Focus on Financial services

Updated ASIC Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements - Will you be ready?

RG 97 was  updated in November 2015. The amendments require, amongst other things, additional disclosure about transactional and operational costs to be included in PDSs issued by responsible entities and superannuation trustees. This primarily revolves around the concepts of indirect costs and interposed entities. The changes are significant and depart from current practice.

All PDSs are required to be updated by 1 February 2017.

Indirect Costs

Indirect costs are any amounts that will directly or indirectly reduce the return on the product or option that is paid from, or the amount or value of, the income of, or property attributable to:

  • the product or option; or
  • an interposed vehicle in or through which the property attributable to the product or option is invested.

The costs related to over the counter derivatives transactions are specifically included as indirect costs as derivatives can functionally be used in a similar manner to interposed vehicles to provide exposure to other assets. However, costs related to over the counter derivatives transactions that are held for the primary purpose of  hedging are not included as management costs.

Except for a new product, indirect costs and indirect amounts should be calculated based on the indirect costs paid in the previous financial year, and the indirect cost ratio should be calculated based on the total average net assets for the relevant financial year.

Indirect costs must include indirect costs which the issuer knows, or reasonably ought to know and a reasonable estimate of indirect costs that are unknown.

Interposed entities

Issuers must, when disclosing fees and costs information in a PDS, take into account the costs of making direct investments, as well as the costs of investing in entities that are considered ‘interposed vehicles’ which may make further investments in underlying assets or investments (including through other interposed entities). For example, management fees based on the value of assets and fees based on the return paid from interposed entities would be an indirect cost.

What are interposed entities?

An interposed vehicle is a body, trust or partnership that:

  • is not excluded under the platform test; and
  • meets either the assets test or the PDS test.

The platform test

The entity will not be considered an interposed vehicle where:

  • securities or interests in an entity are selected by the investor and are acquired through a platform;
  • the responsible person for the PDS has published a list of securities or interest that can be acquired on the instruction, direction or request of the client; and
  • the arrangement under which the instructions would be acted on is a custodial arrangement as defined in subsection 1012IA(1) of the Corporations Act 2001 (Corporations Act)

The assets test

A body, trust or partnership is an interposed vehicle if the product is invested in or through the entity and the issuer believes or has reasonable grounds to believe that the entity has more than 70% of its assets by value invested in the financial product, other than certain excepted financial products. The excepted financial products are:

  • financial products that are traded on a financial market on which the entity to which the financial products relate are listed and are reasonably regarded as a means by which the entity invests in real property or infrastructure entities; and
  • financial products that confer control of another entity, unless the responsible person for the product disclosure statement has reasonable grounds to believe that the second entity has more than 70% of its assets by value invested in securities or other financial products.

The PDS test

An entity will be an interposed vehicle if, based on the PDS for the product or option, a security or interest in the entity could reasonably be regarded as the means by which the benefit of the investment is obtained, rather than the end investment.

Issues to consider

  • Disclosure of direct and indirect costs should usually be based on the previous financial year. However, for a new fund in where such disclosure may be misleading and deceptive ( eg performance fee )  another basis for disclosure may be required and must be reasonable.
  • What happens if new information on indirect costs comes to light during the new financial year which is a material increase, eg where actual fees are materially larger that estimated?
  • How do you apply the test to determine if a vehicle is a interposed vehicle for the purposes of RG 97?
  • The treatment of OTC derivatives as part of management costs and operational transactions costs and their amounts.
  • Disclosure of transactional and operational costs which include 'explicit' costs such as brokerage and buy-sell spread and 'implicit' costs which includes and assessment of the difference between the price paid for acquiring the asset and the price that would be payable if it were disposed. All transactional costs must be disclosed including those that may be recovered though a product buy-sell spend.

Given the holiday period during December and January we recommend that product issuers review their PDSs as soon as possible.

ASIC Consultation Paper 263: Risk management systems of responsible entities: Further proposals

ASIC proposes to issue a new regulatory guide to help responsible entities as well as AFS licensees comply with their obligation under section 912A(1)(h) of the Corporations Act to have adequate risk management systems.

In summary the Consultation Paper sets out the following:

Establishing a risk management system

  • REs should set out its risk appetite, taking into account changes in its business context.
  • The risk management system should be applied to the day-today operations of its business.
  • Senior management should foster a strong risk management culture.
  • Segregation of functions to allow for independent checks and balances (eg, asset valuations and investment management)
  • Liquidity risk management processes must be included in light of its financial obligations (redemption, distribution, etc)
  • Review and disclosure of risk management policies

Identifying and assessing risks

  • Examples of risks: strategic, governance, operational, etc
  • Methods of assessing risks: self-assessment, stress testing and/or scenario analysis, loss data analysis, etc.

Managing risks

  • RE should determine whether the identified risks are acceptable in light of its risk appetite and have documented risk treatment plans setting out how each material risk will be managed.

Prime Trust appeal - Directors’ duties and unilateral amendments to constitutions

The Full Court of the Federal Court of Australia has upheld an appeal by former directors of the RE of The Prime Retirement and Aged Care Property Trust (Prime Trust). The Court found that the trial judge should not have found that any of the former directors had contravened the Corporations Act as alleged by ASIC. As a result, the previous disqualifications and pecuniary penalties imposed on the directors were set aside.


On 19 July 2006, the directors resolved to amend the Prime Trust’s constitution to provide for new fees to become payable to the RE in its personal capacity. This included a new listing fee to be payable to the RE if the Prime Trust was listed on the ASX.

Following a board meeting on 19 July 2006, two of the directors signed an amending deed containing the amendments to the Prime Trust’s constitution. On 22 August 2006, the directors resolved to lodge the amended constitution with ASIC. On or about 23 August 2006, the RE lodged with ASIC a consolidated constitution containing those amendments.

The Prime Trust was listed on ASX-listed trust in 2007 and collapsed in 2010 and investors lost around $550 million.

Following the collapse, ASIC investigated the conduct of the RE of the Prime Trust. In August 2012, ASIC commenced proceedings in the Federal Court against the RE and five former directors.

In December 2013, the Federal Court decided that the RE had breached its duties as responsible entity, primarily because of the payment of a $33 million listing fee from the Prime Trust to the RE in its personal capacity, and that all of the directors had also breached their duties. The Federal Court found that Mr Lewski received the benefit of the fee, as the RE was controlled by persons and entities associated with him.


The Court determined that the directors did not have the power to unilateral amend the constitution (ie without a special resolution of members) as the amendments were adverse to members’ rights as they involved payment of additional fees from the Prime Trust to the RE. In determining whether a change to the constitution will adversely affect members’ rights under section 601GC(1)(b) of the Corporations Act, the Court endorsed the approach in 360 Capital Re Ltd v Watts (2012) 36 VR 507 over that of Barrett J in ING Funds Management Ltd v ANZ Nominees Ltd and Others (2009) 228 FLR 444 and in Re Centro Retail Ltd (2011) 255 FLR 28.3. Thus the Court considered that “members’ rights” include a member’s right to have the managed investment scheme managed according to the constitution. However, it does not follow that any change to the constitution will be adverse to members’ rights.

The Court held that even though the RE did not have the power to unilaterally amend the constitution, the amendments were valid from the time of amendment until such time as they are declared invalid by a court.

The Court considered whether the directors breached their duties under section 601FD of the Corporations Act in passing the lodgement resolution on 22 August 2006. In determining whether the directors had contravened section 601FD, ASIC could not rely on the 19 July 2006 resolution as constituting any contravention because the relevant limitation period had expired under section 1317K.

The Court considered that the amendments to the constitution had been made on 19 July 2006 and the lodgement resolution on 22 August did not re-visit what the directors honestly believed was a valid resolution at the 19 July 2006 meeting. On that basis, the Court held that the directors did not contravene their duties in section 601FD(1) by passing the lodgement resolution on 22 August 2006.

The Court also considered whether the RE contravened section 208 of the Corporations (as modified by section 601LC) in relation to the payment of the listing fee and whether the directors were involved in any such contravention by the RE. Under section 208 any financial benefit given out of scheme property to the responsible entity requires members’ approval. However, this does not apply to the payment of fees to a responsible entity payable under the constitution. Therefore, on the assumption that the lodgement resolution and the amendment to the constitution were already in place when the decision was made to pay the Listing Fee, it was held there was no relevant contravention under section 208.


The directors in the case were saved by the fact that proceedings where not issued within the statute of limitations applicable to the July 2006 directors meeting. Had proceedings been issued in time it is likely that a different result would have ensued similar to the outcome at first instance.

ASIC Consultation Paper 474  Culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry

A vertically integrated business means businesses whose operations include at least two of the following functions:

  • investment management
  • acting as a responsible entity or wholesale trustee
  • acting as a trustee of a registrable superannuation entity
  • operating a platform (eg investor directed portfolio services (IDPS) or IDPS-like structures)
  • acting as custodian, which may also include an investment administration (back-office) function.

“Conflicts of interest” are circumstances where some or all of the interests of people (clients) to whom a licensee (or its representative) provides financial services are inconsistent with, or diverge from, some or all of the interests of the licensee or its representative. This includes actual, apparent or potential conflicts of interest.  ASIC considers that the vertically integrated business model may create more opportunity for conflict to arise.

For example, a vertically integrated business has more opportunities to cross-sell financial products and cross-selling can give rise to the following types of conflicts:

  • between product manufacturers whose objective is to sell in-house products and investors whose interests are to be offered a range of suitable investments
  • when appointing related party service providers – a lack of service provider assessment, inappropriate criteria being used for the assessment, non-arm’s length engagement process and no independent oversight of the service provider
  • when employee incentives reward strategies that focus on short-term sales targets or which encourage employees to promote or give priority to related party products
  • when a person holds a directorship on more than one group company.

In light of the circumstances, ASIC provides a list of good governance processes which it encourages AFS licensees to adopt.  These include:

  • Board approval of conflicts policies and procedures.
  • Conflicts being a standing board and committee item.
  • Boards consider material contracts with related parties, with related party agreements being reviewed by legal and compliance prior to board consideration.
  • Having a risk management team separated from the business, and who provides regular reporting on operational risk to the audit and risk committee.
  • Adoption of a formal review and escalation process for conflicts.
  • Employees being responsible on a day-to-day basis for reporting conflicts.
  • Having conflict management committees to deal with complex or structural conflict issues on an ad hoc basis.
  • Periodic reviews of conflicts, and not just conflict processes.
  • A formalised due diligence process for investment selection and retention which is applied consistently to related and unrelated parties.
  • Adopting the same process, considerations and criteria for outsourcing to related and unrelated parties.
  • Periodic training on conflicts.
  • Adoption and regular updating of conflict of interests registers (in addition, for superannuation trustees, registers of duties and interests).
  • Periodic formal reviews of cash default options that are with a related party bank.

If you have any questions about this update please contact a member of our Financial Services team.


Harry New

Harry leads our financial services team and focuses extensively on financial services law and corporate advisory.

John Bassilios

John Bassilios

Partner & Fintech and Blockchain Lead

John has broad experience in financial services, funds management, blockchain, crypto, web3 and corporate law.

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