ASIC keeps close watch on fund advertising

As ASIC continues to keep a close watch on funds’ advertising and promotional material, licensees, representatives, and investment managers should be aware resolution of an issue with ASIC will not save you from later facing regulatory or court action. Partner Selina Nutley highlights three recent cases and explains what you need to know.

Need to know

• ASIC continues to closely scrutinise funds’ advertising and promotional material.
• Funds should avoid words such as ‘stable’ or ‘certain’ unless the vast majority of the fund’s assets are cash or cash like products.?Care should also be taken in representations about withdrawal or redemption periods.
• Reliance upon disclaimers is likely to be insufficient.
• Undertaking corrective action in conjunction with ASIC will not be enough to safeguard a trustee or responsible entity (RE) against enforcement action.?However, early and ongoing cooperation continues to be very favourably viewed by the courts.
• Courts are very focused on imposing significant penalties which are not simply absorbed by funds as a cost of business.
• You need to act promptly if you have concerns about your advertising or receive correspondence from ASIC. We can help.

Background

Over the past 18?months, ASIC undertook risk?based surveillance of advertising material, website disclosure, and PDSs issued by managed funds, focusing on whether funds were providing potential investors with adequate information as well as accurately and clearly presenting key features of their investment products.?ASIC held concerns about advertising material containing unbalanced comparisons, safety and stability representations which did not accurately portray the risk of capital loss, and misleading representations as to withdrawal timeframes.?

Arising from this surveillance, ASIC commenced two noteworthy actions in relation to advertising.?These decisions provide guidance for the industry about the types of representations which should be avoided in advertising, as well as the seriousness with which ASIC and the court regards inaccurate or misleading advertising.?

Mayfair Wealth Partners

The Mayfair 101 Group offered investments in multiple debenture products.?The products would appear in Google searches for terms such as ‘bank term deposits’ and ‘best term deposit’.?After the Mayfair Group’s collapse, ASIC commenced civil penalty proceedings.?The Federal Court said the Mayfair companies had represented—

• the investments were comparable, and of similar risk profile, to bank term deposits, when they were in fact significantly higher risk
• the products carried no risk of default when there was a substantial risk investors could lose some or all of their principal investment
• the principal investment would be repaid in full on maturity, when Mayfair had a right under the constitution to extend the time for repayment for an indefinite period
• the products were fully secured, when in fact they were not.

The Court permanently restrained the companies from using phrases such as ‘term deposit’ and ‘certainty’ in any future advertising.?

In a sign of how seriously the Court viewed the Mayfair Group’s conduct, it was collectively ordered to pay a pecuniary penalty totalling $30?million.?It is important to note Mayfair Group has appealed the Federal Court’s decision, both on liability and the penalty judgment.?That appeal is presently before the Full Federal Court, and we will keep you updated about its progress.

La Trobe Financial Asset Management

The crux of ASIC’s concerns in relation to La Trobe’s conduct was the advertising of two products called the ‘48 Hour Account’ and ‘90 Day Account’.?These products were primarily mortgage funds.

The Court said:

• La Trobe contravened the law by representing investors in the two products would be entitled to withdraw their investment within 48 hours or 90 days respectively, when the constitution provided La Trobe had up to 12 months to satisfy a withdrawal notice if the fund was liquid, or only in accordance with a withdrawal offer made by La Trobe if the fund was illiquid.
• La Trobe’s advertising said?capital invested in the fund would be stable, that is, there was no risk of substantial loss to the capital, when in fact the majority of the fund’s assets were invested in mortgages subject to risk.
• While La Trobe used disclaimers, they were not prominent enough to dispel the representations, particularly as some of the representations were made in the fund’s name.

An interesting focus of the judgment was the use of the term ‘capital stable fund’.?ASIC’s view is that term should only be used to describe a fund that invests across a range of asset classes, but with a significant portion in defensive assets such as fixed interest investments and cash, and a small portion in growth assets such as shares and property.?In the case of La Trobe products, the majority of the fund’s assets were loans secured by first mortgages, as well as cash and deposits.

Ultimately, La Trobe conceded it had contravened the law by making the representations but placed significant weight on the fact it had always paid redemptions within the period represented in the advertising.?La Trobe had undertaken various modifications to its advertising in conjunction with ASIC.?The Court inferred ASIC had accepted its correspondence caused La Trobe to believe ASIC had no concerns about its advertising.?

Despite a maximum penalty of $15 million, ASIC and La Trobe had agreed to a proposed penalty of $750,000.?Ultimately, the overriding circumstances, and particularly the level of cooperation shown by La Trobe, was sufficient to convince the Court (albeit with deep reservations) the penalty of $750,000 was sufficient.?

PE Capital Funds Management

In 2021, ASIC also launched Federal Court proceedings against PE Capital Funds Management (PE Capital), seeking declarations some of PE Capital’s advertising was misleading and deceptive.??

PE Capital had been the authorised representative (AR) of various AFSL holders.?However, much of its activities fell outside the authority it had been given and had been undertaken without the licensee’s knowledge.?Despite this, PE Capital stated in each of the relevant information memoranda (IM) that it:

• was the issuer of the IM
• was the authorised representative of a particular licensee.?

The court said:

• In including its corporate authorised representative number, and citing the licensee’s AFSL number, PE Capital held itself out not only to be an AR of the licensee, but also that its conduct was within the authority given to it.
• Read independently of each other and divorced from the context of the IM, those statements may have been literally true.?However, when read in context and in combination, they gave rise to a misleading representation PE Capital had the authority of its licensee to issue the IMs.

Like the Mayfair case, PE Capital was also found to have falsely represented various feeder funds would hold security over real property assets, when they did not.?

How can we help?

In June?2020, ASIC issued a press release confirming it had directly raised concerns with seven REs, including La Trobe, about their advertising and disclosure, and those seven REs each took corrective action.?While the seven REs were unnamed in ASIC’s press release, following a Freedom of Information (FOI) request, the Australian Financial Review (AFR) named several of the REs and published a series of articles on this topic.?Other REs escaped being named as they successfully opposed the AFR’s FOI application, including clients represented by McMahon Clarke.?

Our Litigation and Funds Management teams are monitoring these cases closely.?If you have concerns about your advertising or have received correspondence from ASIC, it is important you act promptly.?Contact us for assistance.