In brief
- On 21 December 2009 the Federal Government released for public comment draft regulations requiring a short product disclosure statement (PDS) for registered managed investment schemes that invest mainly in financial assets and for all superannuation products. Example PDSs have also been released.
- Comments on the draft regulations and example PDSs are sought by 26 February 2010.
Background
The current PDS regime in Part 7.9 of the Corporations Act is principles-based and requires disclosure of key information such as significant benefits and risks, fees and costs and other information that might be expected to have a material influence on the decision of a reasonable retail client whether to acquire the product. It is generally acknowledged that this principles-based regime has often lead to PDSs that are overly lengthy, because issuers and their lawyers have responded to the lack of precision in the legislation by including more detailed information where there is any doubt.
Which products will be affected by the draft regulations?
The draft regulations will apply to a registered managed investment scheme (whether listed or not) which invests at least 80% of its assets in “financial assets”. The commentary accompanying the draft regulations refers to such schemes as “straightforward” managed investment schemes.
The expression “financial assets” is not defined. ASIC uses the expression in AFSL licensing documentation to refer to “schemes that hold cash, cheques, orders for payment of money, bills of exchange, promissory notes, securities, deposit products and interests in managed investment schemes, but does not include derivatives”. [1] Based on ASIC’s definition, funds that may be expected to be covered by the draft regulations include cash management trusts, bond funds, mortgage funds and share funds.
The commentary states that agri-business and property schemes are examples of schemes that would be excluded under the definition.
The superannuation products covered by the draft regulations are interests in regulated superannuation funds, approved deposit funds and pooled superannuation trusts.
What are the content requirements?
The draft regulations modify the PDS content requirements in Part 7.9 as they apply to the short PDSs. The main content requirements in section 1013D and the general obligation to include other influential information in section 1013E are omitted.
The total length of the PDS (not including a title page, table of contents and any information incorporated by reference) must not exceed six A4 pages.
The PDS must include sections which are numbered and titled as follows:
1. About [name of responsible entity]
2. How to invest with [name of responsible entity]
3. Benefits of investing with [name of responsible entity]
4. Risks of managed investment schemes
5. How we invest your money
6. Fees and costs
7. How managed investment schemes are taxed
8. How to apply
The PDS for superannuation products must include similar sections plus a section on insurance.
The contents of these sections are prescribed in great detail in the draft regulations. Notably, the fees and costs section must include a worked example of fees based on an initial investment of $100,000, annual contributions of $5,000, an investment return of 5% after taxes but before fees and the withdrawal of the investment after 10 years.
Information incorporated by reference (IBR)
IBR information is deemed to be part of the PDS and the full range of PDS liability and enforcement provisions of the Corporations Act will apply to it. The IBR information must be publicly available in a document other than the PDS, and clearly distinguishable from other matters that are not incorporated. Each version of IBR information will need to include the date on which it was prepared. Each version of the PDS and IBR information must be retained for 7 years.
When will the new provisions apply?
Comments on the draft regulations and example PDSs are sought by 26 February 2010. The commentary states that appropriate application and transitional arrangements will be made at a later date to take into account the need to give stakeholders sufficient time to comply with the new requirements.
For further information, please contact Michael Hodgson, Partner, Tel: +61 2 8233 9756. Email michael.hodgson@dibbsbarker.com
[1] RG 2, at paragraph RG 2.77.
