Executive Summary

The third tranche of the Stronger Super legislation introduced a requirement for RSE licensees to publish their portfolio holdings.

The intended outcome is for members of superannuation funds to better understand and compare the underlying holdings of superannuation funds. In this article we explain the portfolio holdings disclosure requirements, outline some of the practical implementation issues and describe how the ‘look-through’ of portfolio holdings may expose proprietary information of fund managers.

Legislative Background

The third tranche of the Stronger Super legislation (the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 (SLA Transparency Measures Act)) received royal assent on 3 December 2012.

The SLA Transparency Measures Act made further amendments to the Superannuation Industry (Supervision) Act 1993 and the Corporations Act 2001, with most of the amendments commencing on 1 July 2013. The recent release of the fourth tranche of the Stronger Super legislation deferred the commencement of portfolio holdings until 1 July 2014.

Exposure draft regulations were released by Treasury on 30 April 2013 which prescribe the format of the portfolio holdings disclosure reports (the Superannuation Legislation (MySuper Measures) Regulation 2013 (SLA Regulations)). The final form of the regulations is expected to be published in August.

Portfolio Holdings Disclosure

As of 1 July 2014, the Corporations Act 2001 (Corporations Act) will require trustees of all registrable superannuation entities (RSEs) to publish information on their websites that is sufficient to identify “each of the financial products or other property in which assets, or assets derived from assets, of the entity are invested”, and their value as at 30 June and 31 December each year (section 1017BB). Each of these dates is a ‘reporting day’ and holdings information is essentially a snapshot taken on those days. The information must be published within 90 days of those reporting dates.

The legislation also introduces new reporting obligations for parties to arrangements under which financial products are acquired using assets of an RSE. The ‘first party’ in each of the below scenarios must notify the ‘second party’ that the asset is, or is derived from, the assets of the RSE and of the details of the RSE trustee. The second party must then provide the RSE trustee with information about the financial product acquired to allow the RSE trustee to publish the prescribed portfolio holdings information on its website.

  1. the ‘first party’ acquires a financial product from a ‘second party’;
  2. an agent of the ‘first party’ acquires a financial product from the second party;
  3. the ‘second party’ provides a custodial arrangement to which the ‘first party’ is a client; or
  4. the ‘first party’ is the provider of a custodial arrangement and the ‘second party’ will acquire a financial product for the ‘first party’ under that custodial arrangement.

These obligations apply to any of the above arrangements entered into on or after 3 December 2012. The regulated parties (in the case of the ‘first party’, likely to be outsourced investment managers and, in the case of the ‘second party’, likely to be product issuers or their custodians) will find themselves subject to penalties not normally associated with their business activities simply because they are party to an arrangement under which financial products are acquired using ‘assets or assets derived from assets’ of a superannuation fund.

Issues/considerations

Trustees should ensure that they take reasonable steps to ensure that the information published is not misleading or deceptive or contain any omissions.

Below we list some of the issues to consider in implementing this new obligation.

  1. ‘Look-through’ of investments
    • Trustees must report holdings of financial products acquired using “assets or assets derived from assets” of the fund.
    • The SLA Regulations make it clear that this means each intermediate product and each ‘final product’ must be published in a chain of investments. In other words, the holdings are not reported on an aggregated basis and the report will identify the portfolios of interposed investment managers thereby disclosing their proprietary information. Although this only occurs as a ‘snapshot’ taken on one day every six months (and on a 90 day lag basis), this exposure of proprietary information is likely to concern fund managers.
    • Following consultation on the exposure draft of the SLA Regulations (likely to be released in August), the government has announced that it will make further changes which will hopefully provide for disclosure on an aggregated basis, which would remove this concern.
    • It may nevertheless be difficult for trustees to obtain information on underlying investments of private equity vehicles, hedge funds or index-based investments where this information is proprietary or sensitive to the manager and therefore confidential. Again, the SLA regulations may address this concern by providing for specific exclusions from the disclosure requirements.
    • The legislation provides for regulations to be made which prescribe a materiality threshold below which holdings are not required to be published or which exclude certain arrangements from the obligation on the ‘first party’ to provide a notice to the ‘second party’ and for the ‘second party’ to provide information to the RSE trustee. Again, RSE licensees should closely review the SLA Regulations when they are released for any such provisions.
  2. Format of report
    • Identifying all underlying investments is a considerable administrative task. Some financial products are identified by codes which may need to be translated into something meaningful for retail investors. Also, identifying some types of instruments (such as derivative products) may be difficult to standardise and would be complex to understand for retail investors. Further, an accurate valuation may be difficult for some types of investments such as infrastructure assets or derivative positions or where the effect of hedging is to be taken into account.
    • The format and type of information is different to the information required to be submitted by trustees under APRA’s Superannuation Reporting Standards (for example, in SRS 530 and 531). Trustees (and fund managers who receive requests for information from trustees) have extra work to collate holdings information under the two regimes with different submission dates, formats and level of detail.
    • The draft SLA Regulations prescribe the format in which the information is to be published. Two tables are prescribed which should be published concurrently, beginning with the 30 June 2014 ‘reporting day’:
  • Table 1 This table should list each MySuper product and each investment option of a choice product. Each ‘final product’ or property attributable to that MySuper product or investment option should be listed. The table should not include intermediate holdings that invest in other financial products or property. The draft SLA Regulations provide an example as follows:

Click here to view table.

  • Table 2 This table requires disclosure of each “investing product” (i.e. intermediate financial products) and each “final product” (i.e. each ultimate underlying financial product acquired using assets or assets derived from assets of the RSE). The information is to be presented at the fund level and not, as for Table 1, at the investment option level. There is therefore some duplication of information between the two tables. Each intermediate product’s underlying investments and their respective quantity and price must be identified at every point in a chain of investments. The draft SLA Regulations provide an example as follows:

Click here to view table.

  1. Extra-territorial application
    • The obligation on the ‘first party’ to provide a notice to the person from whom it is acquiring a financial product and on the ‘second party’ to provide information to the RSE trustee are limited to arrangements under which financial products are acquired “in this jurisdiction”. The analysis of whether a financial product or other property is acquired in Australia will need to be undertaken by investment managers who will likely seek agreement with and guidance from trustees on the extra-territorial application of these obligations for different financial products. For listed equities, the position is relatively straightforward. For over-the-counter positions, the interpretation may be more difficult. It may be difficult to enforce or convince investment managers they are subject to these obligations where investment managers are located off-shore.
    • The RSE licensee has an obligation to publish portfolio holdings where it knows, or reasonably ought to know, information sufficient to identify the financial products or other property acquired irrespective of the jurisdiction in which it was acquired.
  2. Amending current arrangements
    • Investment management agreements RSE licensees should consider whether to amend investment management agreements to add a contractual obligation requiring investment managers to give the notices required under the new regime to any ‘second party’ involved in the investment and for enhanced portfolio holdings reporting by investment managers to enable trustees to meet their reporting obligations.
    • Cleaning up custody records RSE licensees may draw upon custody records to prepare portfolio holdings reports. These may need ‘cleansing’ so that information can be drawn in a format that will allow the trustee to prepare the report.
  3. Transitional arrangements
    • The obligation to report commences 1 July 2014, however, the first ‘reporting day’ is 30 June 2014 and the first report must be published within 90 days of that date (i.e. before 30 September 2014). The notification obligations of the ‘first party’ and the ‘second party’ apply to arrangements entered into on or after 3 December 2012 (the day the legislation received Royal Assent). RSE licensees will need to publish the first full list of holdings as at 30 June 2014 (not just those established after 3 December 2012) and must secure co-operation from investment managers and custodians to ensure they can do so.

ASIC guidance and next steps

ASIC has published an FAQ on the portfolio holdings reporting obligations (see: http://www.asic.gov.au/asic/asic.nsf/byheadline/Stronger+Super+FAQs?openDocument).

This provides helpful general guidance but more detailed guidance is required on the format of the reports and how ASIC intends to exercise its power to determine how the value of an asset is to be calculated. Guidance is also required on how an ‘asset derived from a fund asset’ is to be determined and described.

Also, RSE licensees should monitor the release of the SLA Regulations which are likely to provide for materiality thresholds, specific exclusions of market sensitive data and reporting of dis-aggregated data. The release of the SLA Regulations is expected some time in August. We will update you on the regulations when they come to hand.

Portfolio holdings disclosure is designed to provide transparency on the investments underlying superannuation fund investment options. While this has obvious merits for consumers, the cost and complexity of the reporting and the potential for misleading comparison between funds may detract from the consumer benefits of transparency.