A GUIDE TO PUBLIC INVESTMENT FUNDS

Marketing of Public Investment Funds in Australia

This is the third article in CNM Legal’s four-part series: A Guide to Public Investment Funds. The series provides an overview of registration, regulation, marketing and tax treatment of public investment funds in Australia. This article will discuss marketing of public investment funds in Australia, focusing on the applicable regulatory frameworks, licensing requirements for marketing activities and the regulatory restrictions and requirements.

What regulatory frameworks apply to the marketing of public funds? 

The DDO Regime, as defined in CNM Legal’s A Guide to Public Investment Funds – Regulatory Framework for Public Investment Funds in Australia, aims to ensure that financial products, including funds, offered to retail clients are designed with consumer interests in mind, preventing the sale of unsuitable financial products. For funds, this involves:

  • Responsible entities (‘REs’) designing financial products likely to align with the objectives, financial situation, and needs of their intended consumers
  • REs and distributors taking reasonable steps to ensure that interests in a fund reach the appropriate target market.
  • REs monitoring consumer outcomes and conducting reviews to ensure consistency with consumer objectives, financial situations, and needs.

The Target Market Determination (‘TMD’) is a pivotal document within the DDO Regime. It outlines the target market for the fund, conditions and restrictions on fund issuance or distribution, circumstances suggesting the TMD is no longer suitable, review schedules, and information that distributors must provide to the RE. The TMD must be publicly available at no cost. Corporate directors of ‘corporate collective investment vehicles’ (‘CCIVs’), REs, and fund distributors must also ensure that fund distribution to retail clients aligns with the corresponding TMD. This includes periodic reviews of TMDs for compliance and appropriateness.

Marketing materials for funds are regulated by the Corporations Act 2001 (Cth) (‘Corporations Act’) and the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’), with additional considerations under general law.

A Product Disclosure Statement (‘PDS’) must be provided to retail clients before offering or issuing a financial product, such as an ‘managed investment scheme’ (‘MIS’) interest or a CCIV security. The PDS must be current, clear, concise, and effective, disclosing benefits, risks, costs, fees, taxation implications, dispute resolution details, and ethical considerations. Prescriptive guidelines govern the content and presentation of this information. A short-form PDS may be used for ‘simple managed investment schemes’, provided certain conditions are met. The application form for investment must be included or accompanied by the PDS. If fund interests are tradable on a financial market, the PDS must be lodged with ASIC. Otherwise, ASIC must be notified of PDS use within prescribed timelines. There is an exposure period after lodging a PDS with ASIC, during which investments cannot be issued or sold.

In addition to regulated disclosure requirements, financial products are subject to prohibitions against dishonest, misleading, deceptive, and unconscionable conduct under the Corporations Act, ASIC Act, and general law.

What are the licensing requirements that apply to the marketing of public funds? 

An Australian financial services licence (‘AFSL’) is typically required for entities engaging in the marketing of fund interests, as this activity involves providing financial advice or dealing in financial products. However, there are several exceptions to licensing requirements under specific circumstances:

  • Advice provided solely to a related body.
  • Certain offshore licensees who fulfil specific requirements set by ASIC and whose Australian clients are exclusively wholesale clients.
  • Funds issuing interests under an arrangement with an AFSL-holding intermediary that offers to arrange for the issue on the terms of the offers.

Individuals providing services on behalf of an AFSL holder do not need their own AFSL but must be appointed in writing as authorised representatives by the AFSL holder, with the appointment notified to ASIC. AFSL holders must adhere to the financial and other conditions stipulated in their AFSL, as well as comply with general conduct conditions outlined in the Corporations Act.

What regulatory frameworks apply to the marketing of public funds? 

Distribution fees or other charges

Investment advisers are prohibited from giving or receiving certain types of conflicted remuneration for investments made by retail clients. Conflicted remuneration refers to any benefit, whether monetary or non-monetary, that, due to its nature or the circumstances surrounding its provision:

  • could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients, or
  • could reasonably be expected to influence the financial product advice given to retail clients.
Advertising

Advertising restrictions are in place to ensure that potential investors are informed about the fund’s PDS and are encouraged to consider it before making investment decisions. Cold-calling and anti-hawking restrictions govern the distribution of advertising and PDS materials. Moreover, there are specific circumstances in which a fund, which is required to be registered as an MIS can be mentioned or referred to before registration. These circumstances are limited and regulated to ensure compliance with applicable laws and regulations.

Investor suitability

There are no specific investor suitability requirements, apart from the DDO Regime, for the types of funds that may be offered. As previously discussed in this article, a RE must prepare a TMD before issuing an interest in a fund to a retail client. The TMD outlines the class of retail clients comprising the target market and must be deemed ‘appropriate’. This means that it should be reasonable to conclude that if the fund were issued or sold to a retail client in accordance with the distribution conditions, it would likely align with the target market’s objectives, financial situation, and needs.

Custody of investor funds or securities

Although not mandatory, it is common practice to appoint a custodian separate from the fund RE for registered fund assets. This practice is often observed due to the capital adequacy requirements mandated under the RE’s AFSL for holding certain fund assets, as outlined above. Similarly, there is no obligatory requirement for the assets of a sub-fund of a CCIV to be held by a separate custodian.