RECENT COURT AND REGULATOR PRONOUNCEMENTS ARE A TIMELY REMINDER FOR FUND MANAGERS AND RESPONSIBLE ENTITIES TO USE CAUTION IN THEIR DISCLOSURE, AND MAKE SURE THEY ARE BEING TRUE TO LABEL
In a recent decision by the Federal Court on 26 November 2021, Australian Securities and Investments Commission v La Trobe Financial Asset Management Ltd  FCA 1417, La Trobe Financial Asset Management (“La Trobe”) was ordered to pay a $750,000 penalty and $120,000 in legal costs for false and misleading marketing of the $5 billion La Trobe Australia Credit Fund (“Fund”). The Fund invests in loans secured by first mortgages, as well as cash and deposits and has over 45,000 investors. The Court found that La Trobe misled investors to believe they could withdraw funds from the “48 Hour Account” and the “90 day Account” within 48 hours or 90 days of providing withdrawal notice given the branding of the accounts. However, under the governing rules of the Fund, if the Fund is liquid, La Trobe had up to 12 months to satisfy a withdrawal notice and if the Fund is not liquid, an investor of the Fund would have been entitled to withdraw only when a withdrawal offer was made by La Trobe (as set out in Chapter 5C of the Corporations Act, s.601KB).
In their defence, La Trobe expressed that no investor had suffered any loss of principal in any of the Credit Fund accounts referred to in ASIC’s claim and that it always met redemptions, including throughout the Global Financial Crisis. La Trobe also stated that they engaged ‘extensively with ASIC to meet their responsibilities’. Federal Court Justice O’Bryan considered this factor and stated that La Trobe had demonstrated ‘a very high level of cooperation with ASIC’ and had a ‘commendable attitude toward legal compliance’. Despite this, Justice O’Bryan concluded that the misleading conduct was ‘serious’ and had ‘very considerable potential’ to mislead the public about the characteristics of both investment accounts and that the misleading conduct potentially affected investment decisions involving significant sums of money.
CAPITAL STABLE AND USE OF DISCLAIMERS
The Court also found that La Trobe contravened the Corporations Act by representing in various advertisements that were available to the general public that any capital invested in the Fund would be “stable”, conveying to investors that there will be no risk of substantial loss of capital. La Trobe provided disclaimers relating to the risks associated with investing in the Fund in fine print at the bottom of the page. The disclaimer included a statement that “investors risk losing some or all of their principal investment.” However, Justice O’Bryan reasoned that La Trobe’s disclaimers were not ‘sufficiently prominent to dispel the capital stable representation’.
ASIC INDUSTRY SURVEILLANCE
In May 2020, ASIC introduced a surveillance initiative with a specific focus on ensuring that funds were being operated ‘true to label’ and that the product name aligns with the underlying assets.
ASIC tested 37 managed funds that collectively held approximately $21 billion in assets and identified specific issues of entities comparing fixed-term investment products to bank term deposits in investment advertising. Issues were also identified with the mislabelling of ‘cash’ funds as well as inconsistencies were found between the redemption features offered and the liquidity of underlying assets.
The surveillance also found inconsistencies between the redemption features offered and the liquidity of underlying assets. In some funds there was a significant difference in the redemption terms offered to consumers and the liquidity of the underlying assets. If the underlying liquidity of a fund is inconsistent with its redemption promises, investors may not be able to withdraw their investments when they anticipated they would be able to do so. During COVID-19 and in periods of market volatility, the liquidity risks faced by the funds and investors increase.
ASIC made public warnings to managers to correct their advertising (see ASIC Media Release 20-218).
ASIC commenced proceedings against La Trobe in December 2020.
MAYFAIR 101 – USE OF BANKING TERMINOLOGY
In March 2021, four months after ASIC commenced civil penalty proceedings against La Trobe, ASIC brought an action against four companies of the Mayfair 101 group for misleading advertising. The companies’ products gave the impression that their products were alike and of similar risk profile to bank term deposits and were advertised to consumers as ‘bank deposits’ and ‘best term deposits’. It was also represented that the products carried no risk of default, when there was a risk that investors could lose all of their principal investment. Finally, it was also conveyed to consumers that the principal investment would be repaid in full on maturity, when this might not occur because Mayfair could indefinitely extend the time for repayment. The companies were forced to pay a combined penalty of $30 million. ASIC Deputy Chair Sarah Court said ‘This penalty makes clear that firms must do the right thing by their investors’ and that ‘failing to accurately advertise financial products can result in significant penalties’. In his decision, Justice Anderson permanently restrained the companies from using certain words and phrases such as ‘term deposit’ and ‘certainty’ in any future advertising. ASIC Regulatory Guide 45 Mortgage Schemes: Improving disclosure for retail investors outlines terms that would be seriously misleading such as ‘secure’, ‘secured’, ‘guaranteed’, ‘safe’, ‘deposit’, ‘first ranking’ and ‘no fees’. Additionally, a prominent disclosure should be contained in investment advertising that investors could lose some or all of their money.
Another issue identified by ASIC in their surveillance of 37 funds was the mislabelling of ‘cash funds’. Out of the managed 22 funds that used the term ‘cash’ in their labelling, 14 funds had product labels that were considered confusing or inappropriate. Some of the ‘cash funds’ were holding assets more similar to a diversified fund or bond. Both assets 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. The funds labelled as ‘cash plus’ and ‘cash enhanced’ had more than 50% and 70% of their respective assets invested in assets other than cash such as fixed-income securities and mortgages. In ASIC’s media release ‘ASIC tells fund managers to be ‘true to label’, ‘a fund should not use terms such as “cash” or “cash enhanced” unless its assets are predominantly in cash and cash equivalents’.
The outcome of ASIC’s actions against La Trobe and Mayfair aim to deter other entities from contravening the ASIC Act and Corporations Act and serve as a clear warning to fund managers as to the differences between managed funds and bank deposits. This risk is particularly heightened in a low-interest rate environment where investors are seeking yield. Former ASIC Deputy Chair Karen Chester stated that “it is paramount that consumers are not misled about the level of risk associated with a particular product’ and that funds being “true to label” is a ‘must-have’ for responsible entities to meet their legal obligations.”
To access the full decision of ASIC v La Trobe  FCA 1417 please click here.
For more information, and any guidance or advice on your disclosure with a view to ensuring your product disclosure is as “true to label” as it needs to be, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.