ASIC pulls out all the stops | DDO regime enforced against leveraged property investments

ASIC has continued its intervention in funds management with further stop orders under the ‘Design and Distribution Obligations’ regime in respect of:

• APIL Essential Retail Income Fund
• Australian Residential Property Fund;
• Private Property Trust No. 20; and

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APIL Essential Retail Income Fund

On 30 September 2022 ASIC announced it had made an interim stop order preventing Australasian Property Investments Limited (APIL) from offering or distributing the APIL Essential Retail Income Fund (APIL Fund) to retail investors because of a non-compliant target market determination (TMD)

The APIL Fund invested in two shopping centres and was raising money to purchase a third. The APIL Fund borrows money to support its investment activities and investors cannot withdraw their money until April 2029.  ASIC also noted that the APIL Fund PDS disclosed that money invested in the Fund is not guaranteed and the monthly income distribution is based on assumptions and the actual results may be different to the forecast result.

The target market for the Fund includes investors:

• looking to invest in commercial properties with the prospect of capital growth and a secure income stream;
• who are ‘cash rich’ entities or retirees looking for a long-term capital investment along with a monthly return;
• with a ‘buy and hold’ strategy and do not require immediate access to capital; and
• with a need for preservation of capital that accrues capital gains/losses over the lifespan of the investment.

ASIC considered that the APIL Fund was not suited to this target market, and found that APIL did not meet the information requirements for the TMD nor the appropriateness requirements under the DDO because of an inadequate distribution condition.

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Australian Residential Property Fund and Private Property Trust No. 20

On 13 September 2022, ASIC announced that it has placed interim stop orders on the offer and distribution of the following funds due to deficiencies in the relevant TMD:

• the Australian Residential Property Fund (ARPF); and
• the Private Property Trust No. 20 (PPT 20).

Both funds invest primarily in property assets, and borrow money to support their investment activities. Such investments could be considered relatively risky, given that borrowing is involved, and property assets are fairly illiquid.

Notwithstanding this, the TMD for the each of these funds defined the target market as being investors:

• with a capital preservation investment objective
• intending to use the product as a core component (25-75%) or potentially even a solution/standalone component (75-100%) of their investment portfolio
• with a medium or low risk and return profile

Given the above, ASIC considered that the ARPF and PPT 20 are not suited to the target market identified by the TMDs.

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Conclusions

This is only the third, fourth and fifth instance of ASIC placing interim stop orders under the new Design and Distribution Obligations regime which took effect on 5 October 2021. Previous instances saw ASIC take action against PPM Units and the UGC Alpha Global Fund. 

The interim stop orders will be in effect for an initial 21 days. ASIC may impose a final stop order if it still finds the relevant TMD defective after holding a hearing and giving reasonable opportunities for any interested people to make submissions.

As set out in ASIC’s latest Corporate Plan for 2022-26, one of ASIC’s external priorities are Retirement Decision Making, where ASIC is striving to protect consumers as they plan and make decisions for retirement.  The investor traits identified in the TMDs of the Stopped Funds are likely to match the profiles of retirees, which may explain why ASIC has targeted them.

We expect that ASIC will continue such interventions in particular in funds targeting retirees.  This highlights the importance of the TMD and meeting the DDO obligations at the outset.

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Mackay Chapman

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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