Australian Financial Services Reforms – New Issues for Superannuation and Hedge Funds

by K&L Gates LLP
Contact

Superannuation fund trustees will be seeking increased input and cooperation from their investment managers in order to comply with new regulatory requirements while hedge funds will need to consider their status under the refined definition of 'hedge fund'.

We have previously reported on some other aspects of these reforms and their potential impact on fund managers and this legal insight is an update on these earlier releases.

Superannuation

New Reporting Standards

Australia's prudential regulator, the Australian Prudential Regulation Authority (APRA) recently finalised a series of 35 new reporting standards which require superannuation fund trustees to submit detailed data on a quarterly or annual basis.

While some of the standards are related to internal trustee matters, many are concerned with fund investment and performance issues. We anticipate that investment managers will be asked to assist trustees compile and collate this information in the formats required by the regulator. For example, trustees will be required to report to APRA:

  • the value of all investments held by the fund (directly and indirectly) and the portion of those investments which are managed under individual mandates the fund's investment income, realised and unrealised gains and losses and any foreign exchange gains and losses 
  • the investment fees and costs payable by the fund, including those fees built into the price of underlying products

  • the fund's asset allocation percentages, relative to the trustee's target allocation.

For some standards, APRA requires information for the period commencing 1 July 2013 while the remainder of the reporting standards are in respect of the period commencing 1 July 2014. In most cases, the reporting date is 28 days after the end of the reporting period (for quarterly reporting standards) or 31 days after the end of the reporting period (for annual reporting standards). APRA has granted very short extensions on the first reporting date for some of the reporting requirements.

Managers will need to build into their systems the capability to provide the information required by APRA and those managers who are unwilling or unable to provide the required information may find it difficult to keep their superannuation mandates. 

Performance Fees for Investment Managers

The current reforms also restrict the circumstances in which superannuation funds can pay performance fees to their investment managers for arrangements entered into on or after 1 July 2013. These restrictions are strictest for funds which accept "default employer contributions", ie the mandatory contributions from employers on behalf of their employees to a fund selected by the employer. Default employer contributions make up the majority of contributions into superannuation funds in Australia. Funds accepting these contributions can only pay a performance fee to their investment manager where: 

  • the base fee (ie the non-performance based component) has been reduced to reflect the possible payment of performance fees
  • performance is measured against the performance of similar investments on an after cost basis 

  • performance is measured over an 'appropriate' time period for the particular assets 

  • there are disincentives for the investment manager for underperformance.

These restrictions are designed to align the interests of the investment manager with the employees whose money is being invested.

Refined 'Hedge Fund' Disclosures

The Australian Securities and Investments Commission (ASIC) has redefined the test for schemes that will be considered hedge funds for the purposes of some new hedge fund disclosure requirements and the requirement to comply with the shorter Product Disclosure Statement (PDS) regime. These new requirements are mandatory for funds which are offered to retail investors in Australia, while hedge funds, which are offered to wholesale investors, are 'encouraged' to comply.

Funds that fall within the revised definition of hedge fund will be required to comply with the disclosure obligations set out in Regulatory Guide 240: Hedge funds: Improving disclosure (RG 240) but will not be required to comply with the shorter PDS regime. Some funds that do not fall within the revised definition may be required to comply with the shorter PDS regime. The test for hedge funds has been redesigned to ensure that funds with more orthodox investment strategies are not inadvertently captured under the new definition, as was the case under the previous version.

The new material from ASIC makes it easier to determine whether a scheme falls within the definition of hedge fund and also introduces an anti-avoidance clause to ensure schemes are not structured for the sole purpose of avoiding being characterised as a hedge fund.

The amendments to the definition of hedge fund include:

  • Clarification of the complexity of investment strategy limb, which is triggered when a scheme pursues investment strategies intended to produce returns with low (or zero) correlation to prescribed published indices, or any combination of them. The list of asset classes covered by the published indices has also been expanded.
  • Changes to the complexity of investment structure limb, which is triggered when a scheme invests through three or more vertically interposed entities (or two or more where at least one entity is offshore), where the responsible entity (RE) or an associate has the capacity to control either the disposal of products or two or more of the interposed entities.

    The amendments redefine 'interposed entity' to exclude registered schemes and certain foreign entities from being counted as interposed entities when determining whether the complexity of investment structure limb is triggered.

    The relevant foreign entities are those which are incorporated or registered in certain offshore jurisdictions and regulated by prescribed regulatory authorities (Prescribed Foreign Regulatory Authority). Prescribed Foreign Regulatory Authorities include the US Securities and Exchange Commission, the UK's Financial Conduct Authority and the Hong Kong Securities and Futures Commission.

  • Changes to the definition of 'derivative' and to the carve-outs from when this characteristic will be met, and clarification as to when the derivatives limb will be triggered.

  • Changes to the performance fee limb so that it is only triggered where there is a right to a performance fee and the RE has disclosed to investors that performance fees will be payable when certain conditions are satisfied. 

RG 240 identifies a number of benchmarks and disclosure principles for hedge funds which include: 

  • valuation of assets – whether the valuation of a hedge fund's non-exchange traded assets are provided by an independent administrator or an independent valuation service provider 
  • periodic reporting – whether the responsible entity (RE) of the hedge fund will provide periodic disclosure of certain key information on an annual and monthly basis 

  • investment strategy – details of the investment strategy for the fund 

  • investment manager –necessary information about the people responsible for managing the fund's investments 

  • fund structure – an explanation of the investment structures, relationships between entities in the structure, fees payable to the RE and investment manager, jurisdiction of any offshore parties and the due diligence performed on underlying funds 

  • valuation, location and custody of assets – the types of assets held, their location, how they are valued and custodial arrangements 

  • liquidity – the fund's ability to realise its assets in a timely manner and the risks of illiquid assets 

  • leverage – the maximum anticipated level of leverage of the fund (including leverage embedded in the assets of the fund) 

  • derivatives – the purpose and types of derivatives used by the RE or investment manager and the associated risks 

  • short selling – how short selling may be used as part of the investment strategy and of the associated risks and costs 

  • withdrawals – the circumstances in which the RE allows withdrawals and how this might change.

The amendments take effect on 1 February 2014 and will result in many hedge funds, which are open to retail investors, having to address a range of additional issues in their disclosure documents.

Conclusion

The superannuation reforms will require effort from superannuation fund trustees and their investment managers if the new requirements are to be satisfied. In this regard, investment and reporting processes may need to be updated and agreements and mandates may need to be reviewed.

The hedge fund disclosure reforms should result in fewer 'false positives' in relation to classification as a hedge fund for disclosure purposes, ensuring that the disclosure requirements are aimed at the appropriate entities. Fund managers will need to consider whether they fall within the revised hedge fund test and update their disclosure documents accordingly.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP
Contact
more
less

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.