ASIC issues interim stop orders against two Perpetual funds
The Australian Securities and Investments Commission (ASIC) has issued interim stop orders preventing Perpetual Investment Management Limited from offering or distributing two funds to retail investors because of deficiencies in their target market determinations (TMDs).
These funds are Perpetual Pure Microcap Fund (ARSN 164 986 047) and Perpetual Geared Australian Share Fund (ARSN 103 864 688).
The interim orders stop Perpetual from issuing interests in, giving a product disclosure statement for or providing general advice to retail clients recommending 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 17 DDO interim stop orders, including the orders for these funds.
Perpetual Pure Microcap Fund is invested solely in a portfolio of Australian microcap equities. Microcap equities carry a significant level of risk due to high price volatility, shallower market depth (with few traders and turnover in share transactions) and the limited operational history of microcap companies.
Perpetual Geared Australian Share Fund is invested solely in a portfolio of Australian shares and employs leverage, with the fund being able to take on debts valued at up to 60% of the fund’s total assets. The fund’s investment strategy comes with elevated risks, including the potential for a high level of price volatility and the use of leverage, which increases the chances of investors incurring large losses.
ASIC is concerned that Perpetual has not appropriately considered these features and risks in determining the wide target markets for the funds. The TMDs for both funds include investors:
- with a capital preservation investment objective;
- intending to use the product as a core component (25-75%) or satellite component (up to 25%) of their investment portfolio;
- with a potentially low, medium or high risk and return profile;
- with a ’Medium’ investment timeframe (under 2 years and up to 8 years); and
- with a need to withdraw their money on a daily and weekly basis.
Furthermore, ASIC considered that the TMDs did not meet the appropriateness requirements under DDO because they did not include any distribution conditions.
The regulator expects Perpetual 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. Perpetual will have an opportunity to make submissions before a decision is made about a final stop order.
As at 30 September 2022, the Perpetual Pure Microcap Fund held $114.43 million in assets under management and the Perpetual Geared Australian Share Fund held $399.65 million in assets under management.
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 (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.
Of the 17 DDO interim stop orders issued by ASIC to date, nine interim stop orders have been lifted following actions taken by the entities to address ASIC’s concerns or where the products were withdrawn. Six remain in place.