Breathing room for now … but the devil’s in the derivatives

This article was written by Claire Warren.

Changes to the first reporting day for portfolio holdings disclosure has given many superannuation trustees some respite, but uncertainty about required disclosures remains.

On 28 October 2019 ASIC amended ASIC Class Order [CO 14/443] to delay the first reporting day for portfolio holdings disclosure (PHD) for most superannuation trustees by twelve months to 31 December 2020.  However, changes made to the PHD rules earlier this year have also added extra complexity which will still need to be navigated when the PHD requirements do come into force.

The PHD rules are set out in section 1017BB of the Corporations Act 2001 (Cth) (Corporations Act) and provide that trustees of most superannuation entities must make certain information about their fund's portfolio holdings publicly available and update this at 6 monthly intervals.

PHD requirements were first introduced into the Corporations Act by the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 (Cth).  In 2014 the Government announced that the first reporting day be deferred to 1 July 2015, which was facilitated through ASIC Class Order [CO 14/443].  ASIC has since implemented further deferrals through amendments to [CO 14/443], and has again deferred the first reporting day for trustees of registrable superannuation entities to whom the PHD requirements otherwise apply to 31 December 2020.  ASIC have stated that "the continued deferral will facilitate the Government considering and settling its policy position on the PHD requirements, including making regulations to prescribe the content and format of disclosure." This is good news.  However, this latest deferral by ASIC highlights the need for guidance in this complex area, particularly following amendments to the PHD rules earlier this year.

On 5 April 2019 the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Act 2019 (Cth) was passed which incorporated a number of reforms relating to superannuation and amendments to the Corporations Act and the Superannuation Industry (Supervision) Act 1993 (Cth).  One of these sets of amendments was to the PHD rules as set out in section 1017BB of the Corporations Act which was repealed and replaced by a new section.  These amendments reflected industry concern that the previous requirements were particularly onerous and complex, in particular requiring disclosure to be made about assets the fund invests in on a full "look through" basis and disclosing assets held by non-associated entities.

The new section provides that the trustee, or trustees, of a registrable superannuation entity (Reporting Entity) must make specified information about "disclosable items" allocated to each of the entity's investment options publicly available on its website within 90 days of 30 June and 31 December each year.

Under the amended PHD rules "disclosable items" are assets and derivatives.  Derivatives are now specifically included in the PHD rules as a derivative position may not always be an asset for an entity, but could also be a liability.

The new rules provide that for each investment option offered by a Reporting Entity, information must be published which includes the total value and the total weighting or exposure of all disclosable items, along with "sufficient information" to identify:

• each disclosable item allocated to the investment option that is held by the Reporting Entity, its associated entities or a pooled superannuation trust, which is not an investment in the associated entity or pooled superannuation trust; and
• the value, and the weighting or exposure, of each disclosable item.

There is no guidance at present as to what "sufficient information" means.

The Explanatory Memorandum suggests that "sufficient information":

• will be determined by the way that the information will be disclosed; and
• includes, but is not limited to, the name of the disclosable item. 

By way of example, if a disclosable item is listed on the ASX, the ASX code for the investment item would also be required to identify the investment item.   

There is little guidance as to what this could mean for derivative positions. Whilst it is clear that holding derivatives indirectly will not avail a Reporting Entity of the requirements given the obligation to disclose information about disclosable items held through associated entities and pooled superannuation trusts, there is little further to go on at this stage.

Additionally, identifying a derivative for the purposes of the PHD rules could be a much more significant task than disclosure of sufficient information relating to other assets. The examples set out in the Explanatory Memorandum refer mainly to traditional asset classes.  With respect to over-the-counter, privately negotiated derivative contracts, there is a question as to whether the counterparty to that derivative will need to be disclosed and how much information needs to be given about a derivative to sufficiently identify it – for example could this require disclosure of the key terms of the transaction, the reference assets it relates to or any collateralisation provisions. This leads to uncertainty around the operation of contractual confidentiality obligations embedded into documentation and whether a Reporting Entity which is compelled by law to disclose this information will breach any such obligations. 

Further, even if counterparties are not required to be identified, there may be a risk that third parties can draw reasoned assumptions about the derivatives positions of the Reporting Entity, its associated entities, and any known counterparties, from the information published.  The Explanatory Memorandum states that it is "expected that given the detailed nature of the information required to be disclosed, financial analysts will disseminate the information to facilitate increased useability of the disclosed information".

This makes disclosure of derivatives very different from most other assets to be disclosed under the PHD rules.

In short, yes. The new PHD rules provide that regulations may vary the disclosure required for certain types of disclosable item so that only the name of that kind of disclosable item, and the total value and weighting or exposure of all disclosable items of that kind, must be disclosed.  Additionally, they provide that regulations may set out whether an exemption to the disclosure requirements apply for a particular kind of asset or derivative.

The Explanatory Memorandum states that regulation-making power is included in the PHD rules to address potential situations where disclosure of the value of particular investments would be inappropriate when disclosed separately, and to provide flexibility to exempt other types of investments for which disclosure of the prescribed information may be of no or little benefit to members or detrimental to the interests of the fund and its members. 

In the Explanatory Statement to the latest amendments to [CO 14/443] ASIC commented that "without regulations to support the PHD requirements, there is no information prescribed to standardise the format for PHD and provide further information about specific exemptions from the requirements."  It seems clear that the regulations will be crucial in shaping the disclosure required by the PHD rules.  The deferral of the first reporting date to 31 December 2020 allows further time for consideration and consultation on the regulations to support this regime.

Yes, there are limited exemptions in the new PHD rules.

The exemptions are intended to reduce the compliance burden on Reporting Entities where the benefit of disclosure for members and their employers is outweighed by the compliance burden associated with publicly disclosing the information.

A "full" exemption from reporting applies to entities that are pooled superannuation trusts, single member funds or small APRA funds.

"Partial" exemptions apply to:

• an investment option that has been closed to new members for at least 5 years; or
• assets and derivatives that are:
• invested solely to support a defined benefit interest;
• invested in a certain life policies or investment account contracts; or
• otherwise prescribed by the regulations as "not a material investment" or exempt for the purpose of the PHD rules.

Reporting Entities may also determine up to 5% of assets (but not derivatives) attributable to each of their investment options for which they are not required to make information publicly available, so long as those assets are commercially sensitive, and disclosure of the information would be detrimental to the interests of the members of the fund. This carve out does not apply to derivative positions, and in any event, requires the trustee to form a view that disclosure of the information would be detrimental to the interests of the members of the fund so would not cover assets that are simply subject to contractual confidentiality restrictions.  The Explanatory Memorandum gives examples of investments in private equity, venture capital and other assets where disclosure would negatively impact the potential return which may constitute "sensitive assets". However, no such protection is yet available for derivatives.

The deferral of the first reporting date to 31 December 2020 gives the Government additional time to develop regulations in relation to the content and format of the disclosure required under the PHD rules.  It will also allow the Government additional time to settle its policy requirements in relation to what disclosure is required for certain types of disclosable items, or exempt particular types of disclosable item from the regime altogether. 

As a consequence, the impact of the PHD rules on the financial markets, and in particular on the derivatives markets, will depend in great part on the regulations and other guidance to be provided in the next twelve months.  Watch this space.