Clayton Utz Insights
19 July 2012
By Matthew Daley and Matt Anderson.
Superannuation platforms, certain multifunds, and hedge funds are exempted from the shorter PDS regime.
On 18 June 2012, the Australian Securities and Investments Commission released Class Order CO 12/749 "Relief from the Shorter PDS regime".
The Class Order, which has effect until 22 June 2012, provides that superannuation platforms and certain multifunds can be excluded from the shorter product disclosure statement (PDS) regime. The Class Order additionally exempts hedge funds from the shorter PDS regime.
What is the shorter PDS regime?
The shorter PDS regime (introduced by Corporations Amendment Regulations 2010 (No 5)), is designed to make PDS shorter and simpler and assist consumers with comparing financial products.
The shorter PDS regime includes prescribed headings, prescribed content and a restricted maximum page length, as well as an "incorporation by reference mechanism" (which permits additional information to be given to consumers and is deemed to form part of the PDS).
The shorter PDS regime is currently mandatory for superannuation products, margin lending products, and simple managed investment schemes (as defined in the Corporations Act 2001) (simple MIS).
What does the Class Order do?
The Class Order gives effect to the announcement made by the Minister for Financial Services and Superannuation on 22 December 2011, which stated that:
- superannuation platforms will be excluded from the shorter PDS regime on an interim basis, but providers have the discretion to opt in to the shorter PDS regime;
- multifunds will be excluded from the shorter PDS regime on an interim basis, but providers have the discretion to opt in to the shorter PDS regime; and
- complex products such as hedge funds will continue to be excluded from the shorter PDS regime.
Though ASIC has released the Class Order in order to address the Minister's announcement (following consultation with the industry), it has noted that the Class Order provides interim relief only pending a future government decision on the appropriate regulation of these products.
Exclusion of superannuation platforms
The Class Order excludes "superannuation platforms" from the shorter PDS regime. The exclusion applies to those superannuation products in which:
- two or more investment strategies are available from which a member, or class of members, may choose in accordance with section 52(4) of the Superannuation Industry (Supervisions) Act 1993; and
- each of the investment strategies enables a regulated acquisition (within the meaning of section 1012IA of the Corporations Act) of a financial product to be made.
ASIC also clarifies (in the explanatory statement accompanying the Class Order) that the exclusion is not intended to apply to superannuation products with default options or pre-mixed investment strategies, even if those products allow members to choose from a range of accessible investments.
Exclusion of multifunds
The Class Order applies some limited relief for multifunds. It expressly says a long form PDS may be used for a simple MIS where the relevant document comprises another long form PDS which relates to a different registered MIS (which may be, but is not required to be, another simple MIS).
However, this exception does not extend to other financial products. Therefore, if a simple MIS is offered together with a non-MIS product, the offer would need both a shorter PDS to cover the simple MIS and a long form PDS to cover the other non-MIS product.
Exclusion of hedge funds
The Class Order excludes hedge funds and funds of hedge funds from the shorter PDS regime.
The Class Order provides a definition of "hedge fund" (which has been debated recently as a result of ASIC consultation papers 147 and 174). For the purposes of the Class Order, a "hedge fund" is a registered MIS which:
- is promoted by the responsible entity as being a hedge fund (using that expression); or
- has two or more of the defined characteristics of a hedge fund
These defined characteristics are:
- the investment strategy has a low correlation to published financial market or bond indices;
- the fund acquires financial products through three or more interposed entities within its control, or at least two, if one of the interposed entities is an offshore entity;
- the fund uses debt for the dominant purpose of making an investment;
- the fund deals in derivatives for speculative purposes (ie. not to manage a foreign exchange or interest rate risk);
- the scheme engages in short selling strategies; or
- the responsible entity of the fund has a right to be paid fees which are performance-based.
Funds of hedge funds
The exclusion from the shorter PDS regime also applies to funds of hedge funds. "Funds of hedge funds" is also defined as a registered MIS that:
(a) is promoted by the responsible entity as being a 'fund of hedge funds' (using that expression); or
(b) invests at least 35% of its assets in one or more (i) hedge funds; or (ii) schemes that would be a hedge fund if they were a registered MIS; or
(c) is promoted by the responsible entity on the basis that its assets are invested in the way set out in (b) above.
Note also that those responsible entities which have issued a shorter PDS prior to the commencement of the Class Order may continue to use that shorter PDS until 31 January 2013.
Further guidance and ASIC Information Sheet 155
In addition to the Class Order, ASIC released Information Sheet 155 ('Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes) and an updated Information Sheet 133 (Shorter PDS regime: Superannuation, managed investment schemes and margin lending), in order to provide some guidance on the application of the Shorter PDS Regime and the availability of interim relief for certain products.
In Information Sheet 155, ASIC aims to provide concise guidance to the industry on technical issues relating to the implementation of the shorter PDS regime. The Information Sheet addresses, amongst other things, the following issues:
ASIC confirms that the prescribed maximum page length (generally eight A4 pages) can be eight single-sided pages or four double-sided pages.
"White label" products
In circumstances where product issuers have a number of identical "white label" superannuation products, the Information Sheet confirms that material incorporated by reference can relate to more than one primary document, provided that the incorporated material indentifies the name, date and version of all primary documents to which it relates.
Under the shorter PDS regime, issuers of superannuation products must give a shorter PDS to a standard employee sponsor, as well as to members. Therefore superannuation product issuers will no longer be able to continue the typical industry practice of providing separate customised PDSs to employers (focusing primarily on the information an employer would want to know about the fund). In addressing this issue, ASIC has proposed that superannuation trustees could give employers a copy of the shorter PDS alongside a separate document that includes employer-specific information.
Standard risk measure
ASIC has recommended the disclosure, as far as practicable, of the ASFA/FSC standard risk measure (SRM) (a classification system enabling investors to compare investment options across superannuation funds) in the risks section of a PDS.
Other information explaining the SRM and how it is calculated should be included in material incorporated by reference.
ASIC also recommends that where the SRM is not used by a fund, the PDS should explain why the model has not been used, and describe the alternative risk classification model that has been used instead and why.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
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