- On 18 June 2012, ASIC released guidance in relation to the shorter PDS regime in the form of INFO 133 and INFO 155 and relief in the form of Class Order CO 12/749 entitled ‘Relief from the Shorter PDS regime’.
- This Class Order allows superannuation platforms and certain multifunds to be excluded from the shorter PDS regime (which becomes mandatory for simple managed investment schemes on 22 June 2012).
- The Class Order also exempts hedge funds from the shorter PDS regime. The applicable definition of a hedge fund is very wide and may catch funds which would not be commonly regarded as hedge funds. Responsible entities need to check whether their simple managed investment schemes may qualify as hedge funds. If they do, they will be exempt from the shorter PDS regime and will need to either issue a long form PDS or obtain relief from ASIC to issue a shorter PDS.
On 18 June 2012, ASIC released Class Order CO 12/749 entitled ‘Relief from the Shorter PDS regime’ (Class Order). The Class Order allows superannuation platforms and multifunds to be excluded from the shorter product disclosure statement (PDS) regime and exempts hedge funds from the shorter PDS regime.
The relief under the Class Order came into effect on 18 June 2012 and has effect until 22 June 2013. ASIC has noted that the Class Order may be reviewed earlier and that the relief is interim relief pending a future government decision on the appropriate regulation of these products.
The shorter PDS regime is currently optional for simple managed investment schemes (as defined in the Corporations Act 2001 (Cth)) (simple MIS) and will become mandatory for simple MISs on 22 June 2012.
The shorter PDS regime is currently mandatory for superannuation products and margin lending products.
On 22 December 2011, the Minister for Financial Services and Superannuation announced in a media release that:
- superannuation platforms will be excluded from the shorter PDS regime on an interim basis, but providers can opt in to the shorter PDS regime,
- multifunds will be excluded from the shorter PDS regime on an interim basis, but providers can opt in to the shorter PDS regime, and
- complex products such as hedge funds will be excluded from the shorter PDS regime.
After discussions and consultation with industry, ASIC has released the Class Order to address the Minister’s announcement.
Exclusion of superannuation platforms
The Class Order amends Regulation 7.9.11K to allow superannuation platforms to be excluded from the shorter PDS regime. The exclusion covers superannuation products in which:
- two or more investment strategies are available from which a member, or a class of members, may choose in accordance with subsection 52(4) of the Superannuation Industry (Supervision) Act 1993, and
- each of the investment strategies enables a regulated acquisition (within the meaning of section 1012IA of the Act) of a financial product to be made.
The exclusion does not extend to:
- superannuation products which have a default option or which provide for pre-mixed investment strategies, even if those products allow members to choose from a range of accessible investments, and
- a facility (eg a cash account) where members’ contributions are temporarily placed when they fail to make a choice of investment or make an error in their choice of investment.
Superannuation platform issuers may:
- opt in to the shorter PDS regime by preparing a shorter PDS, and
- subsequently opt out of the shorter PDS regime by preparing a long form PDS under the general PDS regime in Part 7.9 of the Act, unmodified by the shorter PDS regime (long form PDS).
Exclusion of multifunds
Outside the shorter PDS regime, one long form PDS may be used for the offer of multiple schemes. Market practice has been to issue long form ‘omnibus’ PDSs for ‘multifunds’, where the terms of issue and operation of the schemes are very similar or identical, to avoid duplicating information in multiple documents. This style of multifund PDS has facilitated comparisons between schemes and concise disclosure.
Multifund PDSs have not been permitted under the shorter PDS regime because a shorter PDS must only relate to one simple MIS.
The new Class Order now provides some limited relief for multifunds by providing that a long form PDS can be used for a simple MIS where the PDS also relates to another registered managed investment scheme (which may be, but does not need to be, another simple MIS).
Importantly, the multifund exception is limited to a long form PDS for registered schemes and does not extend to other financial products. This means that if a simple MIS is offered with a related put option (eg to provide capital protection for the simple MIS) an omnibus PDS cannot be used and the offer would need both a shorter PDS for the simple MIS and a long form PDS for the put option.
Unfortunately the timing of the release of this Class Order limits the utility of this exemption because, in readiness for the 22 June 2012 deadline, most mutlifund issuers have already incurred the cost of complying with the shorter PDS regime.
Exclusion of hedge funds
In his media release of 22 December 2011, the Minister emphasised that the government’s intention is to exclude complex products such as hedge funds from the shorter PDS regime ‘until these products can be fully considered in respect of the policy intent of the [shorter PDS] regime’.
The Class Order amends Regulation 7.9.11S to exclude hedge funds and funds of hedge funds from the shorter PDS regime (except, for an interim period to 31 January 2013, hedge funds which opted in to the shorter PDS regime and issued a short form PDS prior to 18 June 2012).
The definition of a hedge fund has been debated recently as a result of ASIC consultation papers 147 and 174 in relation to hedge fund regulation.
For the purposes of the Class Order a hedge fund is a registered managed investment scheme which:
- is promoted by the responsible entity using the expression, and as being, a ‘hedge fund’, or
has two or more of the following characteristics:
investment strategy or structure – the scheme invests:
- in accordance with an investment strategy that aims to generate a return with low correlation to indices relating to listed securities or to bonds or debentures, or
- through a number of interposed entities in Australia and/or offshore, most or all of which are related entities to the responsible entity,
- leverage - the scheme uses debt for the dominant purpose of making a financial investment,
derivatives - the scheme uses derivatives unless:
- A.the dominant purpose of that use is managing foreign exchange or interest rate risk (associated with holding scheme property), or
- B.the use takes place on a financial market and for the dominant purpose of managing the financial risk arising from deferring a proposed dealing in another financial product that is not a derivative for a period of less than 28 days,
- short selling - the scheme engages in short selling. For these purposes short selling includes where the responsible entity has a presently exercisable and unconditional right to vest the financial products being sold only because of a securities lending arrangement, and
- performance fee - the responsible entity or investment manager has a right to be paid a fee substantially based on the performance of the scheme’s property (whether or not they are also entitled to any management fee).
- investment strategy or structure – the scheme invests:
This approach to determining a hedge fund raises a number of difficulties and challenges for responsible entities:
- as a practical matter, hedge funds are not often promoted using the expression, or as being, a ‘hedge fund’, so the first limb of this test (in paragraph (a)) will rarely have application, and
the second limb of the test (in paragraph (b)) is so broad that a simple MIS which would not be commonly regarded as a hedge fund may qualify as a hedge fund.
- For example, a simple MIS which uses a leveraged swap to gain investment exposure to an index, a long/short fund which engages in very limited short selling and uses a number of interposed group entities for tax efficiency or a levered fund which uses a performance fee structure may have the two or more characteristics needed to qualify as a hedge fund.
- Responsible entities using shorter PDSs need to check whether their simple MISs may qualify as hedge funds. If they do, they will either need to issue a long form PDS or obtain ASIC relief to issue a shorter PDS.
The new exclusion also applies to a fund of hedge funds which for the purposes of the Class Order means a registered managed investment scheme that:
- is promoted by the responsible entity using the expression, and as being, a ‘fund of hedge funds’,
- invests at least 35% of scheme property in a way that gives rise to economic interests in one or more of a hedge fund or a managed investment scheme or body in or outside Australia that would be a hedge fund if it were a registered managed investment scheme, or
- is promoted by the responsible entity on the basis that scheme property will be invested in the way set out in paragraph (b) above.
Unlike the superannuation platform and multifund exemptions, this exception cannot be opted into or out of. However, as noted above, where a hedge fund or fund of hedge funds opted into the shorter PDS regime prior to 18 June 2012, that fund may continue to use a shorter PDS until 31 January 2013.
ASIC Information Sheets 133 and 155
ASIC also updated Information Sheet 133 and released Information Sheet 155 (INFO 155) on 18 June 2012, to provide some guidance on the application of the shorter PDS regime and the availability of interim relief for certain products.
Items of interest in INFO 155 include:
- relief - ASIC has confirmed that it will consider individual relief applications from responsible entities who consider that the Class Order gives rise to an anomalous result for their fund or funds. Responsible entities of simple MIS which qualify as hedge funds, given the broad definition of a hedge fund in the Class Order, but which would not be commonly regarded as hedge funds, will need to apply to ASIC for relief if they are to continue to issue a shorter PDS under the shorter PDS regime,
generic IBR documents - in the absence of a multifund exception, many multifunds are issuing or have issued shorter PDSs, using an omnibus or generic incorporation by reference document (IBR document), where the IBR document applies to a series of simple MISs. An omnibus or generic IBR document is also often used in relation to white label issuers of simple MISs.
- Regulation 7.9.11X(6)(b)(ii) provides that where incorporation by reference material refers to more than one PDS, the incorporation by reference material ‘does not need to name each PDS of which it forms part’. The explanatory memorandum for this regulation noted that some documents may be incorporated in a large number of PDSs and that it would not be helpful for the reader if all the PDSs were separately identified.
- However, yesterday, INFO 155 ASIC stated that having one generic document for material incorporated by reference with no reference to the name, date or version of the primary documents would not achieve the policy intent that material incorporated by reference should be easily identifiable.
- We have now confirmed with ASIC that this INFO 155 statement was intended to apply to superannuation products only and was not intended to apply to simple MISs, which may continue to use and rely on Regulation 7.9.11X(6)(b)(ii).
- page length - ASIC has confirmed that the 8 pages of A4 paper (or equivalent) for shorter PDSs refers to single sided, not double sided paper. In other words a shorter PDS printed on A4 paper could be 8 pages printed single-sided or 4 pages printed double-sided,
employer superannuation - a superannuation trustee must give a shorter PDS to a standard employer sponsor, as well as to members. ASIC suggests that superannuation fund trustees give employers a copy of the shorter PDS for employees, together with a non-PDS document outlining any employer-specific information, given:
- the practice of preparing a separate PDS for employers, focusing on information relevant to employers, and
- that a shorter PDS for a superannuation product must be in the form prescribed in Schedule 10D of the Corporations Regulations.
- MySuper - the government has proposed changes which include requiring superannuation funds to offer a ‘MySuper’ product, which will generally replace the current default option. ASIC has confirmed that it does not anticipate there to be any requirement for a MySuper product option to have a separate, shorter PDS (although some MySuper products will be standalone superannuation products which will need to have their own shorter PDSs),
- insurance - certain insurance information must be provided in a shorter PDS for a superannuation fund. ASIC has confirmed that the policy intention is that the shorter PDS should only contain the essential ‘need to know’ information as set out in Schedule 10D(10) of the Regulations and that other compulsory disclosures applicable under relevant insurance legislation may be incorporated by reference, and
risk disclosure - in July 2011 ASFA and the FSC announced new industry guidelines to standardise investment risk disclosure for superannuation funds. The standard risk measure (SRM) contains 7 risk levels from ‘very low’ to ‘very high’, with each level based on the estimated number of negative annual returns over any 20-year period. In INFO 155, ASIC:
- encourages superannuation trustees to use the SRM for their default option in the shorter PDS as far as practicable, and
- recommends that funds which do not use the SRM, explain in the shorter PDS why they are not using the SRM and describe what risk classification model has been used instead.