Incorporation by reference is here! - Product Disclosure Statements and Statements of Advice

As of 24 August 2007, information can now be incorporated by reference both in Product Disclosure Statements ("PDS") and Statements of Advice ("SOA").

Those wishing to rely on incorporation by reference will need to reconsider their approach to disclosure and determine how best to take advantage of the increased flexibility which has been introduced into these disclosure regimes.

Incorporation by reference for PDSs

When the PDS regime was introduced there was no way to incorporate information into the PDS which sat outside the document itself. This was because the PDS disclosure regime is a directed disclosure regime which focuses on the needs of retail clients (as opposed to those of retail clients and their advisers in the prospectus regime) and requires disclosure by reference to certain criteria, including the significant risks, benefits, fees and costs of the product.

Since the introduction of the PDS regime, ongoing concerns including the length of disclosure documents, use of jargon and ensuring that the PDS is "clear, concise and effective" have resulted in industry lobbying for the ability to incorporate information into the PDS by reference.

The introduction of the new regulations mean that, subject to certain limitations discussed below, the product issuer will not be obliged to include a statement or information (the "incorporated material") in the PDS if the following is satisfied in relation to the PDS:

• the incorporated material is in writing and publicly available in a document other than the PDS (other than in a Short-Form PDS); and
• the PDS:
  • refers to the incorporated material
  • provides sufficient details about the incorporated material to enable a person:
    • to identify by a unique identifier the document, or part of the document, that contains the incorporated material
    • to locate the incorporated material
    • to decide whether or not to read the incorporated material or obtain a copy of the incorporated material; and
  • states that a copy of the incorporated material may be obtained from the issuer on request, at no charge,

in which case the incorporated material will be taken to be included in the PDS, and thereby satisfy the PDS content requirements.

In the event that:

• information regarding the significant benefits or other significant features or characteristics of the product (as contemplated by section 1013D(1)(b) or (f)) of the Corporations Act is incorporated by reference, then the PDS must contain a description, in summary form, of the purpose and key features of the product; or
• information regarding the significant risks associated with holding the product ((as contemplated by section 1013D(1)(c)) is incorporated by reference then the PDS must contain a description, in summary form, of the key risks of the product.

Notwithstanding the ability to incorporate information into a PDS, certain information must still be contained in the PDS itself, namely:

• the name and contact details of the issuer – as required by section 1013D(1)(a)
• information about the dispute resolution system covering complaints by holders of the product – as required by section 1013D(1)(g) of the Act
• information about the cooling-off regime that applies in respect of the product – as required by section 1013D(1)(i); and
• the majority of the prescribed fee disclosure regime, including the consumer advisory warning.

There are additional administrative requirements which follow from incorporating a statement or information into the PDS, in particular:

• if the client requests a copy, the product issuer will need to provide a copy of the incorporated material as soon as practicable and at no charge; and
• the product issuer will need to retain the document, or that part of the document, which contains the incorporated material for seven years after the date of the PDS (or will be required to lodge it with ASIC if the PDS is for a listed fund).

The introduction of the ability to incorporate information by reference presents product issuers with an opportunity to revisit their current approach to disclosure and consider whether certain types of information currently contained in the PDS can be located elsewhere.

Examples of types of information which may be appropriate to incorporate by reference could include past performance information, document summaries and the type of operational product information often found in the "additional information" sections of a PDS.

This needs to be balanced with ensuring that the terms of the PDS itself when read as a standalone document remains an effective form of disclosure.

Incorporation by reference for SOAs

The provisions concerning incorporation by reference for SOAs are broadly the same as for PDSs, other than that the following information cannot be incorporated by reference into an SOA:

• a warning in accordance with section 945B if the advice is based on incomplete or inaccurate information - as contemplated by sections of the Corporations Act 947B(2)(f) and 947C(2)(g); and
• information regarding the charges and benefits that a client may incur or lose where the advice recommends the replacement of one product with another - as required by section 947D of the Act.

In addition, information may only be incorporated by reference where the client has already been provided with the document containing the relevant information (including in the case of an authorised representative, where it has been given by another authorised representative or by the licensee itself), otherwise the document must be given to the client at the same time as the SOA.

Those involved in providing personal advice should consider the extent to which their existing SOAs contain relatively standard terms which may apply to groups or types of clients which can be incorporated by reference to streamline the content of the SOA itself.