Assessing Federal Legislative Changes to Employee Share Schemes
This article focuses on recent measures taken at the federal level to renew Australia’s employee…
ASIC’s media release
On 23 March 2022, ASIC released 22-061MR. In the release, ASIC stated it has commenced a surveillance into the marketing of managed funds, to identify the use of misleading performance and risk representations in promotional material.
ASIC has said it is scrutinising traditional and digital media marketing of funds, including search engine advertising, targeting retail investors and potentially unsophisticated wholesale investors, such as some retirees.
ASIC has stated it is concerned that, in the current highly volatile and low-yield environment, consumers seeking reliable or high returns are being misled about the performance and risks of the funds they are investing in. This surveillance follows on from ASIC’s “True to Label” initiative, which examined whether representations in fund labels may have misled consumers about the fund’s’ characteristics and underlying assets.
Statement of Deputy Chair
ASIC Deputy Chair Karen Chester has made the following points:
What is the significance of the reference to “potentially unsophisticated wholesale investors?”
A number of important aspects of financial services laws operate differently between retail clients and wholesale clients or sophisticated investors. In brief, fund managers are exempted from complying with a number of disclosure, licensing and conduct based protections in relation to wholesale clients or sophisticated investors.
The Corporations Act details a number of ways in which an investor will qualify as a wholesale client or as a sophisticated investor. In short, there are four eligibility tests under which clients may be treated as a wholesale client, as follows:
Additionally (although less frequently), investors may be construed to be sophisticated investors, being persons that an Australian financial services licensee has determined upon reasonable grounds to be appropriately experienced in making financial investments.
Of relevance are the product value and individual wealth tests (the two most common wholesale client exemptions), which have caused concern in that they may allow clients to be treated as wholesale without having an appropriate (or indeed any) level of financial literacy. In Australia, increased earnings, property values, superannuation holdings and inflation have meant it has become increasingly easier for individuals to qualify under these tests.
ASIC’s recent activity
Fund managers should note the recent Federal Court judgment in favour of ASIC in its case against Mayfair Wealth Partners Pty Ltd and others .
The case involved fundraising from members of the public (who qualified as wholesale investors) through various notes or debentures. Mayfair promoted the products through websites and newspaper and online advertising, including through google “ad words”. ASIC alleged that Mayfair misrepresented that the Mayfair products had similar characteristics to bank deposits and/or were secured, when in fact they had little effective security (if any). ASIC also contended that the Mayfair Products were marketed to wholesale but inexperienced investors, at least a substantial subset of whom were unlikely to understand the significant risk associated with the Mayfair Products.
The Federal Court found that Mayfair Wealth Partners Pty Ltd and others engaged in misleading or deceptive conduct and made false or misleading representations. In reaching his judgment, Justice Anderson quoted from a report by the provisional liquidator. The report concluded that, whilst investors targeted by the scheme “…typically met the legal definition of a ‘sophisticated investor’’, their characteristics frequently were more reflective of a retail investor”.
What does this mean?
This media release (coupled with ASIC’s recent activity) signifies ASIC’s intent to increase and extend its scrutiny of disclosure and marketing to investors, whether or not they are retail, and perhaps with a focus on potentially unsophisticated wholesale investors. Fund managers should therefore be conscious of the need to ensure disclosure to all investors is adequate, accurate and not misleading or deceptive, whether in disclosure documentation or ancillary marketing material.
How we can assist
Fund managers should be aware that, as per our market intelligence, ASIC have recently been conducting enquiries in accordance with its “True to Label” initiative, in respect of existing managed investment schemes and their relevant disclosure documentation (such as a PDS or an IM) and associated marketing material. Further, fund managers need to be aware of the technical aspects of availing of “Google ads” to ensure search fields are only populated with terms which are “True to Label”, and which could not be considered misleading or deceptive.
We can assist fund managers seeking advice on their disclosure documents and marketing material to ensure it complies with ASIC policy and the law.
1. Australian Securities and Investments Commission v Mayfair Wealth Partners Pty Ltd (No 2)  FCA 247 (23 March 2021)