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IR 03-31 ASIC provides overview of applications for relief under FSRA
The Australian Securities and Investments Commission (ASIC) today provided an overview of its decisions in some recent applications for relief from the licensing, conduct and disclosure provisions of the Corporations Act 2001 (the Act) as amended by the Financial Services Reform Act 2001 (FSRA).
ASIC has released this information both to illustrate examples of the sorts of matters where it has provided relief, and to make the manner in which ASIC has responded to specific matters fully transparent. The overview also includes examples of the circumstances in which ASIC has refused relief.
‘ASIC intends to issue these overviews at least twice-yearly to assist industry in understanding our approach to regulation under the FSRA regime’, ASIC Director of Financial Services Regulation (Legal and Technical Operations), Ms Pamela McAlister said.
‘While each application for relief is considered on a case-by-case basis, this overview provides some guidance on the circumstances in which ASIC will consider granting relief. However, potential applicants should not assume that ASIC will provide relief in the future in similar cases, as each relief application depends on the unique facts and circumstances of the case’, Ms McAlister said
The attachment to this information release provides a summary of the circumstances in which relief has been granted or refused under the FSRA licensing, conduct and disclosure provisions.
ASIC’s general policy is to only consider granting relief from the requirements of Chapter 7 of the Act to address atypical or unforeseen circumstances and unintended consequences of those provisions. The criteria that ASIC will apply in considering applications for relief are most recently outlined in Information Release 03-29: ASIC issues additional guidance for FSR relief applicants and in Policy Statement 167: Licensing: Discretionary powers and transition and Policy Statement 169: Disclosure: Discretionary powers and transition.
ASIC is required to publish a copy of each exemption and modification instrument issued in the Gazette, which is available from the ASIC website at www.asic.gov.au.
End of release
Attachment to IR 03-31: Recent examples of FSRA-related relief considered by ASIC
Related bodies corporate
Section 911A(2)(i) of the Act provides that a person is exempt from the requirement to hold an Australian financial services licence (AFS licence) where the person only provides financial services to a related body corporate. Section 50 of the Act defines when a company is a related body corporate.
ASIC has granted conditional relief from the licensing provisions of the Act to allow an applicant to provide financial services to entities in the same corporate group (including under a joint venture arrangement) in circumstances where the other entities were closely connected, but technically not related bodies corporate within the meaning of s50 of the Act. ASIC has only granted relief where the connected entities are wholesale clients.
Dealing with client money
Section 981B of the Act generally requires client money to be paid into an account satisfying the requirements of the Act on the day the money is received by the licensee or on the next business day.
ASIC has granted relief from this requirement for a licensee (an insurance broker) in a remote rural area without a bank, as the licensee was unable to pay client money into an account within the required timeframe. Conditional relief was granted extending the number of days within which the insurance broker must pay client money in to an account satisfying the requirements of the Act. In deciding whether to grant relief, ASIC took into consideration the licensee’s existing compliance systems for handling client money.
Reporting requirements for natural persons
Section 989B of the Act provides that, in respect of each financial year, an AFS licensee must prepare a true and fair a profit and loss statement and balance sheet as set out in that provision.
ASIC has granted relief from this provision allowing an AFS licensee who is a natural person to prepare and lodge a profit and loss statement that does not include personal expenses and revenue not relating to the financial services business carried on by that person. However, ASIC has refused to grant relief in respect of the inclusion of personal assets and liabilities in the balance sheet on the basis that natural persons do not enjoy limited liability. For further information, refer to ASIC Information Release 03-23: Reporting requirements for AFS licensees that are natural persons.
Disclosure and related provisions
In ASIC’s view, Division 2 of Part 7.9 of the Act does not permit two or more issuers to jointly issue a single Product Disclosure Statement (PDS) covering a number of products offered by these issuers because, for example, provisions such as s1013A contemplate a single issuer responsible for a given PDS.
ASIC has granted conditional relief from this prohibition in circumstances where two or more issuers that are related bodies corporate proposed to prepare a single PDS covering a number of financial products of the same type (eg. that all products are within only one category under s764A(1)). It was a requirement of the relief that the relationships between issuers and products are disclosed in the PDS and that all the products offered under a single PDS are either all unlisted or all listed.
Preparation of PDSs – Relief where an Issuer does not have to prepare a PDS - instalment receipts issued by security trustee
Section 1013A(1) sets out the circumstances in which the issuer of a financial product must prepare a PDS for the product.
ASIC has granted relief from s1013A (and related provisions in Part 7.9 of the Act) for a security trustee/custodian that was a technical issuer of instalment receipts. Relief was granted in circumstances where it was proposed that investors be offered the opportunity to acquire interests in a registered managed investment scheme through the payment of two equal instalments. Until the final instalment was paid, the security trustee would hold the interests in the scheme. On the payment of the first instalment, the security trustee would issue an instalment receipt to investors.
The security trustee was the technical issuer of the instalment receipts and, as such, would ordinarily be required to prepare a PDS. Under the relief granted by ASIC, the security trustee was not required to prepare a PDS. However, relief was granted on the basis that the responsible entity of the scheme and underwriter of the offer were responsible for preparing the PDS for the offer and that the PDS would cover both the instalment receipts and interests in the scheme.
PDSs – on-sale of financial products following a corporate restructure that involves stapled securities
Section 1012C(6) and (7) sets out the situations in which a PDS must be given for an offer relating to the on-sale of financial products.
ASIC has extended the relief under Categories 3 and 4 of Class Order 02/1180: Disclosure for on-sale of securities and other financial products [CO 02/1180] to accommodate general reconstructions by allowing the on-sale of managed investment products which, because they were created under the restructure, had not been listed continuously for 12 months, where, before any on sale of the products:
- the Notice of Meeting and Explanatory Statement for the restructure is disclosed to the Australian Stock Exchange (ASX),
- the newly created managed investment product will be ED securities quoted on the ASX; and
- retail investors have access to a PDS relating to the product before any on-sale of the products.
(Refer to Category 4 of [CO 02/1180] and Policy Statement 173: Disclosure for on-sale of securities and other financial products).
Under restructure proposals recently considered by ASIC, ASIC was asked to grant secondary sales relief to permit existing holders to trade or sell on market their interests in stapled securities which were created by the restructure.
ASIC refused to grant on sale relief from s1012C(6) and s1012C(7) of the Act on the basis that there was no statutory or court-approved disclosure document which specifically dealt with the managed investment component of the stapled securities in existence at or about the time the financial product was issued. ASIC considers there is nothing in the Act that would indicate a lower on sale disclosure standard applies where stapled securities are involved.
PDSs made up of two separate documents
Section 1013L(1) of the Act provides that a PDS may be made up of two or more separate documents that are given at the same time.
ASIC has refused to grant relief to allow a PDS made up of two documents to be provided at different times. Relief was refused in circumstances where one document contained information that would remain the same (eg. the basic terms of the offer) and the other document contained variable information (eg. interest rates and issue price percentages) which would be updated at regular intervals.
ASIC refused relief in these circumstances because both documents contained substantive information that was important in describing the product and relevant to a retail client’s decision whether to acquire it.
Use of Supplementary PDS provisions for mortgage schemes.
A mortgage scheme operator applied for modifications to the PDS provisions to allow relief equivalent relief to that currently allowed for mortgage investment schemes that have not transitioned to the PDS regime under [CO 00/202]: Two part prospectus relief for mortgage schemes. Essentially the applicants wanted to use a two-part PDS regime where common information is in Part 1 and specific information relating to specific undertakings is in Part 2.
ASIC decided relief was not needed as the Supplementary PDS (SPDS) provisions could be used for Part 2. The Act does not presuppose that the same SPDS will be given to all prospective investors, nor does it prohibit different versions of a SPDS being given to potential investors. The Act does not require an issuer to give a SPDS and the PDS at the same time provided of course that the SPDS contains a statement that it is to be read with the PDS - s 1014C(c) and the PDS itself complies with the general information requirements of the PDS provisions.
ASIC also decided that relief was not needed for the application form to be attached to the SPDS because s1014D of the Act would have the effect of deeming an application form attached to or accompanying the SPDS to be in the PDS to which it relates.
Lodging 'in use' notices – PDSs made up of two separate documents
Section 1015D of the Act provides that in certain circumstances the responsible person for a PDS must lodge a notice with ASIC advising that the PDS is in use (an ‘in use’notice).
ASIC has refused to grant relief to allow the responsible person of a PDS made up of two separate documents to only lodge an ‘in use’ notice for one part of the PDS. An ‘in use’ notice must be lodged in relation to, or encompassing, the whole PDS.
Relief was refused because ‘in use’ notices are placed on ASIC’s public registers, which means that they are a notice to the wider community as well as ASIC.
Lodging ‘in use’ notices – Supplementary PDSs
Section 1015D of the Act also provides that in certain circumstances the responsible person for a Supplementary PDS must lodge an ‘in use’ notice with ASIC.
ASIC has refused to grant relief from the requirement to lodge an ‘in use’ notice for a Supplementary PDS (SPDS). ASIC refused relief because the effect of the law is that, if a PDS must be lodged with ASIC, then so must the SPDS. Similarly, if an ‘in use’ notice must be lodged with ASIC for a PDS, ASIC also requires notice that a SPDS is in use.
Up-to-date information in PDSs
Section 1012J of the Act requires that the information in a PDS must be up-to-date at the time the PDS is given to a retail client.
ASIC has granted class order relief from this requirement in circumstances where the issuer makes the up-to-date information available through a web site, a toll-free telephone service, or other facility that provides convenient access for investors. The relief is only available where the update does not include materially adverse information of a kind that must be disclosed in a Supplementary PDS.
For further information, refer to ASIC Information Release 03-10: ASIC grants exemption on requirement to provide up-to-date information.
Not altering a PDS after the date of the PDS
Section 1015E of the Act prohibits a regulated person from giving a PDS that has been altered after the date of the PDS unless certain criteria are satisfied.
ASIC granted relief from s1015E of the Act in circumstances where information about the distribution rate and minimum conversion number would not be available when a PDS was lodged with ASIC, but would be available when the PDS was printed and distributed.
Relief was granted in similar terms to Pro Forma 123: Changing a disclosure document before making offers, which is used to provide relief permitting an issuer to make minor changes to a disclosure document lodged with ASIC under Chapter 6D of the Act.
Restricted issues must be made under an eligible application
Section 1016A(2) of the Act provides that an issuer may only make a restricted issue if it is made under an eligible application. An application made using an application form included in, accompanied by, a current PDS is an eligible application.
ASIC has granted relief from the requirement for an eligible application in circumstances where retail clients holding an interest in a managed investment scheme invest in another scheme operated by the same responsible entity without disposing of their original holding (described as a ‘top-up’ application).
ASIC granted relief on similar conditions to those in Class Order 02/262: Applications to switch managed investment products which provides relief to responsible entities in circumstances where retail clients dispose of an interest in a scheme and use the proceeds to acquire an interest in another scheme operated by the same responsible entity (described as a ‘switch’ application).
These conditions include the requirement that the responsible entity believes on reasonable grounds that, at the time the application was made, the holder has received a PDS for the new managed investment product that contains all the information that would have been required at the time of the application.
Dealing with application money
Section 1017E of the Act provides that issuers who are required to prepare a PDS must hold any application money for the financial product in a prescribed account for an applicant until the product is issued or the money is returned to the applicant.
ASIC has granted relief modifying s1017E(3) to permit a responsible entity of several managed investment schemes to withdraw application money from a prescribed account and pay it into a second account that also complies with s1017E and associated provisions.
Relief was granted because there would be no reduction in protection for retail clients and advantages because of the higher interest rate that would generally be available on the second account.
Relief for possible future listing of financial a product
ASIC refused an application for relief from s1016D(2) of the Act to allow an issuer to make statements in a PDS as to possible future listing of units in a retail managed investment scheme on the ASX. The application was rejected because an exemption in relation to the statements about listing would be contrary to the purpose of sections 1013H and 1016D(2) of the Act.
Compensation arrangements – responsible entities
During the FSR transition period, the AFS licensees that are responsible entities of registered managed investment scheme must maintain adequate professional indemnity and fraud insurance as required by Policy Statement131: Managed investments: financial requirements (PS 131).
ASIC has granted relief to a licensee that is a responsible entity of registered scheme in circumstances where the licensee held professional indemnity insurance but was unable to obtain fraud insurance complying with PS 131.
Relief was granted because ASIC was satisfied that the reason the applicant could not obtain fraud insurance was due to the fact it was in the process of starting a new business. Temporary relief was granted on conditions, including that all scheme assets were held by a third-party custodian that had appropriate professional indemnity and fraud insurance.
However, ASIC has refused to grant temporary relief from the requirement to maintain adequate professional indemnity and fraud insurance in circumstances where the licensee did not yet have any funds under management. Relief was refused on the basis that ASIC was not satisfied there was any basis to alter the requirement that, at all times, the licensee must maintain insurance that is adequate having regard to the nature of activities of the licensee under the licence and that covers claims of at least of $5 million or the value of all scheme property, whichever is lesser.
Transitional licensing – providers of mutual risk products
ASIC has granted transitional relief from the licensing provisions in circumstances where, since prior to 11 March 2002, an applicant had been continuously operating a mutual risk product (MRP) scheme of the type described in Information Release 03-17: ASIC's interim approach for regulation of mutual risk products (IR 03-17).
Transitional licensing relief was granted on the basis that the applicant was currently registered as an insurance broker under the Insurance (Agents & Brokers) Act, the applicant qualified for and received relief from the managed investment scheme provisions in Chapter 5C of the Act (as described in IR 03-17) and that, if the applicant had applied for and been granted that relief prior to 11 March 2002, it would have been entitled to the two-year transition period for obtaining an AFS licence covering this activity.
Lodging ‘opt in’ notices
Section 1438(3) provides that during the FSR transition period, an issuer of a financial product may lodge a notice with ASIC opting into the product disclosure regime in Part 7.9 of the Act. The notice must specify a date, at least 28 days after the notice is lodged with ASIC, from which the issuer wants the new product disclosure provisions to apply to the product.
ASIC has granted relief from the 28 day notice period for ’opt in’ notices in circumstances where an issuer proposed to give retail clients a PDS for interests in registered managed investment scheme that prior to 11 March 2002, were never the subject of a disclosure document under Chapter 6D of the Act (eg. the product was a new product in the same class of products first issued by the issuer prior to 11 March 2002, or the product was only offered to wholesale clients prior to 11 March 2002).
ASIC granted relief in these circumstances because the 28 day notice period is primarily intended to operate where there is an actual transition from the old disclosure regime (where there was an actual disclosure document on market that complied with the old law) to the new regime.
Dealing with application money – stapled securities
Section 1017E of the Act provides that issuers who are required to prepare a PDS must hold any application money for the financial product in a prescribed account for an applicant until the product is issued or the money returned. This provision applies to all financial products, whether new or existing, from 11 March 2002.
When an issuer offers interests in a managed investment scheme that are stapled to shares (described as ‘stapled securities’), s722(1) of the Act separately regulates how the issuer must deal with any application money for the shares. The concurrent operation of s1017E and s722 results in an issuer of stapled securities being required to maintain two separate accounts for application money and, in practice, is likely to require applicants to forward two separate payments with their application.
ASIC has granted transitional relief from the requirements of s1017E of the Act for an issuer of stapled securities. The effect of relief was to delay the commencement of s1017E until end of the transitional period so that s722 (as it was immediately prior to 11 March 2002) continues to apply to the application money for both shares and interests in a managed investment scheme.
Exit statements – common fund deductions
ASIC has granted product issuers conditional class order relief in respect of exit statements from having to provide a notional estimate of a client's proportion of fees and expenses deducted from the common fund, as prescribed by paragraph 7.9.75(2)(b) of the Act for reporting periods ending on or before 31 December 2003.
Under the relief, the exit statement may accompany the statement of common fund deductions in order to give industry some flexibility in complying with this statutory requirement. For further information, see ASIC Information Release 03-19: ASIC extends relief in CO 03/485: Exit statements under s1017D.
External dispute resolution schemes
Policy Statement 165 Licensing: Internal & external dispute resolution provides that where, during the FSR transition period, there is no approved external dispute resolution (EDR) scheme or schemes in existence that cover or together cover complaints in connection with all of the financial services covered by the AFS licence, the licensee must instead belong to one or more unapproved EDR schemes covering all the financial services covered by the licence.
ASIC has granted transitional relief from this requirement in circumstances where some or all of the financial services provided by an applicant were not covered any approved or unapproved EDR scheme. An exception to our policy will be made where the applicant can satisfy ASIC that, by 11 March 2004, it will be a member of an approved EDR scheme that covers all of the financial services authorised by the licence.