ASIC hits another fund with DDO stop orders

Mike Taylor

Managing Editor/Publisher, Financial Newswire

9 January 2023

Another investment entity has fallen foul of the Australian Securities and Investments Commission (ASIC) and the design and distribution obligations (DDO) regime – this time Pivotal Diversified Fund distributed by Vasco Responsible Entity Services.

ASIC has issued interim stop orders against Vasco preventing it from issuing interests in, giving a product disclosure statement for or providing general advice to retail clients recommending an investment in the fund. The order is valid for 21 days unless revoked earlier.

ASIC said it made the interim order to protect retail investors from potentially investing in a fund that may not be suitable for their financial objectives, situation or needs.

The regulator noted that, to date, ASIC had issued 22 interim stop orders under the DDO regime, including the order for this fund.

It said the Pivotal Diversified Fund is invested in various managed funds, including hedge funds, a fund invested in residential and commercial real estate developments and a private equity fund. The underlying investments in the hedge funds are exposed to a very high-risk strategy that generates absolute returns by trading in listed equities and by using short selling, leverage and derivatives. The managed fund invested in property development projects is subject to project financing, valuation and construction risks, and the private equity fund is illiquid and leveraged.

“ASIC is concerned that Vasco has not appropriately considered these features and risks in determining the target market for the Pivotal Diversified Fund. ASIC considered that the target market inappropriately includes investors:

• with a potentially high risk and return profile, when the risks associated with the fund’s investments are very high; and
• with a ‘medium’ investment timeframe (up to 6 years).

“Furthermore, ASIC considered that the TMD did not meet the appropriateness requirements under DDO because it did not include any distribution conditions.”

“ASIC reminds financial product issuers that under DDO, they must define target markets for their products appropriately, having regard to the risks and features of their products. Issuers also need to consider how their product will reach the target market and have appropriate distribution conditions in place to ensure the product is directed towards the target market.”

“ASIC expects Vasco to consider the concerns raised regarding the TMD and take immediate steps to ensure compliance. ASIC will consider making a final order if the concerns are not addressed in a timely manner. Vasco will have an opportunity to make submissions before a decision is made about a final stop order.”