RG97 - the saga continues

With just over a month to the deferred RG97 implementation start date of 30 September 2017, on Friday 25 August 2017, the Australian Securities and Investments Commission (ASIC) announced further change to Class Order [CO 14/1252] (the Class Order) and its implementation.

While ASIC has provided guidance on its proposed changes to the Class Order in its FAQs the actual amendments are not available at the time of writing.  ASIC has stated that it will discuss with the industry working group the proposed drafting of the amendments to the Class Order and register the legislative instrument as soon as practicable. ASIC has not offered any extension for compliance with these new legislative provisions or any indication as to when industry may expect their publication.  ASIC has not indicated what its approach will be to PDS in the market which were either (a) issued before 1 February 2017 by early adopters or (b) issued after 1 February 2017 and, in either case, comply with the Class Order as it stood prior to this proposed round of amendments.

The majority of the proposed changes to the Class Order are relevant to super funds but managed investment schemes (MIS) are also impacted.

AMENDMENTS TO CLASS ORDER [CO 14/1252]

The proposed amendments to the Class Order are disclosed as FAQ 26 and can be divided into 4 broad categories

1. Amendments to clarify when property funds are interposed vehicles
2. Amendments to make the disclosure of an estimate of the bid-ask spread law
3. Amendments to extend time frame to disclose transaction and operational costs for super funds that invest in property
4. Amendments to extend the time frame to disclose some information to be included in Periodic Statements

Property Funds as Interposed Vehicles

ASIC appears to remain concerned that responsible entities and super trustees may attempt to “game the system” by stating in their PDS and Promotional Material that the units in an unlisted or listed property fund is the end investment when in fact they intend to give investors exposure to real property.

ASIC intends to clarify this by further amending the Class Order.

ASIC consider, unless the investment is clearly held as a means of gaining exposure to the units in the property fund (listed or unlisted) rather than the assets held through the property fund, then despite what the PDS and other marketing material may say, ASIC will consider the property funds are interposed vehicles where the investment in these property funds is treated as means of gaining exposure to real property.

ASIC considers despite any words to the contrary in a PDS or promotional material, a property fund will be an interposed vehicle “if the issuer of the PDS can be perceived as intending to give exposure to real property”, so for example places the fund on their website as a property fund or labels the investment option as a property investment option or labels it as or states it to involve or include a named property fund.

Where the option is a balanced option ASIC suggest an investment in a property fund should be treated as an interposed vehicle unless it clearly forms part of the balanced option’s equities allocation (which will generally be limited to listed equities), and is acquired and held in accordance with the investment mandate and strategy for that component of the balanced option and is treated as such for reporting and promotional purposes

The second principle of the “rule of law” is that laws should be expressed in such a way that people may be guided by it.  It will be of concern to all industry participants if this amendment to the Class Order becomes “a property fund is an interposed vehicle when ASIC says it is.”

Bid-ask Spread

ASIC has indicated that it intends to include in the definition of transactional and operational cost (see clause 103 of Schedule 10 of the Corporations Regulations), the ‘bid-ask spread’.  ASIC has indicated that the amendments to the Class Order will expressly require example costs reflected in ‘bid-ask spreads’ to be included in a PDS.

What exactly is the bid-ask spread, is a matter of some debate. Publicly ASIC has stated it considers the bid-ask spread to be difference between the amount paid to acquire an investment and the price that it would be disposed of at that time. ASIC has acknowledged there may be no bid-ask spread where a Fund acquires/disposes of listed shares by a market crossing unless, the transaction is completed over multiple trades and the ultimate transaction size is so significant it could move the market once completed (regardless of whether it did). It is difficult to know how this cost could be reasonably estimated when there is no available data (as the transaction did not move the market) and the Fund has not in fact incurred a measurable cost.  It is troubling to hear that privately with industry groups ASIC suggests that issuers buy market data from which they may estimate this bid-ask spread incurring a cost for members when the relevant Fund did not incur any actual cost as it may be difficult to discern any member benefit in incurring this cost

Transaction and Operational Costs for Property Funds

ASIC is to delay to 1 October 2018, the requirement to disclose in Super Fund PDS real property operational costs included in the investment fee (and also as a result indirect costs) on the condition that the PDS includes an estimate of the amount of those costs under Additional explanation of fees and costs.

The delayed commencement in relation to the vexed area of real property operational costs (A property operational cost is a transactional and operational cost that relates to real property and does not relate to the acquisition or disposal of real property and is not a management cost ) disclosed in Super Funds PDS, is to allow more time for discussions between ASIC and industry about what costs should be included based on the “for the benefit of the owner rather than for the benefit of the tenant” test.  ASIC will amend the Class Order to exclude real property operational costs from the investment fee (and also as a result indirect costs) when disclosed in a PDS issued before 30 September 2018 on the condition that the PDS includes an estimate of the amount of those costs under the Additional Explanation of Fees and Costs section of the PDS.

In relation to the disclosure of these real property operational costs in Super Fund Periodic Statements, ASIC will amend the Class Order so:

• for periods ending on or before 29 June 2018, these costs may be excluded on the condition that there is a statement that these costs have been excluded; and
• for periods ending on or after 30 June 2018 and before 30 September 2018, periodic statements to not include these real property operational costs in other fees, if an estimated amount that has been borne by the member is included in a separate disclosure in the periodic statement

ASIC does not appear to have modified the PDS disclosure requirements for managed investment schemes that invest in real property.  It is therefore unclear what the disclosure requirements are for a managed investment scheme that invests in real property.

Other Modifications to Periodic Statements

ASIC will modify the provisions of the Class Order that relate to periodic statements so that for any period ending on or before 29 June 2018, disclosure will not be required for:

For Super Funds:

• borrowing costs, so long as periodic statement tells members where they can find the information on the Super Fund’s website;

• the buy-sell spread where the periodic statement states that as it is not reasonably practicable for the trustee to include it. ASIC has provided guidance on what information they consider super trustee’s relying on this exemption should provide including that the investor be provided with contact details to ask the trustee for more information about the buy-sell fee charged;

For MIS:

• transactional and operational costs for managed investment products;
• to exiting investors in 2017 where the responsible entities irrevocably elects to reduce the maximum period in which the exit statements are provided from six months to no less than one month so the statements that are to be given to those exiting investors in 2017 will not be required to comply with the Class Order

For Super Funds and MIS

• disclosure in the total of other fees of any amounts by which tax deductions have been resulted in reduced disclosed fees or costs. This in line with ASIC’s view that gross of tax disclosures should be included in the total (see RG 97.234); or

For periodic statements for periods ending on and after 30 June 2018, the modified provisions of Schedule 10 will require this information to be included in the periodic statements.

ASIC has stated its rationale for the deferral of the requirement for these disclosures in periodic statements was to provide for a single timeframe for making changes that industry claim they have not prepared for and provides ample time to enable these changes to be made without unnecessary expense.