Welcome to the final edition of Financial Services Thinking for 2022 with the latest news from the corporate regulators.
In breaking news, we share a Hot Tip about even more scrutiny of fund marketing by ASIC which means fund managers should review their processes and compliance plans to check they adequately address the new issues.
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ASIC Report 740: Insights from the reportable situations regime: October 2021 to June 2022 highlights the regulator’s initial insights into the regime and the four key areas on ASIC’s radar. ASIC says the level of reporting is not where they expected and suggests the low number is due to licensees failing to lodge reports rather than reportable situations not occurring.
ASIC found the reports were concentrated to larger licensees, with 74 percent of all reports submitted by only 23 licensees, and only 5 percent of AFS licensees with under $50 million (funds under management) lodged a report. ASIC is also concerned about the time taken to recognise and investigate breaches, with 18 percent of reports taking a year or more.
ASIC says licensees must compensate customers who are financially impacted from reportable situations and correctly scope the root causes of the reportable situations when breach reporting.
Expect ASIC to have a particular focus on breach reporting in the coming year. If you have any queries about the regime reach out to a member of our Funds Management team.
ASIC has again issued interim stop orders on two direct property trusts due to defective target market determinations (TMDs). The concerns arose from the target market including those who want ‘stable and regular’ income distributions, as well as investors needing to make withdrawals during the term of the trusts (despite having no ongoing withdrawal rights). The TMDs did not adequately specify the review triggers, information to be reported to the issuer by distributors, and the period for this information to be reported.
ASIC has also issued interim stop orders against two registered equities funds available to retail clients focusing on Australian leveraged shares and small cap equities. ASIC was concerned the leveraging ability and strategy of the fund did not appropriately reflect the risk statements outlined in the offer documents and were not appropriately marketed to investors' risk profiles. Also, the TMDs failed to include distribution conditions or parameters and did not adequately consider and describe investors’ capital consideration and investment timeframes.
To date, ASIC has issued 17 interim stop orders. ASIC’s conduct has made its focus on defective TMDs clear. Reach out to our Funds Management lawyers for advice on whether your TMDs correctly represent the products’ attributes. For our latest learnings read our Special Briefing by Sean McMahon and Jeunesse Meldrum.
The ASIC Corporations (Amendment) Instrument 2022/0940 was registered on 14 November 2022. The Instrument amends 12 ASIC instruments and three ASIC class orders to account for the approaching implementation and uptake of corporate collective investment vehicles (CCIVs). The Instrument modifies other ASIC legislation to bring CCIVs into line with managed investment schemes by imposing substantively similar requirements and providing similar relief to CCIVs.
We secured the first AFS licence in Australia authorising a person to operate a CCIV: a significant industry milestone. We encourage you to contact our funds management partners to discuss whether and how the vehicle may benefit your business. For more details read the latest edition of our CCIV Guide.
For directors appointed prior to 31 October 2021, the 30 November 2022 cut off to apply for a director identification number (DIN) is soon approaching. The ATO has recently clarified any uncertainty for directors who were appointed prior to 31 October 2021 but will cease to be a director on the cut-off date. On 15 November 2022 the ATO published draft legislative instrument ABRS 2022/D1 exempting directors who fall into this category from having to apply for a DIN provided they resign or are removed as a director prior to 1 December 2022.
The enforcement actions for directors who do not apply for a DIN by 1 December 2022 include up to $1.1 million in civil penalties and criminal penalties in certain circumstances. Applications can be made online, and for background information read our article here.
Reach out to our Funds Management team for more information.
On 17 November 2022, the ASX announced it is reassessing all aspects of the CHESS Replacement Program following an independent review. The review identified significant issues with the ability of the program’s design to meet the ASX’s requirements. In response to the announcement, ASIC and the RBA issued a joint statement making clear what their expectations of the ASX are moving forward. Given the significant costs already imposed on industry by the Chess Replacement Program, ASIC will be closely monitoring how the cost of the program is accounted for by the ASX.
AUSTRAC released a new financial crime guide, Preventing trade-based money laundering in Australia, on 28 October 2022. The guide is designed to assist government departments and financial service providers to understand and identify trade-based money laundering and provides guidance on the appropriate instances to report suspicious financial activity.
In line with its focus on the promotion of funds, ASIC now appears to be moving toward scrutinising not just the advertising itself but the processes which led to approval and publication. ASIC has recently worked with responsible entities on changes to compliance plans to require vetting of marketing material by external counsel, ongoing monitoring of published material, and regular training of frontline personnel. Further detail can be found in this media release: 22-330MR Managed funds to improve marketing oversight following ASIC surveillance | ASIC.
Fund managers should review their processes and compliance plans to consider whether they adequately address these issues. Get in touch with our Funds Management team who can help with delivering training, auditing processes, and reviewing material.
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