Insights from ASIC surveillance of managed funds

Key points

• ASIC is continuing its surveillance into managed funds;
  
  
• Marketing materials across 18 funds to be ‘voluntarily’ amended;
  
  
• Two interim stop orders have been placed on two managed funds for defective target market determinations;
  
  
• ASIC will take prompt action and continue to take regulatory action if they find poor conduct. 

Managed fund issuers are under the watchful eye of ASIC. As a result of the regulator’s ongoing surveillance, the marketing collateral of 18 funds is to be amended and interim stop orders have been imposed on two managed funds.

Following the significant regulatory reforms in October 2021, ASIC also commenced its surveillance of the marketing of managed funds, with a focus on misleading performance and risk disclosures in fund promotional material. Surveillance of managed funds is not new - this program followed ASIC’s initial surveillance in 2020 where ASIC told fund managers it wanted products to be ‘true to label’.

ASIC’s concerns with retail products and some wholesale products

ASIC’s primary concern is that “retail investors and potentially unsophisticated wholesale investors, especially retirees, [are] making important investment decisions based on marketing that does not accurately represent fund performance”. The regulator emphasised that responsible entities, trustees and investment managers have an obligation to ensure that their marketing collateral does not stray into ‘fair weather’ marketing.

As a result of this surveillance, 13 responsible entities or fund trustees have or will ‘voluntarily’ amend their marketing materials across 18 funds. As part of its media release, ASIC outlined the funds affected have not made any admissions of guilt and liability and summarised its concerns, as well as the actions that have or will be taken to address their concerns.

ASIC’s key concerns included:

• Performance benchmarks used were inconsistent with the fund’s assets and strategy;
  
  
• Warnings were absent from a website and advertisements, or were not sufficiently clear, prominent or close to the claim they were about, such as target return statements;
  
  
• Products were compared to other products that were not consistent with the fund’s assets and strategy;
  
  
• Past and future performance were not appropriately disclosed or were not accompanied by sufficiently prominent warnings (e.g. no dates for past performance or failure to fairly disclose risks for future performance); and
  
  
•  Failing to source or date a claim that a fund was ‘Best Performing’.

In response, affected responsible entities, trustees and fund managers have withdrawn offending advertisements or undertaken to review promotional material to address ASIC’s concerns.

Design and Distribution Obligations (DDO)

Marketing collateral is not the only focus of ASIC for managed funds. Less than a week after ASIC’s media release on its surveillance of managed funds, ASIC also announced that it had placed interim stop orders on two managed funds given concern about defective target market determinations (TMD).

The first stop order was placed as ASIC considered that the target market defined by the responsible entity was too broad and that not all retail clients within their defined target market were appropriate for the product. ASIC also found that the distribution conditions set out in the TMD were inadequate and inferred that consumers not in the target market were being distributed the product.

The second stop order was issued as the TMD did not have appropriate distribution conditions, did not adequately describe the class of retail clients in the target market and did not specify the mandatory review periods.

ASIC also used this enforcement as an opportunity to remind product issuers of their broader ‘design and distribution obligations’, including the requirement to exercise diligence in defining the target market appropriately and putting in appropriate place distribution conditions to ensure that the product is targeted at the right market.

What to expect?

ASIC notes that its surveillance into marketing of fund performance and risk is ongoing. The regulator has warned that it will ‘take prompt action’ if they find poor conduct and will continue to apply ‘a range of regulatory interventions’ including stop orders and court action. We can also expect ASIC to continue to monitor entities’ compliance with DDO, particularly as industry continues to develop its approach to these relatively new obligations.

Targeted surveillance is under way and ASIC states that it will take ‘quick action to disrupt poor conduct and prevent potential consumer harm’. This is unsurprising given that ASIC has mentioned this on multiple occasions as well as noting in its 2022-2026 corporate plan that DDO compliance is one of their priorities.

We recommend responsible entities and trustees of managed funds review their marketing collateral as well as their TMDs and associated policies in light of ASIC’s areas of focus coming out of the recent surveillance.