ASIC CLASS ORDER [06/682]

EXPLANATORY STATEMENT

Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

Paragraph 1020F(1)(c) —Declaration

The Australian Securities and Investments Commission (ASIC) makes Class Order [C0 06/682] Relief from Product Disclosure Statement requirements for multiple deemed issuers of a derivative under paragraph 1020F(1)(c) of the Corporations Act 2001 (the Act).

Paragraph 1020F(1)(c) of the Act provides that ASIC may declare that Part 7.9 of the Act applies in relation to a person or financial product, or a class of persons or financial products, as if specified provisions were omitted, modified or varied as specified in the declaration.

1.          Background

Summary of relevant sections of the Act

Subsection 761E(6) of the Act provides that where a derivative is entered into or acquired on a financial market through arrangements made by a financial services licensee, that licensee is taken to be the issuer of the derivative. Derivatives acquired on financial markets are also referred to as "exchange traded derivatives".

Where more than one financial services licensee is involved in arranging for a derivative to be entered into or acquired on a financial market, each of those licensees will be deemed to be the issuer of that derivative. This affects certain requirements that apply to Product Disclosure Statements, namely:

(a)        section 1013A of the Act — which provides that a Product Disclosure Statement must be a document that has been prepared by the issuer of the financial product; and

(b)        section 1013D of the Act — which provides that the Product Disclosure Statement must include such specified statements and information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product. The specified statements and information referred to in paragraphs 1013D(1)(a), (c), (d), (e), (f), (g) and (j) of the Act may be affected by the existence of more than one issuer of the derivative by reason of subsection 761E(6) of the Act; and

(c)        section 1071I of the Act (as inserted by Schedule 10BA of the Corporations Regulations 2001) — which provides that a Short-Form PDS must contain a summary of the statements and information referred to in paragraphs 1013D(1)(a), (c), (d), (e) and (g) of the Act.

Reasons for making the instrument

It is common for exchange traded derivatives to be acquired by retail clients through a series of arrangements where:

1.      a financial services licensee (an intermediary licensee) who is not a participant on a relevant financial market makes recommendations to a client to acquire the derivative and introduces the client to a financial services licensee (a market participant) who is a participant on the relevant financial market; and

2.      the market participant  then acquires the derivative for the client on the relevant financial market.

Under subsection 761E(6) of the Act both the intermediary licensee and the market participant will generally be deemed to be the issuer of the derivative that is acquired. Both the intermediary licensee and the market participant must therefore prepare a Product Disclosure Statement for the derivative. The Product Disclosure Statement that is prepared must contain the statements and information required by section 1013D of the Act about each of the deemed issuers.

Although the Act permits preparation of a joint Product Disclosure Statement where a financial product is jointly issued, it is common practice for intermediary licensees and market participants to prepare separate Product Disclosure Statements for exchange traded derivatives.

Where separate Product Disclosure Statements are prepared, consumers will receive more than one Product Disclosure Statement for the same derivative. These Product Disclosure Statements could potentially contain inconsistent information, which could confuse consumers. Consumers will need to read and compare each Product Disclosure Statement to make a decision about whether to acquire the derivative.

The deemed issuers of the derivative may also have difficulty complying with the requirements in section 1013D of the Act to include statements and information about the other deemed issuer or issuers.

Where a joint Product Disclosure Statement is prepared, the deemed issuers accept joint liability for the information included in the Product Disclosure Statement. This may involve a significant burden where these entities are not related, other than by reason of their commercial relationship.

There may also be some overlap between the information about the deemed issuers that is included in the Product Disclosure Statement and information included in the Financial Services Guides of the deemed issuers.

2.         Purpose of the class order

The purpose of [CO 06/682] is to address concerns that, where financial services licensees are affected by subsection 761E(6) of the Act, strict compliance with the requirements for preparation of Product Disclosure Statements could result in duplication of information and confusion for retail clients, without compromising disclosure to retail clients.

3.         The class order

[CO 06/682] grants relief with the effect that:

·        where there is more than one issuer of a derivative by reason of subsection 761E(6), only the market participant has to prepare a Product Disclosure Statement, or a Short-Form PDS, for the derivative;

·        the Product Disclosure Statement, or a Short-Form PDS, does not have to include any statement or information that is required by subsection 1013D(1) that relates to only to an intermediary licensee (and not the market participant) if the Statement includes:

(a) statements that there may be additional risks, fees or costs, rights, terms, conditions or obligations that attach to the derivative, and available dispute resolution schemes that relate only to the intermediary licensees; and

(b) a statement that details of these matters may be obtained from the intermediary licensee; and

·        the intermediary licensee must give to retail clients to whom the intermediary licensee offers to issue, arrange for the issue of, or makes a recommendation to acquire, the derivative, in writing, the information or statements that relate only to the intermediary licensee that would otherwise have been required to be included in the Product Disclosure Statement, or a Short-Form PDS, for the derivative. The intermediary licensee can include this information either in their Financial Services Guide, or in a separate document.

A consequential modification has been made to section 1013E of the Act to ensure that information that relates only to the intermediary licensee would not have to be included in the Product Disclosure Statement, or a Short-Form PDS, prepared by the market participant on the basis that it is information that would reasonably be expected to have a material influence on decisions made by retail clients about the acquisition of the derivative.

The relief will only be available in circumstances wherethe intermediary licensee and the market participant have entered into a written agreement under which the intermediary licensee agrees to take reasonable steps to ensure that retail clients to whom the intermediary licensee offers to issue, arrange for the issue of, or makes a recommendation to acquire, the derivative are given the market participant's Product Disclosure Statement and the additional product-related information that relates to the intermediary licensee; and

4.         Consultation

ASIC consulted with the Australian Stock Exchange, the Sydney Futures Exchange, the Securities and Derivatives Institute of Australia, and members of each of those entities, and Nova Legal and Advisory Pty Ltd before making [CO 06/682].

A Regulatory Impact Statement has been approved by the Office of Regulatory Review and is attached.