New precedent set? ASIC issues first DDO stop order for a property trust

24th August, 2022 | No Comments

ASIC’s recent enforcement action in relation to unlisted property funds is instructive for PFA members, particularly regarding the design and distribution obligations (DDO) regime under the Corporations Act, which commenced on 5 October 2021.

ASIC takes its first enforcement action in relation to DDO

ASIC has recently issued its first stop orders under the DDO regime, after it found deficiencies in several target market determinations (TMDs).

The TMD is a critical part of the DDO regime, as the TMD identifies the types of consumers who are appropriate for a financial product, taking into account the risk profile and other features of the product offering, and the potential investors for whom the product is suitable. A TMD is required when engaging in retail product distribution.

In explaining the stop order notices, ASIC said the financial firms either did not identify the appropriate consumers for the financial product having regard to the financial product’s risk profile and the consumers’ likely objectives, financial situation and needs; or the product issuer did not have a TMD at all where the issuer had been suspected to have engaged in retail product distribution.

ASIC Deputy Chair, Karen Chester, said

“ASIC’s focus has now shifted to compliance. Industry has had sufficient time to bed down its implementation of the DDO regime

“We have targeted surveillances underway to check whether product issuers and distributors are complying with their design and distribution obligations. We will continue to look at defective TMDs, as well as issuers who have not made TMDs or not made them publicly available.

“We will review how product issuers interact with their distributors to confirm they are not straying beyond their target market.

“We will also review how they monitor and review consumer outcomes to ensure consumers are receiving products that are consistent with their likely objectives, financial situation and needs.”

ASIC takes action against a property trust which misrepresented performance risks

ASIC issued an interim stop order for Fawkner Property Ltd (Fawkner), which prevents Fawkner from offering, selling, issuing or transferring units in one of its property trusts, due to “misleading or deceptive statements in the Fund’s marketing and disclosure”.

ASIC says Fawkner misrepresented the performance risks in the marketing of its fund, in particular on Fawkner’s website and in its PDS. The regulator highlighted the following issues:

• not adequately explaining how forecasted returns were calculated;
• not providing adequate warnings that the forecasted performance may not be achieved;
• using the term ‘Covid-proof’;
• inappropriately comparing the Fund to lower risk investments, benchmarks and indices; and
• using outdated performance numbers.

The stop orders are in line with ASIC’s recent surveillance. This demonstrates that ASIC is willing to take action to set precedents. It follows that relatively small property funds need to be careful around their disclosure as well as the information they use to market their funds.

ASIC issues stop order regarding fund advertisements

ASIC also issued an interim stop order against RES Investment Fund. The breaches in this case were more subtle, but still regarded misleading and deceptive statements in advertising the fund, which is in line with key themes of ASIC’s recent surveillance.

In this case, it involved the manager suggesting its investors were investing directly in Pleasure Point Mine Pty Ltd (PPMPL), which was a related entity of Responsible Entity Services Limited (the responsible entity of the fund). However, investors were actually buying units in the fund, the sole investment of which was a loan to PPMPL and not a direct investment in PPMPL.

ASIC found these claims misleading “…because they may lead investors in PPM Units to believe that they will receive shares and/or a direct ownership interest in PPMPL”.

Again, this demonstrates ASIC’s willingness to take action and make an example of the wrongdoings of financial firms, and reinforces the need for vigilance amongst those in the industry.

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