ASIC at crossroads over SMA regulation
THEAustralian Securities and Investments Commission(ASIC) would seek further industry input and discussion before it realises its final position on the regulation of separately managed accounts (SMAs), according to ASIC legal and technical operations director Pamela McAlister.
McAlister says ASIC will release a policy proposal paper this month setting out its current views for comment and would release its final policy for the regulation of SMAs in July 2003.
At present, ASIC says it is considering applying the same requirements that apply to investor directed portfolio services (IDPS) to SMAs, which would require operators to have a securities dealers licence and an Australian Financial Services Licence.
It would also require a level of net tangible asset backing, a defined organisational structure, a complaints scheme and a guide to the investments for clients.
Other similarities with IDPS products would also include disclosure about investments accessed through the SMA, and a minimum of quarterly and annual reports.
McAlister says ASIC is still considering a number of regulatory issues in relation to SMAs, including whether they were a managed investment scheme or an investment product, which would in turn affect the regulatory risks that arise and ASIC’s response to those risks.
Overseas regulators have struggled with the same issue, with the UK regulator considering SMAs a collective investment vehicle, while the US regulator says they are an investment advisory service.
In seeking to tackle this problem in the local market, McAlister says the status of SMAs as a product or scheme would depend on whether client contributions were pooled by the service operator and contributions were made by other clients, or if client contributions were used in a common enterprise to generate profits for the client.
“The key feature of SMAs we have so far identified is that cash is handed over to a manager in an effort to generate profit, which would therefore be considered as a managed investment scheme,” McAlister says.
If this is the case and SMAs are offered to retail clients, McAlister says they will be subject to full regulation under the Financial Services Reform Act (FSRA) and as such would need to fill all licensing and conduct requirements. SMA providers would also need to meet product disclosure statement requirements.
But McAlister says ASIC will remove any regulatory requirements that are unsuited to the operation of SMAs.
“These products will not be regulated for the sake of it, but rather to reduce the risks ASIC sees in this area. At the moment it is hard to guess the shape of the policy but it will meet the needs of the retail clients who use SMAs,” McAlister says.
So far ASIC has indicated the main risks relevant to SMAs are churning of the portfolio to generate higher brokerage costs, inadequate research on investments and that clients may not receive information or protection in the event SMAs are not regulated.
AUTHOR
Jason Spits
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