ASIC Report: Keeping the gatekeepers in check

  • Date:01 Oct 2011
  • Type:CompanyDirectorMagazine
Greg Medcraft explains how ASIC is working to hold the promoters of investment products to account to boost investor confidence.


The number-one outcome for the Australian Securities and Investments Commission (ASIC) is ensuring investors and financial consumers are confident and informed, and this extends to holding gatekeepers to account. These gatekeepers include the promoters of investment products, particularly responsible entities (REs) of managed investment schemes (MIS) and super fund trustees.

As a result of the global financial crisis, ASIC’s work in these sectors has focused on reviewing a range of areas including infrastructure entities, hedge funds, agribusiness and unlisted mortgage and property schemes. We have also examined REs that promote themselves as providing compliance services to non-related asset managers.

If not, why not disclosure

As part of this work, ASIC has engaged the industry on improving disclosure to retail investors in infrastructure, agribusiness, unlisted mortgage and property schemes, and hedge funds. This has been done via the "if not, why not?" benchmark approach and disclosure requirements. This approach is about setting out clearly to investors the business model of the enterprise in which they are thinking of investing. This is all about ensuring retail investors are better informed about these products when making investment decisions.

Responsible entity funding

ASIC has also consulted industry on changes to REs’ financial resource requirements to ensure appropriate funding to meet their operational needs and alignment with investors’ interests.

Later this year, we will release new and revised regulatory and investor guides dealing with these sectors.

Exchange Traded Funds

Our consumer finance website,, also has information to help people understand exchange-traded funds (ETFs), a type of managed investment that can be bought and sold like shares. They usually aim to replicate changes in the value of a share index, but are now also available for a wide range of assets, including natural resources and foreign currencies. Some ETF products are complex.

In recognition of ETFs’ growing popularity in Australia – 700 per cent growth over five years – and the need to help investors understand the risks and other considerations, ASIC is reviewing ETFs, both standard and synthetics, to assess the risks and what they mean for Australian investors.

Over the coming year, ASIC will also look at the adequacy of REs’ risk management, cash-management funds and compliance with new or revised disclosure requirements. In addition, we will be examining custodians, compliance of REs in the unlisted property sector, asset consultants and the adequacy of compliance plans and the audit of these.

Super funds

In the superannuation space, ASIC is pleased to support the transparency initiatives of the Financial Services Council (FSC) and the Association of Superannuation Funds Australia (ASFA) in proposing a standard risk measure that will help investors better assess their super fund risk.

The standard risk measure discloses the level of risk in a super option and provides consumers with more transparency about these risks. It is a proposal also welcomed by the Australian Prudential Regulation Authority.

The standard risk measure will have seven risk bands, ranging from "very low" to "very high", and sets out what these terms mean in relation to the chances of a negative return over 20 years. Super fund members will be able to more easily compare investment options within their fund, as well as make comparisons across funds.

It is expected the risk measure will be included in super fund product disclosure statements (PDS) with a start date of 22 June 2012 for disclosing this information on a standardised basis. This timing will coincide with when trustees must use a shorter PDS.

We are also working with the industry on portfolio-level disclosure. That is, asking the industry to come up with best practice on how to disclose to investors the actual securities and debt instruments they invest in.

Hedge funds

In the hedge fund sector, our thinking is being driven by our recent regulatory experience – and in particular, the fraudulent operations of Trio/Astarra – as well as by international regulatory developments. These include the work of the International Organization of Securities Commissions (IOSCO), developments in the US with rule-making taking place under the Dodd-Frank Act and the recent passage of the Alternative Investment Fund Managers Directive in the European Union.

As most hedge funds are structured as MIS, they share many of the same issues as the broader sector. However, the complexity of their investment strategies, investment structures and use of leverage, derivatives and short selling poses particular risks to investors and challenges from a disclosure point of view.

Earlier this year, we published a consultation paper on the improvements we would like to see in hedge-fund disclosure.

Greg Medcraft Chairman
Australian Securities and Investments Commission