ASIC pounds funds for misleading investors

Inappropriate labelling of a fund can mislead investors into believing that the fund is much safer or more liquid than it actually is.

Karen Chester, deputy chair ASIC. Picture: David Geraghty / The Australian.

More than half of the responsible entities targeted by the corporate regulator in its crackdown on misleading labelling of funds have been ordered to correct inaccuracies that suggested their offerings were less risky or more liquid than they actually were.

The Australian Securities and Investments Commission in recent months undertook targeted surveillance of 37 managed funds operated by 20 responsible entities (RE), with $21bn in assets, and ordered corrective action from 13 of the REs to make their products “true to label”.

ASIC sought name changes for nine funds that would better represent their product composition and ordered one RE to change the asset allocation of its fund to reflect its name.

Three REs undertook or committed to undertake a review of their funds, and one further RE withdrew misleading promotional materials on their website and subsequently wound up its fund.

ASIC deputy chair Karen Chester said the regulator’s surveillance identified concerns around the inappropriate labelling of 14 “cash” funds with $7bn in assets as well as redemption features promoted in funds that did not match the liquidity of the underlying assets.

“Funds should be true to label’,” Ms Chester said. “This is not a nice-to-have. It’s a must-have for responsible entities in meeting their legal obligations to their investors, especially in times of market volatility.

“Inappropriate labelling of a fund can mislead investors into believing that the fund is much safer or more liquid than it actually is. Put simply, a fund should not use terms such as ‘cash’ or ‘cash enhanced’ unless its assets are predominantly in cash and cash equivalents.”

Being true to label was fundamental for a competitive marketplace, she cautioned.

“If consumers cannot rely on product labels, then it is difficult for funds to compete on a fair basis – disadvantaging both compliant fund managers and end-consumers,’ Ms Chester warned.

While ASIC found most of the funds it reviewed in the fixed-income, mortgage and property sectors were appropriately labelled, 14 of 22 managed funds used the term ‘cash’ when they should not have.

“Some funds that were labelled as ‘cash funds’ had asset holdings more akin to a bond or diversified fund, which have significantly higher risk and less liquidity compared to a traditional cash fund.

“This was especially prominent in funds that use words such as ‘cash enhanced’ and ‘cash plus’ in their labelling,” ASIC said.

On average, funds labelled as ‘cash plus’ had more than 50 per cent of their assets invested in products other than cash or cash equivalents such as fixed-income securities and mortgages. This jumped to 70 per cent for ‘cash enhanced’ funds, the regulator found.

In its review ASIC also found that in a small number of funds there was “a significant mismatch” between redemption features and asset liquidity, with the risk that underlying assets would not be liquid enough to meet redemption demand in some cases.

ASIC’s latest clampdown on the managed funds sector comes after the regulator last month told the Federal Court that embattled investment house Mayfair 101 may have been running a Ponzi scheme, with money from new investors used to pay those exiting.

ASIC earlier this year launched court proceedings against Mayfair 101, alleging it engaged in misleading or deceptive advertising related to its debenture products when it compared them to term deposits.

The Supreme Court earlier this month ordered the winding up of Mayfair 101’s IPO Wealth Holdings.