How to avoid a stop order for DDO breaches: insights for fund managers

It is no surprise that with ASIC’s focus on private credit funds around half (nine) of the stop orders issued for managed investments relate to mortgage funds. While the products offered in this sector are diverse, ASIC has expressed strong views about what it considers to be an appropriate target market for mortgage funds with the following features:

• Funds investing in loans used for property development.
• Contributory schemes where investors have exposure to a single or limited number of loans, rather than exposure to a diversified pool of loans.
• Funds exposed to unsecured loans.

Fund managers offering products with these features should take particular care when describing the target market and pay attention to ASIC’s views on matters such as the appropriate portfolio allocations and risk/return ratings. 

Property funds have also attracted attention from ASIC, receiving five stop orders. ASIC’s focus has been on property funds where the target market is defined broadly despite the product having the following features:

• Exposure to property development.
• High levels of gearing.
• Liquidity profiles not matching the access to capital attribute in the TMD.

For these funds, ASIC’s view is the target market should be defined narrowly, particularly with respect to the key attributes of portfolio allocation, risk and liquidity. 

Identifying ‘capital preservation’ as an investor attribute has also attracted ASIC’s attention. For example, an investment in a private credit fund is expected to maintain a unit price of $1 per unit.  That is, there is no expectation of capital growth, but investors are seeking to reduce volatility and minimise losses in a market downturn by investing in debt which is used to acquire an asset rather than making an equity investment in an asset. There is an argument the target market for private credit funds includes investors seeking ‘capital preservation’ provided the TMD clearly states there is a risk of loss of capital and makes it clear ‘capital preservation’ does not equal ‘capital guaranteed’.  

However, there is now increased regulatory risk with taking this approach. In a stop order issued in late 2025, ASIC expressed concern with an issuer describing a contributory mortgage fund as suitable for ‘investors seeking capital preservation’ because investors’ capital was at risk and not ‘guaranteed’. If ASIC’s approach is to identify the target market for a product by narrowing it down to only those people who are prepared to accept the worst possible outcome (ie loss of capital or no distributions) then potentially no ‘investment objective’ attributes would be relevant to a target market. This in our opinion is not the purpose of DDO.  

The ‘intended product use/portfolio allocation’ attribute refers to the percentage of an investor’s assets recommended to be invested in a product. ASIC has focussed on this for some products where it considers managers have ‘over-stepped’ by suggesting it is acceptable for investors to invest a material portion of their investable capital in a product. Products which are exposed to a single asset class, but where managers have nominated higher portfolio allocations – above 25 per cent of investable assets (or even above 10 per cent in some cases) – have consistently been the subject of stop orders. ASIC’s view is that in assessing this attribute the manager needs to have regard to the product’s diversification either within a single asset class or across multiple asset classes. For example, a fund with exposure to a single asset within an asset class will have a narrower target market (ie lower investment allocation) than a product which offers diversification via exposure to multiple assets or asset sectors. 

Anecdotally, it seems an allocation of up to 25 per cent may be acceptable, unless the product is very high or extremely high risk in which case a lower allocation may be required. For example, late last year, the issuer of a private credit product reduced the portfolio allocation in its TMD from 35 per cent to 10 per cent to lift a stop order. Conversely, while an allocation above 25 per cent may be appropriate for products that are highly diversified in all measures, fund managers should record robust reasoning to support the higher allocation.  

The risk/return key attribute has also consistently been the subject of stop orders. ASIC’s views on this theme expressed in the stop orders include:

• Products targeting high returns should have a correspondingly high-risk rating.
• The risk/return rating for a contributory mortgage fund offering fixed term investments to retail investors should be ‘medium to high’ (not ‘low to medium’).
• A ‘low’ or ‘potentially low’ risk/return rating is not appropriate for a property fund.
• The risk/return rating for a fund that invests in microcap equities or in Australian shares that employ leverage should be ‘very high to extremely high’ (not ‘low, medium or high’).

ASIC has focused on how investors access capital in the stop orders for property funds (which are not liquid by nature) and for mortgage funds (which generally invest in loans with fixed terms). It has also been the subject of stop orders for equity funds (which may offer daily or weekly withdrawals, but processing times may mean the timing for investors to access their capital is delayed). To avoid ASIC’s attention, fund managers should ensure the ‘access to capital’ needs of the target market are described consistently with, and supported by, the liquidity features of the product. 

The law requires fund managers to take ‘reasonable steps’ that are likely to result in distribution of a product being consistent with its TMD and for the conditions on distribution to be included in the TMD. ASIC has made its views on distribution conditions clear from the outset, and a majority of the stop orders call out a failure to meet ASIC’s expectations in this area. To avoid ASIC’s attention, fund managers need to ensure:

• TMDs include distribution conditions.
• Distribution conditions are specific and adequately indicate how distribution of the product will be directed to the target market.
• Investors are not required to ‘self-certify’ they are in the target market.
• Internal policies and procedures are in place to implement the distribution conditions. For example, where a TMD states an investor questionnaire is required, the questionnaire must be given to the relevant investors, and the fund manager must ensure the questionnaire is completed and the answers to the questions are analysed and assessed by trained staff prior to the application being accepted. 

The Corporations Act 2001 (Cth) prescribes the content for a TMD. Fund managers who have not included all the required content have received stop orders (eg for failing to include review triggers, mandatory review periods or distributor reporting requirements). 

ASIC’s view is very high risk, and speculative products should not be offered to retail clients. For example, ASIC issued three stop orders for funds that invest in crypto-assets, raising concerns about the risk/return rating (potentially medium, high or very high) and the portfolio allocation (up to 25 per cent and 75 per cent to 100 per cent) for the products. The stop order was only lifted when the issuer wound up the schemes.