ASIC has issued interim stop orders preventing Australian Fiduciaries Limited (AFL) from offering or distributing three funds to retail investors because of deficiencies in their target market determinations (TMDs). These funds are:

• Global SRI Ethical Alpha Fund (ARSN 629 361 315)
• Global SRI All Seasons Fund (ARSN 629 361 600)
• Global SRI Multi-Strategy Fund (ARSN 603 285 801) (together, the funds).

The interim orders stop AFL from issuing interests in, giving a product disclosure statement for or providing general advice to retail clients recommending an investment in the funds. The orders are valid for 21 days unless revoked earlier. 

ASIC made the interim orders to protect retail investors from potentially investing in funds that may not be suitable for their financial objectives, situation or needs. To date, ASIC has issued 21 interim stop orders under the design and distribution obligations (DDO), including the orders for these funds.

Both Global SRI Ethical Alpha Fund and Global SRI Multi-Strategy Fund have exposure to a portfolio comprised largely of loans secured by real property and other debt instruments, precious metals, listed and unlisted equity and property development projects.

The Global SRI All Seasons Fund has exposure to a portfolio of managed funds and assets, including unlisted managed funds, derivatives, listed equity and commodities, with an investment return objective of CPI (Consumer Price Index) plus 7% per annum.

ASIC is concerned that AFL has not appropriately considered these features and risks in determining the wide target markets for the funds. ASIC considered that the target market for all three funds inappropriately includes

• investors who need liquidity during the term of their investments, which is not supported by the Funds’ liquidity features
• investors with a tolerance for ‘medium’ to ‘high’ level of risk whilst the risks associated with the portfolio of investments for two funds and the aggressive return objective of one fund are higher
• investors with an undefined ‘higher-than-average’ net worth.

Furthermore, ASIC considered that the TMDs did not meet the appropriateness requirements under DDO because they did not include any distribution conditions. The TMDs also did not clearly specify the information that distributors must report so that AFL can promptly identify the occurrence of a review trigger (or any event/circumstance) that would suggest the TMDs were no longer appropriate.

ASIC reminds financial product issuers that under DDO, they must define target markets for their products appropriately, having regard to the risks and features of their products. Issuers also need to consider how their product will reach the target market and have appropriate distribution conditions in place to ensure the product is directed towards the target market.

ASIC expects AFL to consider the concerns raised regarding the TMDs and take immediate steps to ensure compliance. ASIC will consider making a final order if the concerns are not addressed in a timely manner. AFL will have an opportunity to make submissions before a decision is made about a final stop order.

Background

DDO requires firms to design financial products that meet the needs of consumers, and to distribute those products in a more targeted manner. A TMD is an important requirement under DDO. It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market) and matters relevant to the product’s distribution and review.

ASIC has targeted surveillances underway to check whether product issuers and distributors are complying with DDO. Where firms are not doing the right thing, ASIC can take quick action under DDO to disrupt poor conduct and prevent potential consumer harm.

ASIC issued its first DDO stop orders to prevent the offer of financial products to consumers in July 2022 (22-194MR). ASIC also placed interim stop orders in response to deficiencies in the TMDs of:

• the Australian Residential Property Fund and the Private Property Trust No. 20 (22-252MR)
• the APIL Essential Retail Income Fund (22-266MR)
• three funds operated by Holon Investments (22-278MR)
• the Westlawn Income Fund (22-284MR)
• two funds from MPG Funds Management (22-323MR)
• two funds from Perpetual Investment Management (22-326MR)
• Neldner Road Vintners (22-308MR)
• Finnia Income Limited (22-309MR)
• APS Savings Limited (22-334MR).

Of the 21 DDO interim stop orders issued by ASIC to date, twelve remain in place. Nine interim stop orders have been lifted following actions taken by the entities to address ASIC’s concerns or where the products were withdrawn.

Editor’s note:  Following the interim stop orders, AFL proposed new TMDs that addressed ASIC's concerns. The new TMDs better defined the target market for the funds by excluding certain categories of investors based on an investor’s portfolio allocation, diversification, liquidity needs and investment objectives and ensuring that investors in the target market have the appropriate risk tolerance to invest in the funds. AFL also introduced new review triggers review triggers and updated the distribution conditions in each of the TMDs. As a result, on 20 December 2022, ASIC revoked the interim stop orders on the funds and no final stop orders were made.