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23-002MR Interim stop order placed on the Pivotal Diversified Fund
ASIC has issued an interim stop order preventing Vasco Responsible Entity Services Limited (Vasco) from offering or distributing the Pivotal Diversified Fund to retail investors because of deficiencies in the target market determination (TMD).
The interim order stops Vasco from issuing interests in, giving a product disclosure statement for or providing general advice to retail clients recommending an investment in the fund. The order is valid for 21 days unless revoked earlier.
ASIC made the interim order to protect retail investors from potentially investing in a fund that may not be suitable for their financial objectives, situation or needs. To date, ASIC has issued 22 interim stop orders under the design and distribution obligations (DDO), including the order for this fund.
The Pivotal Diversified Fund is invested in various managed funds, including hedge funds, a fund invested in residential and commercial real estate developments and a private equity fund. The underlying investments in the hedge funds are exposed to a very high risk strategy that generates absolute returns by trading in listed equities and by using short selling, leverage and derivatives. The managed fund invested in property development projects is subject to project financing, valuation and construction risks, and the private equity fund is illiquid and leveraged.
ASIC is concerned that Vasco has not appropriately considered these features and risks in determining the target market for the Pivotal Diversified Fund. ASIC considered that the target market inappropriately includes investors:
- with a potentially high risk and return profile, when the risks associated with the fund’s investments are very high; and
- with a ‘medium’ investment timeframe (up to 6 years).
Furthermore, ASIC considered that the TMD did not meet the appropriateness requirements under DDO because it did not include any distribution conditions.
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 Vasco to consider the concerns raised regarding the TMD and take immediate steps to ensure compliance. ASIC will consider making a final order if the concerns are not addressed in a timely manner. Vasco will have an opportunity to make submissions before a decision is made about a final stop order.
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 Responsible Entity Services Limited and two companies in the UGC Global Group from offering 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); and
- three funds from Australian Fiduciaries Limited (22-335MR).
The Pivotal Diversified Fund invests in Global Capital Property Fund Limited and three funds from the UGC Global Group. ASIC currently has interim stop orders in place in relation to Global Capital Property Fund Limited, UGC Global Alpha Fund Limited and UGC Global Alpha Limited.
Of the 22 DDO interim stop orders issued by ASIC to date, five remain in place. Seventeen 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 1:
Content in the 'Background' section was amended on 10 January 2023 to correct the number of interim stop orders that have been revoked and those that remain in place. Additional content has also been added about funds on which interim orders have been placed.