Foreign Investment Managers impacted by new ASIC risk management guidance

Many non-Australian investment and asset managers and their advisors have established investment funds in Australia using the services of an outsourced responsible entity/trustee (RE). Others are appointed by an Australian RE to manage investments of a fund the RE owns and operates.

On 21st July 2016 the regulator, the Australian Securities and Investments Commission (ASIC) released its report (in consultation paper CP 263) setting out its proposals for providing guidance to responsible entities in relation to risk management systems.

As the "owner" of the product (or as the delegated investment manager), you should understand what your RE does (and is required to do) in performing its role, as it fundamentally affects your product, your business and your reputation.

So, what is changing?

ASIC has found, after reviewing more than 100 responsible entities, that improvements could be made to the ways in which RE's meet their obligations to have adequate risk management systems in place.

As part of its ongoing review, ASIC is seeking industry feedback (by 1 September 2016) on its draft guidelines which will be set out in a regulatory guide.

ASIC discusses "stress testing" and "scenario analysis" which should be undertaken by the RE for the range of identified risks which are within focus at the fund level. These include strategic risk, governance risk, operational risk, market and investment risk and liquidity risk. Market and investment risk and liquidity risk are clearly two primary matters which would be within the domain of the investment manager appointed by the RE to manage the investments of the fund.

Impact on you

As the investment manager appointed by the RE to invest the assets of the fund and often to take responsibility to manage certain facets relating to the operation of the fund, the RE will need to ensure that certain of their obligations are made known to you and will be subject to your doing what is required to ensure the RE does not breach the guidelines. Areas of particular interest likely to be discussed with you by the RE are liquidity risk management provisions (which, as investment managers are probably aware, is a key focus area currently for both the EU and the US regulators), as well as clarifying the particular risks relevant to the fund (especially where the fund is considered to be of the more "complex" variety).

An outcome of the proposals is that, where the RE relies on external service providers (in this case the non-Australian investment manager), the RE must maintain a strong monitoring process for outsourcing of investment management and various other functions.  

These proposals and guidelines do not change the existing legal requirements and are designed to identify and enhance compliance ensuring that adequate risk management systems and processes are put in place. In many cases well established REs may not have to change very much.

Investment managers of Australian managed investment schemes can therefore expect increased monitoring and assessment of the services you provide (even if it is, commercially, their product!). Remember the responsible entity is ultimately responsible for the operation of the fund and will be looking to the investment manager to ensure the responsible entity does not breach its legal obligations or ASIC's guidelines.

Liquidity risk

The key risk that arises relevant to non-Australian investment managers is the "liquidity risk management process" which the RE has as part of its risk management system. ASIC has indicates that this process should include measures to ensure there are adequate financial resources to meet the financial obligations and needs of the responsible entity and the schemes operate. This means having liquidity available to meet investor redemptions.

Global environment

On 22 June 2016 the Financial Stability Board (the global body charged with assessing and addressing systemic risk in the financial services sector) published a consultation paper called Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities. One of the "financial stability risks" identified in that paper is "liquidity mismatch between fund investments and redemption terms and conditions for fund units".

Non-Australian investment managers may already be aware of the similar IOSCO Principles of Liquidity Management for Collective Investment Schemes.

Other risks identified are leverage, operational risk and securities lending activities. No doubt these are typical risks which an RE would also have to pay attention to in formulating and documenting its risk management process in Australia.

It seems that ASIC's CP and associated activity in this area is in line with and a response to the IOSCO and country regulators', as well to the FSB's, focus in these areas.

Due diligence practices in capital raising

As part of a separate review ASIC released a report (Report 484) dealing with due diligence provisions in initial public offerings ( and accordingly with the contents of the prospectuses for those IPO's). Some of the findings will have relevance to capital raisings under collective investment schemes which issue a product disclosure statement (PDS) facilitating investment in those schemes. This may well be another area in which REs pay attention to the due diligence requirements and obligations which they have so as to ensure that in PDS preparation and verification, greater stringency is applied to statements and representations made, including seeking appropriate certifications from the investment managers for those products and funds.

Further information

This summary was prepared by Stephen Etkind of the Henry Davis York Investments Team. For further information please contact a member of our Investment Team.

Nikki Bentley

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Nikki Bentley Partner

Nikki is the Group Leader of Henry Davis York's Corporate Group, which includes the legal teams for Corporate / Mergers & Acquisitions; Investments & Financial Services and Tax.

Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

With more than 15 years funds management experience in private practice, government and as an in-house lawyer, Nikki's practice spans the range of funds management products, with particular expertise in hedge funds, property funds and equities.

Nikki is regularly involved in industry and government discussions on regulatory reforms impacting the Australian funds management industry. Nikki is a passionate advocate for the development of a new corporate collective investment vehicle because of the opportunities it could provide to grow the funds management industry. She is the Honorary Legal Counsel and Chair of the Regulatory Committee for the Australian branch of the Alternative Investment Management Association (AIMA) and is a regular participant on the Financial Services Council (FSC) working groups.

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Jon Ireland

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Jon Ireland Partner

Jon has extensive experience in corporate and financial services law, specialising in complex transactions, funds management and investment distribution. Jon also advises on regulatory issues relating to the use of technology in financial services.

Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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Vinod Kumar

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Vinod Kumar Senior Associate

Vinod advises fund managers and other financial institutions on corporate, commercial and regulatory issues facing their businesses. He specialises in funds management and general corporate law.

Vinod specialises in regulated and unregulated corporate transactions, funds management and financial services regulation. Vinod also provides general corporate advice on matters such as Corporations Act, ASX and regulatory compliance, corporate governance and disclosure.

Vinod's experience includes:

  • advising on a range of listed and unlisted funds, inbound and outbound investment and complex investment products including expertise in superannuation funds
  • foreign financial institutions establishing businesses in Australia
  • assisting clients to establish wholesale and retail funds (managed investment schemes and trusts). Assisting clients to apply for, vary, and administer Australian Financial Services Licences and Australian Credit Licences
  • advising trustees and responsible entities on governance, financial and operational requirements. Developing, implementing and reviewing compliance and risk management policies and procedures
  • advising on trust restructures and schemes, mergers and acquisitions of funds, fund investments and divestments
  • advising on financial services regulations including the Corporations Act 2001 (Cth), Superannuation Industry (Supervision) Act 1993 (Cth) and related regulations
  • launching new financial products including preparing information memoranda, product disclosure statements and advising on disclosure obligations generally, including under the ASX Listing Rules.


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Matthew Farnsworth

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Matthew Farnsworth Special Counsel

Matthew has extensive experience in funds management and financial services law. He advises leading Australian and international financial services clients across a wide range of transactional and regulatory matters.

Matthew advises leading Australian and international financial services clients on transactional and regulatory matters.

Clients look to Matthew to assist them to establish, offer and operate retail and wholesale investment funds. He advises on Australian financial services licensing, fund governance, offer documents and fund restructures, including managed investment schemes and other collective investment vehicles (CIVs).

He also advises on outsourcing arrangements, compliance issues and on ongoing regulatory developments in the financial services sector.

Matthew is experienced in the full range of asset classes and has particular experience in the property funds sector, including fund establishment, capital raising and restructures.

He is also experienced in a wide range of transactions in the financial services sector, joint ventures and funds M&A.

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Sue Everingham

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Sue is an expert in all aspects of superannuation from constituent documents, insurance and investment arrangements through to benefit design and member communication. Her special interest is in corporate and prudential governance from the Board room through to the Prudential Policies and from Risk Management through to compliance.

Sue has over 25 years experience in the Financial Services industry practising in Australia and for a short period in the US. She has private practice experience as well as leading in-house legal teams at Mercer and at CBA. Sue specialises in superannuation and has a Masters of Taxation and is CPA qualified, and completed a Diploma with the AICD in 2004.

Sue's goal is to help clients identify their need for legal advice and provide the advice that meets their needs.  Good communication skills help Sue understand a client's requirements, business acumen helps her position client needs within the relevant context. The extent of Sue's experience helps her deliver legal advice in a commercial and practical format.

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