor practices and conduct – such as fund operators prioritising their own interests over those of investors leading to poorer outcomes for investors. In key jurisdictions including the US, the UK, Europe and Singapore, statutory duties apply to both retail and wholesale fund operators.

• Require retail and wholesale fund operators to notify ASIC and investors of significant events on a timely basis (including when redemptions are suspended): Currently, REs must notify investors of significant events within three months. Neither retail nor wholesale fund operators are required to notify ASIC of significant events that affect them and their funds under management (such as a freeze on redemptions). We consider that the absence of such a requirement prevents timely decision making by investors or regulators. Applying timely, significant event notification and disclosure would be consistent with industry good practice. Introducing timely notification requirements on redemption freezes and other important related events, would enable ASIC to intervene and take appropriate action earlier to protect investors and their funds. It will also enable investors to make timely and informed investment decisions. In key jurisdictions, including the US, the UK, Europe and Singapore, significant event disclosures of the kind proposed for consideration apply to both retail and wholesale fund operators.