Disclosure of Accessible Financial Products: Section 1012IA Corporations Act & ASIC Policy Statement 184 by Jenny Willcocks | July 2007 Area of Expertise | Superannuation & Collective Investments After many drafts and much consultation the ﬁnal version of ASIC Policy Statement 184 (PS 184) has ﬁnally been released. PS 184 deals with delivery of product disclosure for investment strategies. In particular the policy is intended to assist superannuation fund trustees to comply with the product disclosure requirements in Section 1012IA (s.1012IA) of the Corporations Act 2001 (the Act). The requirements of s.1012IA are triggered when a trustee offers a choice of investment strategies to members, which include other speciﬁc ﬁnancial products. These underlying ﬁnancial products are referred to as accessible ﬁnancial products (AFP’s). When these circumstances exist the trustee has an obligation to give the member a Product Disclosure Statement (PDS) about any AFP’s included in an investment strategy of the fund, before the member acquires the AFP. This is in addition to the fund PDS. To understand these obligations a trustee must have reference to s.1012IA, ASIC Class Orders CO 03/1097, CO 06/636, CO 07/386 and PS184. This paper provides an overview of these obligations.
Policy Objective The policy objective of s.1012IA as stated by PS 184 is to ensure members of superannuation funds receive the same standard and quality of disclosure concerning AFP’s they acquire via the investment strategy of a superannuation fund as they would receive if investing directly in those AFP’s as a retail client. Trustees must ensure they give members enough information to help them make an informed assessment of the investment strategies offered by the fund.1
When Must S.1012IA Be Complied With? Class Order 03/1097 (CO 03/1097) was issued on 22 December 2003 to give transitional relief from compliance with the s.1012IA requirements to allow trustees time to prepare. CO 03/1097 has been extended repeatedly. To qualify for the class order relief the trustee must have taken all reasonable steps to ensure any PDS offering an AFP for which a PDS may, but for the class order exemption, be required to be given under s.1012IA: •
includes or is accompanied by written information about how the client can obtain a copy of the PDS for the AFP; or
if the product was offered over the internet or by electronic means, prominently draws attention to information about how a copy of the PDS for the AFP may be accessed (e.g. hypertext link to that information in a prominent place).
Relief under CO 03/1097 is now available until 30 June 2008 provided the trustee does not give any client a PDS dated “later than 1 July 2007”.2 The issue of a supplementary PDS after this date will not breach this requirement.
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What is an AFP? A fund will be seen as offering an investment strategy including an AFP where: •
an instruction is given by a member to the trustee to acquire an AFP;
an actual acquisition is made by the trustee of the AFP on the member’s behalf; and
there is a connection between the member’s instruction and the actual acquisition of the AFP by the trustee.
When one of these elements is missing the deﬁnition of AFP is not met and the requirements of s.1012IA do not apply. For example the s.1012IA requirements do not apply to the default investment option because investments in that option do not involve an “instruction” by the member to the trustee. Investment in the default option occurs in the absence of a speciﬁc instruction from the member.
Circumstances Where an AFP PDS Will Not Be Required Even if a fund offers an AFP there are circumstances where the trustee will not be required to provide a PDS for the AFP.
IS THE AFP NAMED? If you offer composite investment options such as growth, balanced, cash etc. s.1012IA can still apply depending on how those options are described in your PDS. If you do not identify particular ﬁnancial products to be acquired under the investment options by name, s. 1012IA will not apply. That is you simply describe the investment options according to the asset allocation rather than the speciﬁc underlying investment products that make up the investment strategy. However, if you name a speciﬁc ﬁnancial product as forming part of one of those composite investment options the requirements of s.1012IA will apply to that named product or products.
DOES THE TRUSTEE HAVE AN UNFETTERED DISCRETION TO CHANGE AFP’S? Similarly if the trustee retains an unfettered discretion to vary the amount invested in a particular ﬁnancial product, or to replace the AFP without seeking new instructions from members, according to PS 184, s.1012IA “is unlikely to apply”.3 This is based on s.1012IA(1)(b) which refers to the deﬁnition of what will constitute a custodial arrangement. It speciﬁes that if the client gives an instruction, the trustee must (subject to any discretion it has to refuse) acquire the ﬁnancial product. Therefore if the trustee has retained discretion to refuse the requirement does not apply. Of course this discretion would have to be clearly stated in the fund PDS.
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ONGOING CONTRIBUTIONS Each time a member makes a contribution to a fund he or she is making an additional acquisition of the AFP, which triggers the s.1012IA requirements. Class Order 07/386 (CO 07/386) modiﬁes the law to permit a trustee to rely on product information previously given to the member. For example at the time they joined the fund they received a PDS containing all relevant information which has remained current, or been updated through ongoing disclosure. In these circumstances relief is given from the s.1012IA requirements if the member has provided the trustee with a standing instruction to acquire the product. This overcomes a number of problems concerning acceptance of ongoing contributions to the fund.
WHAT IS A “STANDING INSTRUCTION”? The member’s direction to invest in a speciﬁc investment strategy operates in the same way as a standing instruction to the trustee to make additional acquisitions on his or her behalf.4 This is subject to a trustee’s obligation to provide members with updated information if there is a material adverse change to a matter or a signiﬁcant event adversely affecting a matter required to be in the PDS except where the member already has the relevant information.5
MEMBER’S WRITTEN ACKNOWLEDGEMENT Under ASIC Class Order 06/636 (CO 06/636) relief from having to provide a PDS to a member before each contribution requires a written acknowledgement from a member who joins after 1 July 2007 that at the time an additional acquisition is made (i.e. a contribution is invested into the selected investment strategy) the member may not have the current disclosure document or be aware of any material changes or signiﬁcant events. The acknowledgement is not required from an existing member (i.e. a member who joined before 1 July 2007), provided that the trustee tells that member that when an additional acquisition is made they may not have the current disclosure document or be aware of any material changes or signiﬁcant events6. Please note that the reference to “1 July 2007” in paragraph 3 of CO 06/636 does not appear to have been varied by CO 07/386 to refer to “1 July 2008” which was the case with other parts of CO 06/636. It appears that this may have been an over sight. In any case these acknowledgements will need to be built into the fund’s PDS and in the case of existing members other means will need to be adopted.
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OTHER EXCEPTIONS TO S.1012IA Other exceptions to the s.1012IA requirements are as follows: •
Where the trustee knows or believes on reasonable grounds, that the member has already received an up to date PDS7.
Where the member holds a ﬁnancial product of the same kind and the trustee believes on reasonable grounds that: •
the member has received an up to date PDS; or
the member knows that they have access to all disclosure information required to be in an up to date PDS for that particular product, because they already have a PDS for that product plus additional information via on going disclosure or periodic reporting requirements8; or
no information is required to be in the PDS for an AFP because under s.1012IF it would not be reasonable for a person considering whether to acquire the product to expect to ﬁnd the information in the PDS9.
Options for Complying With S.1012IA Requirements As a result of modiﬁcations made by CO 07/386 trustees now have three options for meeting their disclosure obligations regarding AFP’s:
Prepare the information themselves in an AFP PDS for one or more AFP’s. Prepare the information themselves in an integrated PDS
that combines information about the superannuation product with information about one or more AFP’s in the one PDS.
Give a client an AFP PDS prepared by the issuer of the particular AFP.
Trustees offering AFP’s where no exception applies will need to consider each of these options and determine well before the cut off date of 30 June 2008 which one best suits their membership base and investment strategies.
OPTION 1 – TRUSTEE PREPARES FUND PDS AND AFP PDS Under this option the trustee prepares a separate PDS for each AFP it offers in its investment strategies. This is in addition to the fund PDS. PS 184 suggests this option may suit a fund that offers a large number of investment strategies with and without AFP’s, as it allows the trustee ﬂexibility and control over the content of the AFP PDS.
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Provide Only the PDS for the Member’s Preferred Investment Option PS 184 also states that this option allows the trustee to only give members the PDS for the AFP that relates to the member’s preferred investment strategy. In other words they do not have to receive irrelevant information. However, this means that the trustee must ﬁrst establish what the member’s preferred investment strategy is in order to provide the PDS for the relevant AFP. This would require ﬁrst providing the member with the fund PDS, which must still contain a summary of all of the investment options available, including any AFP’s. Based on this information the member would determine what investment strategy they prefer and then request the PDS for that AFP from the trustee. The member’s contributions would have to be invested in the fund’s default option until the AFP PDS has been received and considered by the member, who can then instruct the trustee to proceed with the investment. Obviously this slows down the investment process and adds further administrative steps (and cost) to the acceptance of a new member into the fund. Switching Between Investment Options A further problem arises when such a member later elects to switch between investment strategies. The trustee can not act on the request to switch to another investment option involving an AFP until the member has been given the AFP PDS for the alternative investment option. The switch must therefore be delayed until the alternative AFP PDS has been provided to the member who must then conﬁrm the switch. Delays in acting on the member’s instructions to switch are inevitable and the additional administrative steps add to the cost of administering the fund. In addition if there is a market correction during this process, member complaints may also arise.
Trustee Liability Where the trustee prepares the AFP PDS under option 1 it carries the same responsibility as the issuer of the AFP and will be considered to be the issuer of that product under s.1031A of the Act.
Tailoring the AFP PDS Content Section 1013F of the Act permits the AFP PDS to be “tailored” to take account of the fact that the AFP is being acquired via a superannuation fund and not directly by the member as a retail client. A trustee should consider whether the AFP PDS needs to explain any differences between direct acquisition and acquisition of AFP’s through the superannuation fund10. The general rule is that the AFP PDS must provide the same standard and level of information as that required in a PDS for a product where a retail client would invest directly. You are permitted to modify this information where it would be irrelevant to a member of a superannuation fund and to avoid duplication. Therefore it is not as simple as reproducing the PDS prepared by the issuer of the AFP as some parts of that PDS may not be relevant when the product is acquired through the superannuation fund.
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Reasonable Steps Defence Where a trustee has made reasonable enquiries to ensure that information about the AFP’s it offers meet the PDS contents requirements of s.1013C of the Act, they should be able to rely on the “reasonable steps” defence in s.1021E(4) of the Act. At PS 184.5 the following statement appears: “If you have an arrangement in place with the product issuers described [PS 184.60] – [PS 184.61], we think you will have made “reasonable enquires”.
Information “Actually Known To You” PS 184 provides as a minimum where a trustee is preparing an AFP PDS for the ﬁrst time that they will have actual knowledge of all of the information included in the current PDS of that AFP prepared by the issuer of that product. Obtaining the up to date version of that PDS would be basically good practice before preparing the AFP PDS.11 PS 184 outlines the preliminary steps that should be taken by a trustee as good practice prior to preparation of an AFP PDS as: 1.
obtain a copy of the current PDS for that AFP for which there is a current “in use” notice under s.1015D of the Act. If there is no PDS the trustee must obtain the product disclosure information publicly available for that product;
enter into an “arrangement” with the product issuer of the AFP concerning the currency of the product disclosure information; and
check to see that the trustee has no reason to believe that the product disclosure information obtained under 1 above is not up to date.
According to PS 184 if a trustee follows this procedure it will have done all that can be expected of it as a minimum to prepare the content of an AFP PDS.12
Keeping the AFP PDS Up To Date Under option 1 the trustee must have in place procedures to ensure the AFP PDS it has prepared remains up to date.13 Again this also requires “arrangements” between the trustee and the product issuer of the AFP to give the trustee conﬁdence that it will be properly advised of any material adverse changes or signiﬁcant events that adversely affect any matter required to be in the PDS of the AFP immediately before the change occurs. PS 184 therefore assumes the issuer of the AFP will be agreeable to entering into an “arrangement” with a trustee. The commercial reality may be that the willingness of funds managers to enter into such arrangements may depend on the bargaining position of the trustee. For smaller funds securing these arrangements may be difﬁcult as they will impose new obligations on fund managers and on going responsibilities to pass information to the trustee.
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Note the following statement in PS 184: ”These arrangements should include being provided copies of any supplementary PDS’s or new PDS’s prepared by the product issuer for the accessible ﬁnancial product. The precise terms of any arrangement with the product issuer will be subject to commercial negotiations between you and the product issuer. We have deliberately not prescribed the terms of these arrangements to allow you this ﬂexibility.”14 While ﬂexibility is good there is nothing to address what happens if the product issuer is not prepared to enter into these “arrangements”. This is likely to be market driven and if the demand is presented to the issuers of the ﬁnancial products in which trustees invest, market forces may result in those issuers having to comply or ﬁnd that funds invest elsewhere.
Fee Disclosure The enhanced fee disclosure regulations15 apply to the fees and costs the trustee charges the members in the superannuation product, and also the fees and costs (if any) charged separately by the issuer of the AFP to the extent those fees and costs are payable by a member of the superannuation fund. The relief given by CO O6/636 means the superannuation fund PDS does not have to include the fees and costs template and additional information for the AFP because that information will be set out in a separate PDS for that product. This is because under option 1 the superannuation PDS and the AFP PDS are standalone disclosure documents. However, as the information on fees and costs is split between different PDS’s to minimise confusion the superannuation fund’s PDS needs to make it clear that to understand all of the fees payable by a member who selects a particular strategy, the member must look at both the superannuation entity’s PDS and the relevant AFP PDS.16 A statement giving this direction will need to be included in the fees section of the fund’s PDS.
Content of Fund PDS While this option is intended to avoid duplication of information, PS 184 states that a trustee must still provide sufﬁcient information about the available investment strategies under which the AFP’s may be acquired in the superannuation fund’s PDS. This is because that information is relevant to the member’s decision whether to invest in the superannuation fund.17 The Class Order relief does not change the trustee’s obligation under SIS Regulation 4.02 to provide members with speciﬁc disclosure about all the available investment strategies, including the default investment strategy. Consequently trustees must still include general information about the investment options offered in the fund PDS so that a member is able to understand the key features of all of those investments strategies, including, the risks and beneﬁts of each strategy, to decide which strategy or strategies they wish to invest in.
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OPTION 2 – INTEGRATED PDS This option has been added by CO 07/386, and allows the trustee to prepare an integrated PDS, which combines information about the superannuation product with information about each of the AFP’s offered through the investment strategies of the fund. The information members receive concerning AFP’s must be of an equivalent standard to the information they would receive if they invested directly in the same ﬁnancial product as a retail client.18 In other words it must provide information they would reasonably require to make a decision as retail clients to acquire that ﬁnancial product.19 Consequently trustees must meet the disclosure requirements of Regulation 4.02 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), which require: •
provision of information about the investment objects of each investment strategy; and
all information the trustee reasonably believes a person would reasonably need for the purpose of understanding the effect of any risk involved in the investment strategies offered by the fund.
Under the integrated PDS option all of the required information is contained in one PDS. Like option 1, the trustee remains liable for the information it provides to the member concerning the AFP’s it offers as if it were the issuer of the AFP’s. PS 184 suggests this would be a suitable option for someone offering a limited choice of investment strategies which do not include a large number of AFP’s. It also allows the trustee to have control over the look and contents of the disclosure information that goes to members. As for option 1 the trustee must take reasonable steps to ensure the information relating to the AFP’s in an integrated PDS is up to date and “actually known” to the trustee. It must also ensure that the information concerning the AFP is kept up to date. Therefore arrangements will also need to be in place with the product issuers of the AFP’s to ensure that the trustee is kept informed of any changes.
OPTION 3 –USE AFP PDS OF ISSUER OF THE AFP Under this option the trustee gives the member an AFP PDS prepared by the issuer of the AFP in addition to the fund PDS. PS 184 suggest this option might suit a fund which offers a wide choice of investment strategies which include a range of AFP’s. This option removes the burden on the trustee of preparing the PDS itself, ensuring that it is kept up to date and carrying the liability. PS 184 suggests that an advantage of this option is that the trustee only needs to provide the PDS for the AFP that is part of the members preferred investment strategy. For the reasons outlined in relation to option 1 this is not as straight forward as it sounds.
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Can You Use More Than One Option To Deal With AFP’S? A trustee must adopt a single option for dealing with each investment strategy. For example you cannot adopt option one for one AFP and option 3 for another AFP within the same investment strategy. However, you can adopt different options for different investment strategies. This means you could adopt option 3 for the Growth investment strategy and option 1 for AFP’s offered in the Balanced investment strategy. However, in the case of trustees that choose option 2 all investment information must be included in the integrated PDS and therefore mixing and matching options is not available.
Delivery of the PDS An AFP PDS must be given to a member on request. This limits the number of disclosure documents that must be given to a member. Consequently trustees only need to provide those that are relevant to the AFP’s included in the member’s preferred investment strategy, and not about all available options, including a PDS for every accessible ﬁnancial product included in any investment strategy. As indicated in the section dealing with option 1 above, members will ﬁrst receive the fund PDS (which must meet the SIS requirements and the requirements of the Act) and at a later time, prior to acquisition of any AFP, a copy of any AFP PDS’s relating to the member’s preferred investment strategy. With the exception of the integrated PDS option, the member will therefore not receive all of the disclosure information at the same time.
REQUEST FOR INFORMATION ON AFP Members may request more information about the investment strategies including AFP’s before they instruct the trustee to invest their funds in a particular strategy. If the member does not make a request for further information the trustee “must be satisﬁed that the member has been given all the relevant product disclosure information before implementing the selected investment strategy and acquiring any accessible ﬁnancial products for a member”.20 The only way a trustee could be satisﬁed that this is the case is to provide the AFP PDS and obtain an appropriate written acknowledgement from the member that they have received the AFP PDS and want to proceed on that basis.
DELIVERY OF PDS ELECTRONICALLY It is possible to deliver the PDS electronically to an electronic address nominated by a member and making it available in a way agreed by the member. The examples given in PS 184 are to a member via an electronic facility such as a secure area of your website.21 It is also acceptable to split the PDS and for example provide the fund PDS as a hard copy and the AFP PDS in electronic form. This concession may solve many problems with providing the amount of information that the s.1012IA requirements will involve for funds offering a large number of AFP’s. PS 184 suggests that this should also minimise situations where an instruction from a member cannot be acted on until further disclosure is made to the member in compliance with section 1012IA22.
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Conflict Between The SIS Requirements and The Corporations Law Under s.1012IA the AFP PDS must be given to the member before he or she acquires an interest in the AFP. Acquiring an interest includes every time you make a contribution and each time you switch between investment strategies. The requirement under SIS Regulation 4.02 is more onerous and requires the trustee to provide disclosure about all investment strategies offered by the fund before a member directs the trustee in which investment strategy they want to invest. The provisions of s.1012IA do not override the requirements of SIS, which are still binding on a trustee. This conﬂict is not resolved in PS 184. PS 184 suggests that you need only give the member information about the AFP in the member’s preferred investment option while clearly SIS Regulation 4.02 requires proper disclosure of information relating to all investment options so the member can make an informed choice.
Directions to Invest that are “Time Critical” The general rule is that the PDS for the AFP must be given to the member before a trustee acts on an instruction from the member to acquire that accessible ﬁnancial product.23 However, there are exceptions to this general rule. The general rule does not apply where the act of acquisition is “time critical”. Under this exception if the member gives the trustee an instruction to acquire an AFP immediately or by a speciﬁed time, the trustee may acquire the AFP before giving the PDS to the member.24 The PDS must then be given a soon as practicable after the AFP is acquired but no later than the ﬁfth day after the day on which the AFP was acquired. Obviously there would have to be a process to identify a time critical request from a member in order to determine if this exception applies, and to ensure that the AFP PDS is subsequently given in the speciﬁed time frame. One approach could be to include a time critical option in the form used to switch between investment options, either by the member indicating they require the switch to be made immediately or by specifying a speciﬁc date for it to be completed provided that it is manageable by the trustee. The Member would of course have to be made aware of the consequences of selecting that option and be prepared to receive the AFP PDS after the switch rather than before, and a clear acknowledgement of that fact on the form would be appropriate.
Employer Sponsored Members It is common practice for employer sponsors to join new employees in an employer sponsored superannuation fund, and for the employee to receive the fund information after that date25. This permits the PDS to be given to a member up to 3 months after joining the fund26. PS 184 conﬁrms that Trustees may develop different ways of delivering disclosure relating to AFP’s to applicants to join the fund or existing members prior to the AFP being acquired, depending on when the Trustee is required to deliver the fund’s PDS.27
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However, the disclosure information concerning an AFP must be given to the member before an interest in the AFP is acquired, subject only to the time critical rule referred to above. Therefore while an employer sponsor can join a new employee to the fund before the fund PDS is provided, contributions for that employee could not be invested in an investment strategy including an AFP until the employee is given the PDS for that AFP or an integrated PDS including information relating to that AFP. Contributions would have to be invested in the fund’s default option until these requirements have been met.
Conclusion Provided a superannuation fund qualiﬁes for the class order relief the trustee will not have to comply with the s.1012IA requirements until 30 June 2008. Prior to that date trustees will need to carefully consider: •
how their investment strategies are structured and presented in the fund’s PDS;
whether their investment strategies include AFP’s;
if so, whether any of the exceptions apply; and
if not, which of the 3 options for disclosure they will adopt.
Depending on the option selected it may be necessary for the trustee to negotiate arrangements with the issuers of the AFP’s concerning how up to date information will be provided and maintained. For funds offering a large number of AFP’s these are not issues to be left to the last minute! Given the amount of time it has taken for s.1012IA to become operative it is unlikely that ASIC will agree to any further extensions of time.
PS 184.39 Para. 2 CO 03/1097 PS184.17
CO 07/386 inserts s.1017CA(1)(a) S.1017CA(1)(b), (2)(3) and (4) inserted by para 4(b) of CO 07/386 6 CO 06/636 paragraph 3 Relief for additional acquisitions 7 S.1012D(1) the Act, S.1017CA(6) in CO 07/386 8 S.1012D(2) the Act. S.1017CA(7) in CO 07/386 9 S.1012D(2)(B) the Act 10 PS 184.55, CO 07/386 Content Requirements for the superannuation entity’s PDS, modiﬁes s.1013FB(3)(a)(iv) requiring the provider to ensure the superannuation entity’s PDS contains information that will allow a client to understand the differences between the rights of a person who purchases an accessible ﬁnancial product directly as a retail client and the rights of a client where the provider acquires the product on behalf of a client. 11 PS 184.59 12 PS 184.60 13 PS 184.61 14 PS 184.61 15 Division 4C Corporations Regulations 16 PS 184.64 17 PS 184.67 18 S.1012IA and Regulation 7.9.14A of the Corporations Regulations 2001 5
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Section 1013D Corporations Act PS 184.76 21 PS 184.31, Regulations 7.902A, Corporations Regulations and Section 1015C of the Corporations Act. 22 PS 184.33 23 S. 1012IA(2) the Act 24 S. 1012(G) is modiďŹ ed by 1012IA(4) of the Act 25 S. 1012F the Act 26 S.1012F the Act 27 PS 184.47 20
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After many drafts and much consultation the final version of ASIC Policy Statement 184 (PS 184) has finally been released. PS 184 deals with...