In a K&L Gates client alert, partners Jim Bulling, Daniel Knight and Gabrielle Palmieri reviewed the new issues for superannuation and hedge funds thrown up by Australian financial services reforms.
The team found that superannuation fund trustees will be seeking increased input and cooperation from their investment managers in order to comply with new regulatory requirements while hedge funds will need to consider their status under the refined definition of 'hedge fund'.
Superannuation: New Reporting Standards
Australia's prudential regulator, the Australian Prudential Regulation Authority (APRA) recently finalised a series of 35 new reporting standards which require superannuation fund trustees to submit detailed data on a quarterly or annual basis.
While some of the standards are related to internal trustee matters, many are concerned with fund investment and performance issues. The team at K&L Gates anticipates that investment managers will be asked to assist trustees compile and collate this information in the formats required by the regulator. For example, trustees will be required to report to APRA:
K&L Gates reports that for some standards, APRA requires information for the period commencing 1 July 2013 while the remainder of the reporting standards are in respect of the period commencing 1 July 2014. In most cases, the reporting date is 28 days after the end of the reporting period (for quarterly reporting standards) or 31 days after the end of the reporting period (for annual reporting standards). APRA has granted very short extensions on the first reporting date for some of the reporting requirements.
They write: "Managers will need to build into their systems the capability to provide the information required by APRA and those managers who are unwilling or unable to provide the required information may find it difficult to keep their superannuation mandates."
Performance Fees for Investment Managers
The current reforms also restrict the circumstances in which superannuation funds can pay performance fees to their investment managers for arrangements entered into on or after 1 July 2013, the firm finds. "These restrictions are strictest for funds which accept "default employer contributions", ie the mandatory contributions from employers on behalf of their employees to a fund selected by the employer. Default employer contributions make up the majority of contributions into superannuation funds in Australia." Funds accepting these contributions can only pay a performance fee to their investment manager where:
These restrictions are designed to align the interests of the investment manager with the employees whose money is being invested, K&L Gates advises.
Refined 'Hedge Fund' Disclosures
The firm writes: "The Australian Securities and Investments Commission (ASIC) has redefined the test for schemes that will be considered hedge funds for the purposes of some new hedge fund disclosure requirements and the requirement to comply with the shorter Product Disclosure Statement (PDS) regime. These new requirements are mandatory for funds which are offered to retail investors in Australia, while hedge funds, which are offered to wholesale investors, are 'encouraged' to comply."
Further, funds that fall within the revised definition of hedge fund will be required to comply with the disclosure obligations set out in Regulatory Guide 240: Hedge funds: Improving disclosure (RG 240) but will not be required to comply with the shorter PDS regime. Some funds that do not fall within the revised definition may be required to comply with the shorter PDS regime. The test for hedge funds has been redesigned to ensure that funds with more orthodox investment strategies are not inadvertently captured under the new definition, as was the case under the previous version.
The new material from ASIC makes it easier to determine whether a scheme falls within the definition of hedge fund and also introduces an anti-avoidance clause to ensure schemes are not structured for the sole purpose of avoiding being characterised as a hedge fund. The amendments to the definition of hedge fund include:
K&L Gates writes: "RG 240 identifies a number of benchmarks and disclosure principles for hedge funds which include:
K&L Gates writes: "The amendments take effect on 1 February 2014 and will result in many hedge funds, which are open to retail investors, having to address a range of additional issues in their disclosure documents."
The team concludes: "The superannuation reforms will require effort from superannuation fund trustees and their investment managers if the new requirements are to be satisfied. In this regard, investment and reporting processes may need to be updated and agreements and mandates may need to be reviewed.
The hedge fund disclosure reforms should result in fewer 'false positives' in relation to classification as a hedge fund for disclosure purposes, ensuring that the disclosure requirements are aimed at the appropriate entities. Fund managers will need to consider whether they fall within the revised hedge fund test and update their disclosure documents accordingly."
Opalesque also reported on the new ASIC hedge fund definitions, with comments from Alex Wise, head of fund services at Select Asset Management.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.