We recently conducted a survey of superannuation members. Admittedly, this survey was limited to a small sample size consisting of people the authors know and work with.We asked the survey participants two questions:
Do you know the investments underlying your superannuation fund?
None of them did.
Are you particularly interested?None of them were.
A small and selective survey but nevertheless a telling insight into the level of interest that the average superannuation member has in their superannuation fund, or at least the assets held in the fund.
The public’s equivocal attitude to superannuation investments makes the high regulatory burdens imposed on superannuation funds to report their portfolio holdings hard to rationalise. In light of the continuing uncertainty regarding these reporting requirements, this article looks at the current superannuation fund asset reporting requirements and asks what, if anything, all of the red tape achieves for members.
A small step back in time
Back in 2012, the Corporations Act was amended to require trustees of certain superannuation funds to publish on a publicly accessible website, on a semi-annual basis, the assets held in each of their funds at a particular point in time in each year.
To bolster the asset publication obligation, notification and reporting obligations were created down the chain of investments derived from funds. Trustees of superannuation funds were required in certain circumstances to give notices to the entities in which they invest and to receive reports on the assets held by those entities. Those entities in turn were required to give notices to, and receive reports from, the entities they invested with and so on and so on.
Trustees of superannuation funds are not currently required to comply with all of these additional transparency obligations. There have been many extensions made to the effective dates of the amendments, with the current effective date scheduled for 1 July 2015.
The explanatory memorandum to the relevant amendment to the Corporations Act noted that:
“portfolio disclosure in Australia is unduly opaque and does not meet global best practice. Requiring the disclosure of portfolio holdings will provide greater transparency and allow members to understand where their superannuation is invested.”
What the explanatory memorandum failed to address was why it is important and beneficial for members to understand the assets in which their superannuation is invested.
It is all very well to refer to ‘global best practice’ but given members usually lack control over superannuation fund investment decisions, there would seem to be very little members can really do with the information. The explanatory memorandum identified no specific outcome of the changes nor any real benefit to members. This raises a question as to why the Government should impose new and additional regulatory burdens, the costs of which will ultimately be borne by the members who have not demanded the data.
In November 2013, the Commonwealth Government announced a further review of the reporting and transparency measures and released a discussion paper for public consultation. The public consultation period for that review closed in February 2014. Since that time, the Assistant Treasurer for the Commonwealth Government has stood aside and different priorities appear to have taken hold.
In light of this stalled momentum, it’s worth considering how we got here, where we might go and what it all means.
The reporting regime in a little more detail
The Corporations Act (as amended for the delayed reporting and transparency measures) currently provides that the trustee of a registrable superannuation entity (other than a pooled superannuation trust) must make the following information publicly available on the entity’s website no later than 90 days after each reporting day (being 30 June and 31 December each year):
- information that is sufficient to identify each of the financial products or other property in which assets, or assets derived from assets, of the entity are invested, at the end of the reporting day; and
- the value of the assets, or assets derived from assets, of the entity, at the end of the reporting day, that are invested in each of the financial products or other property.
No regulations have yet been made for the purposes of the above reporting obligation, although it is contemplated that regulations will be made in due course to prescribe the way in which the disclosed information must be organised and also to provide for a materiality threshold.
In addition, the amended Corporations Act establishes a mechanism for a trustee or other responsible entity to collect information about the fund’s assets, and in particular the assets derived from the fund’s assets, to facilitate reporting.
The relevant provisions generally provide a mechanism for the trustee to give a notice to another person (the second person) with whom the trustee makes an investment. The second person is then required to provide certain reports to the trustee. In addition, the second person is required to give a notice to any third person with whom the second person makes an investment using money or assets sourced from the relevant superannuation fund. In turn, the third person then has reporting and notification obligations placed on them. In summary, the notification and reporting obligations flow down the chain of asset investments ultimately derived from the relevant superannuation fund.
The obligation to provide a notice when an investment is made using superannuation sourced funds, and the associated reporting obligations imposed upon the recipient of the notice, only apply where the party providing the notice acquires the relevant financial product in Australia.
There are offence provisions for trustees who don’t comply with the reporting obligations, who provide information that is misleading or deceptive or who omit information. There is a defence to the offence provisions where the trustee has taken “reasonable steps” to obtain the information but was unable to
do so. Offence positions can also apply to those that receive notices from trustees.
The trouble with offshore investments
There has been industry confusion as to the extent to which the superannuation reporting provisions will require a trustee to report on assets derived from investments offshore.
Let’s take the example of an investment by an Australian superannuation fund trustee in a private real estate fund formed as an exempt limited partnership in the Cayman Islands. The trustee would not be required to provide a notice to the general partner of the partnership because the asset has been not been acquired in Australia (it has been acquired in the Cayman Islands). However, this does not relieve the trustee of its obligation to make information publicly available about its interest in the Cayman Islands partnership together with a valuation of its assets invested in the partnership. Further, the trustee has an obligation to report on the assets derived from the assets in the Cayman Islands partnership. The trustee may receive this information through reporting from the general partner of the partnership. If the trustee does not, it may need to ask the general partner for information on the underlying investments to demonstrate it has taken reasonable steps to obtain the information.
Of course, it is common for offshore private funds, whether private equity, private real estate or hedge funds, to impose confidentiality restrictions on investors. Such restrictions often prevent disclosure of investments held within the fund. There is no carve out in the Corporations Act for the trustee not to publish where it is subject to a confidentiality obligation.
To the contrary, the trustee may commit an offence if it fails to publish or to seek information to enable it to publish.
The trouble with private investments
Unlike public market investments, with their established statutory regimes of tracing notices and substantial holder reports, private investments are intended to be, well, private. Private equity, venture capital, private real estate and hedge funds tend to be sensitive to the disclosure of information by investors. There are a number of reasons for this. Some funds simply wish to make investments and pursue strategies out of the public gaze, hence their private nature.
For other funds, the nature of their investments is in and of itself confidential. For example:
- venture capital investing in the early stages is often about backing people with an idea. A rival organisation may be able to steal those people and their ideas if the investments made by venture capital funds were publicly disclosed;
- private equity and private real estate funds may not wish for their valuations of privately held assets to be publicly disclosed on a six monthly basis. This might diminish the ability of those funds to sell an asset at an amount higher than the publicly disclosed valuation; and
- hedge funds may not wish for their assets to be disclosed in case it reveals a particular strategy being pursued by those funds, which might be disrupted if others discover the strategy through public disclosure.
It is for these, and other reasons that many private funds documents contain terms permitting the general partner or other fund sponsor to withhold information from an investor where to make such a disclosure might otherwise cause commercial harm to the fund. In addition, to the extent information is made available by the general partner or other fund sponsor, investors are typically subject to strict confidentiality obligations
Arguments against the imposition of the transparency burden
The private nature of private funds runs counter to the transparency obligations on superannuation fund trustees under the amended Corporations Act.
Some private funds have refused investment from superannuation fund trustees due to the possibility that the transparency measures might become effective in their present form. Other private funds have
taken a “wait and see” approach, but may in the future exclude superannuation fund trustees from making an investment, or continuing to hold an investment, in their funds. So one argument against requiring disclosure by superannuation fund trustees is that it will shrink their investment universe.
There are of course other reasons – as alluded to at the beginning of this article. The Government has not advanced any regulatory or consumer benefit that results from public disclosure. Why impose a burden where the benefits have not been enumerated? Plus, as with all regulatory requirements that result in a practical and administrative burden, investment reporting by superannuation funds comes at a cost. A cost that will ultimately be borne by the members of the superannuation funds.Perhaps the better course would be to require disclosure of public investments and restrict the need to disclose private investments where to make such disclosure would not be in the best interests of fund members (this might be because it would require the trustee to breach confidentiality obligations or risk being excluded from the investment altogether).
Mark McFarlane is a partner in the Sydney office of King & Wood Mallesons where he creates innovative solutions for local and foreign participants in financial services, private equity and other structured funds, hedge funds, structured transactions, club deals and consortiums. Mark has put together a number of joint ventures to invest in real estate and debt assets, and regularly sought out to advise on the most complex arrangements. Mark has assisted clients in a wide variety of transactions in Australia and Asia. He has assisted many foreign participants in the financial services industry comply with regulatory requirements in accessing Australian sources of capital.
Alex Elser is a special counsel in Sydney's Mergers & Acquisitions group. Having practiced in New York and Sydney primarily within specialist mergers & acquisitions and private equity groups, Alex has developed a deep understanding of and experience of working with large blue-chip PE sponsors. She brings a knowledge and understanding that is hard to find in the Australian market and one that has proven very valuable to many of her clients. Alex also provides advice on corporate governance arrangements, corporate compliance and other Corporations Act matters, ancillary documentation (such as non-disclosure agreements) and joint venture arrangements.
Laura Foster is a senior associate in the Sydney office of King & Wood Mallesons where she works local and foreign participants in financial services, private equity and other structured funds, hedge funds, structured transactions, club deals and consortiums. Laura has a wide range of experience including real estate joint ventures. Laura has assisted many foreign participants in the financial services industry comply with regulatory requirements in accessing Australian sources of capital.
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