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Client Update: Funds Management – 7 April 2006
ASIC announces interim no-action position on pricing discretions
In brief: The
Australian Securities & Investments Commission has issued a no-action letter
regarding compliance with the requirements of Class Order 05/26 to the extent
that they relate to the exercise of pricing discretions. The no-action position
applies until 1 May 2007. While this is
a welcome development, the uncertainties and practical concerns arising from the Class
Order have yet to be resolved. Senior Associate Penny Nikoloudis reports.
We reported in AAR's Focus: Funds Management, February 2006
that the Australian Securities & Investments Commission
(ASIC) had issued class order relief allowing
responsible entities to exercise limited discretions when calculating unit
prices. To obtain the benefit of ASIC Class Order 05/1236 (which amends ASIC
Class Order 05/26), a responsible entity must satisfy a number of conditions
including, most notably, that:
- the responsible entity must either exercise the
discretion in accordance with a current documented policy, or provide a
written explanation as to how the discretion was exercised and why such
exercise was reasonable;
- the responsible entity must inform all members on or
before the first date when the responsible entity sends a communication to all
members after 1 May 2006, that they may obtain copies of the documented
policies and written explanations at no charge; and
- if prepared on or after 1 May 2006, the scheme's
product disclosure statement (PDS) must include
statements to the effect that copies of the documented policies or written
explanations are available from the responsible entity at no
charge.
Under the terms of the Class Order, responsible entities
have until 1 May 2006 to document their pricing discretion policies and comply
with the other conditions of the Class Order.
As we reported in the February 2006 Focus,
industry participants expressed a number of significant concerns regarding the
application of the Class Order and the unrealistic compliance deadline. On
behalf of its members, the Investment and Financial Services Association
(IFSA
) made submissions to ASIC seeking modifications to the Class Order and an
extension of the compliance
deadline.
On 29 March 2006, ASIC issued a no-action letter in which it states that it
does not intend to take action for a breach of section 601GAB of the
Corporations Act 2001 (the Act) (inserted by
ASIC Class Order 05/26), provided that the relevant responsible entity:
- takes reasonable steps to comply with the conditions
of the Class Order as soon as is reasonably practicable; and
- continues to report any significant breach of the law arising out of the
exercise of unit pricing discretions under s912D of the Act.
Although the no-action letter refers only to s601GAB (which relates to issue
prices), and not to s601GAC (which relates to withdrawal prices) or s1013D(2B)
(which relates to PDS disclosure), ASIC has informally confirmed that its
no-action position will also apply to sections 601GAC and 1013D(2B).
The no-action position does not affect the obligation of all responsible
entities to ensure that any exercise of a discretion meets the general fiduciary
obligations in Chapter 5C of the Act.
ASIC's no-action position will cease on
1 May 2007. According to ASIC's letter, the no-action position
has been adopted in recognition of the possible overlap between reviews of
scheme constitutions against the recently released Unit Pricing Guide (see AAR's
Focus: Funds Management, November
2005) and reviews of scheme constitutions to ensure compliance with the Class
Order.
A copy of the no-action letter is available to IFSA members on IFSA's
website.
While the no-action position is a welcome development, it does not address
the fundamental concerns expressed by industry in relation to the Class Order.
In particular, the following issues remain unresolved:
- the manner in which the Class Order applies to listed
schemes;
- the broad scope of discretions covered by the Class
Order, which could potentially capture discretions that affect the structure
and operation of a scheme; and
- the compliance costs of documenting pricing discretion policies and
implementing procedures to meet the requirements of the Class Order.
The no-action letter expressly states that ASIC was not prepared to amend the
Class Order. A no-action position is a less satisfactory outcome than an
amendment to the Class Order, as it conveys a policy decision only, and is not
legally binding. Nor does it preclude third parties from taking legal action in
relation to non-compliance with the Class Order. Also, a no-action letter is
only a statement of ASIC's intentions on the information available to it at a
particular time. Even where a no-action letter has been issued, ASIC reserves
its right to take action. For these reasons, although ASIC's no-action position
should provide some comfort to responsible entities, it does not have the same
effect as an amendment to the Class Order.
We expect that industry participants will continue to lobby for clarification
on the uncertainties regarding the application of the Class Order. We will
continue to keep you informed. In the meantime, if you have any queries, please
contact one of our Funds Management experts below.
For further information, please contact:
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