ASIC has made two interim stop orders preventing Interactive Brokers Australia Pty Ltd (Interactive Brokers) from issuing Stock Yield Enhancement Program (SYEP) Derivatives to retail investors because of deficiencies in the product’s target market determination (TMD) and product disclosure statement (PDS).
The interim orders prohibit Interactive Brokers from offering, issuing, giving a PDS for or providing general advice in relation to SYEP Derivatives to retail investors. The orders are valid for 21 days unless revoked earlier.
ASIC made the interim orders to protect retail investors from acquiring SYEP Derivatives where they may not be suitable for their financial objectives, situation or needs. ASIC is also concerned that the PDS is defective.
SYEP Derivatives are arrangements whereby a retail investor may agree to lend eligible securities to Interactive Brokers, which may on-lend the securities to other parties for short selling or other purposes. In return, Interactive Brokers pays consideration, less its fees and commissions, to the retail investor and delivers cash collateral to secure its obligation to return the securities to the investor. Retail investors in SYEP Derivatives are exposed to risks related to securities lending, including the impact of short selling on the value of their securities, counterparty risk if Interactive Brokers defaults, loss of voting rights and tax consequences associated with substituted dividend payments and corporate actions.
ASIC was concerned that the TMD for SYEP Derivatives:
- inappropriately included in the target market investors who declare that their investment objectives include preservation of capital and income generation, or hedging, whereas these objectives are likely inconsistent with the features and risks of the product
- included knowledge and experience criteria for the target market that are not described with objective, tangible parameters
- specified an unreasonably long period for distributors of SYEP Derivatives to report complaints and other matters to Interactive Brokers, and
- specified inadequate and poorly defined triggers for reviewing whether the TMD remains appropriate.
Further, ASIC was concerned that the PDS was defective because, among other things, it omitted important information about the benefits, fees and commissions of the SYEP Derivatives, contained a misleading statement about forfeiture of voting rights, and was not worded and presented in a clear, concise and effective manner.
ASIC expects Interactive Brokers to consider the concerns raised regarding the TMD and PDS and take immediate steps to ensure compliance. ASIC will consider making a final order if the concerns are not addressed in a timely manner. Interactive Brokers will have an opportunity to make submissions before a decision is made about any final stop orders.
To date, ASIC has issued 24 interim stop orders under the design and distribution obligations (DDO), including the order for SYEP Derivatives. 19 interim stop orders have been lifted following actions taken by the entities to address ASIC’s concerns or where the products were withdrawn and five remain in place.
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.
In August 2022, ASIC warned brokers to be careful about or reconsider offering high-risk products and services to retail investors, such as securities lending (refer 22-239MR). In Australia, securities lending has generally been limited to institutional investors who have the size, scale and sophistication to understand and manage the risks.
During a hearing on 27 March 2023, ASIC made two indefinite interim stop orders against Interactive Brokers prohibiting the same conduct covered by the initial interim orders. Interactive Brokers proposed amendments to its TMD, which addressed ASIC’s concerns by (among other things) more narrowly defining the class of consumers which comprise the target market for the SYEP Derivatives, revising the review triggers, and specifying shorter reporting periods. Additionally, Interactive Brokers agreed to a final stop order prohibiting offers or issues of SYEP Derivatives be made under the PDS dated January 2023. As a result, on 24 May 2023, ASIC:
- revoked the indefinite interim stop order relevant to the TMD; and
- issued a final stop order relevant to the PDS.
On 8 June 2023, Interactive Brokers notified ASIC that it has decided not to make any further offers of SYEP Derivatives to retail investors at this time.