Hedge fund disclosure requirements - RG 240

On 18 September 2012, the Australian Securities and Investments Commission released Regulatory Guide 240 "Hedge funds: Improving disclosure" (RG 240). RG 240 sets out ASIC's policy on disclosure that must be given to retail clients investing in a "hedge fund". It requires responsible entities of "hedge funds" to include particular information in a product disclosure statement and to provide ongoing disclosure to members of "hedge funds".

The disclosure requirements apply with effect from 22 June 2013.

What is a 'hedge fund'?

Althouugh the title of RG 240 refers to 'hedge funds', it is not only those funds that are traditionally thought of as hedge funds that are subject to RG 240. For the purposes of RG 240, a 'hedge fund' is defined as a registered managed investment scheme that:

 

a) is promoted by the responsible entity using the expression and as being a "hedge fund"; or

b) exhibits two or more of the following five characteristics:

1. the fund has a complex strategy or structure which means that the fund:

• pursues investment strategies that aim to generate returns with a low correlation to equity and bond indices; or
• has a complex investment structure that invests through three or more interposed entities (or two or more interposed entities if at least one of the entities is offshore) where the responsible entity of the scheme or an associate has the capacity to control the disposal of the products or two or more of the interposed entities.

2. the fund uses debt for the dominant purpose of making a financial investment.

3. the fund uses derivatives, other than for the dominant purpose of:

• managing foreign exchange or interest rate risk, or
• more efficiently gaining an economic exposure, through the use of exchange traded derivatives, to the underlying reference assets of those derivatives, but only on a temporary basis (i.e. less than 28 days).

4. the fund engages in short selling.

5. the responsible entity (or investment manager) has a right to be paid a fee based on the unrealised performance of the fund's assets.

The definition, therefore, captures a broad range of funds, including, for example, a fund that uses debt to acquire real estate and pays a performance fee based on the value of the property at times other than upon the sale of the property.

Scope of application of RG 240

Because the definition of 'hedge fund' is so broad in RG 240, it will apply to a broad range of funds. It will also apply to those 'simple managed investment schemes' (Simple MIS) that qualify as 'hedge funds' within the meaning of RG 240. Simple MIS should not be subject to the shorter PDS disclosure regime, provided ASIC Class Order 12/749 (CO 12/749) operates as intended by ASIC.

RG 240 will also apply to 'funds of hedge funds' (FoHF). An FoHF means a registered managed scheme that either:

• promotes itself as an FoHF; or
• has at least 35% of the fund's assets invested in one or more hedge funds (including a scheme or body in or outside this jurisdiction that would be a hedge fund if it were a registered managed investment scheme).

The responsible entity of an FoHF must provide separate disclosure against the benchmarks and principles set out in RG 240 in respect of each hedge fund that accounts for at least 35% of the FoHF's assets.

RG 240 will not apply to those funds that quality as 'hedge funds' under RG 240, but are also subject to other disclosure rules set out in ASIC regulatory guides applicable to mortgage schemes, unlisted property schemes, infrastructure entities and agri schemes.

If a responsible entity is insure as to whether a fund is a 'hedge fund' and therefore subject to the disclosure rules in RG 240, it can comply with the disclosure requirements in RG 240 or seek clarification relief from ASIC.

ASIC encourages other entities, which pose similar risks to hedge funds, to disclose against the benchmarks and apply the disclosure principles when providing information to investors (for example, when providing an offer document to a wholesale client).

Benchmarks and principles

RG 240 sets out two 'benchmarks' and nine disclosure principles that address key issues that ASIC considers should be highlighted in a PDS. These are to be set out in a PDS in a manner that allows a retail investor to make an informed decision about whether to invest. Like ASIC's disclosure requirements for other asset classes, the benchmark disclosure is on an 'if not, why not' basis; that is, a responsible entity must state whether it complies with the benchmark, or if it does not comply with the benchmark, it must state in the PDS the reasons that it does not comply.

The two benchmarks are:

1. Valuation of assets - are the valuations of the fund's non-exchange traded assets provided by an independent administrator or an independent valuation service provider? If this benchmark is irrelevant (i.e. if the fund has no non-exchange traded assets), then the responsible entity need not refer to this benchmark.
2. Period reporting - will the responsible entity of the hedge fund provide periodic disclosure of certain key information on an annual and monthly basis?

The nine principles are:

*If the disclosure principles are on leverage, derivatives or short selling are irrelevant, the PDS need not address them.

RG 240 sets our lengthy lists of topics that must be disclosed in a PDS under each of the principles. These lists effectively act as the basis for a checklist of items to be covered in the PDS. The benchmarks and a summary of the disclosure principles should be addressed at the beginning of the PDS, with complete disclosure on the topics being provided in the remainder of the PDS.

The benchmark and disclosure principles must be updated and maintained in ongoing disclosure. It should be supported in, and "not be undermined by", advertising material.

Further developments

This is not necessarily the end of regulatory developments in this space. RG 240 referes to the Government carrying out "further work... on the appropriate long-term treatment of these products". While it is unclear what those developments will be, they will presumably be intended to fill the gap left when CO 12/749 expires in June 2013.

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