House of Representatives

Revised Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Chapter 7 Portfolio holdings disclosure

Outline of chapter

7.1 Schedule 6 to this Bill amends the Corporations Act to refine the requirements for RSE licensees to make publically available their portfolio holdings.

7.2 The purpose of these amendments is to ensure that superannuation fund members, and others including financial analysts, have access to publicly available information about the portfolio holdings of superannuation funds, while minimising the compliance burden on RSE licensees.

7.3 All legislative references in this chapter are to the Corporations Act unless otherwise indicated.

Context of amendments

Existing requirements for trustees to publish details of portfolio holdings

7.4 Under the current law, trustees of an RSE (other than a pooled superannuation trust) must publish their fund's portfolio holdings on the fund's website twice a year.

7.5 The information must be sufficient to identify each financial product or other property, and the value of the investment in each financial product or other property. The law does not differentiate between assets held in a fund's associated entities and its non-associated entities. As such, the same level of disclosure is required.

7.6 Disclosure is required for all assets the fund invests in on a full 'look through' basis, including assets derived from assets in the scope of investments. This means that full disclosure must be made with respect to multiple levels of investments.

7.7 To enable trustees to meet these obligations, a party acquiring a financial product from another party must notify the second party if the purchase is being made using the funds of the RSE and provide the second party with details of the RSE. Where this occurs, the second party is required to provide the trustees of the RSE with information on the financial product or any other property acquired using assets of the RSE.

7.8 The existing portfolio holdings disclosure (PHD) requirements were introduced in 2012 by the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012.

7.9 Commencement of these disclosure requirements was initially delayed until 1 July 2015 through Australian Securities and Investments Commission (ASIC) Class Order CO 14/443. The requirements were initially due to take effect from 31 December 2013. Subsequently, ASIC amended the Class Order to defer the first reporting day for PHD disclosure to 31 December 2019.

7.10 Consultation on the existing PHD obligations indicated that there were significant compliance costs in collecting and collating data for all assets held indirectly (held by third parties). Concerns have also been raised by some superannuation funds about the requirement to disclose data which relates to private equity investments, unlisted assets and other commercial-in-confidence arrangements. The amendments in this Schedule will address these and other concerns raised by industry stakeholders.

Summary of new law

7.11 Amendments are made to the existing PHD obligations in the Corporations Act.

7.12 Two important changes to the obligations are the removal of:

•

the obligation to include information about financial products, or other property that non-associated entities or non-pooled superannuation trusts have directly invested in; and

•

the reporting obligations on parties to contracts and arrangements that acquire a financial product using the assets, or assets derived from assets, of an RSE.

Comparison of key features of new law and current law

Detailed explanation of new law

Trustees must publish details of portfolio holdings

7.13 RSE licensees will continue to have an obligation to make publicly available the details of their portfolio holdings twice annually after each reporting day, which are 30 June and 31 December each year, by publishing this information on the fund's website within 90 days. [Schedule 6, items 1, subsections 1017BB(1)]

7.14 For each investment option offered by the RSE, the details published must include information sufficient to identify:

•

each investment item (disclosable item) held by the RSE, its associated entity or a pooled superannuation trust; and

•

the value and the weighting or exposure of each disclosable item.

[Schedule 6, item 1, paragraphs 1017BB(1)(a) and (b)]

7.15 However, if an investment item is an investment in an associated entity of the RSE that is held by the RSE, then the investment item is not a disclosable item. [Schedule 6, item 3, subparagraph 1017BB(1)(a)(ii)]

7.16 An investment item is an asset or a derivative that is not otherwise an asset. [Schedule 6, item 3, definition of 'investment item' in subsection 1017BB(6)]

7.17 The sufficient information required to be obtained, will be determined by the way that the information will be disclosed. This information will include but is not limited to the name of the disclosable item. For example, if a disclosable item is listed on the ASX, the ASX code for the investment item would also be required in order to ensure sufficient information is available to identify the investment item.

7.18 The total value and total weighting or exposure of all investment items must also be provided. [Schedule 6, item 1, paragraph 1017BB(1)(c)]

7.19 However, regulations may prescribe, for certain kinds of disclosable items, that only the following information need to be disclosed:

•

the name of the kind of disclosable item; and

•

the total value and the total weighting or exposure of all disclosable items of that kind.

[Schedule 6, item 1, subsection 1017BB(1A)]

7.20 That is, the value and name of each disclosable item must be reported separately, unless the regulations prescribe otherwise.

7.21 The regulation-making power is inserted to address potential situations where disclosure of the value of particular investments would be inappropriate when disclosed separately.

7.22 The disclosure of a fund's portfolio holdings will provide its members with information on where their member contributions are being directed. 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.

7.23 Importantly, while the RSE must disclose information about its and its associates' investments, including investments in a non-associated entity, it does not need to disclose information about the investments of non-associated entities (see section 50AAA for definition of associated entities) or a non-pooled superannuation trust. The PHD obligations apply to all assets and derivatives held directly or through associated entities, regardless of the legal structure through which the investments are made.

7.24 As required under the current law the RSE must ensure that the information:

•

continues to be made publicly available on the RSE's website until it makes the information pertaining to the next reporting period publicly available (subsection 1017BB(2)); and

•

is organised in accordance with the regulations (subsection 1017BB(3)).

Example 7.1 PHD regime requirements for Top Super's High Growth Fund

Top Super directs $100 million of its member contributions into its High Growth Fund investment option.

High Growth Fund subsequently directs the $100 million as follows:

•

$50 million into Eagle Six Corporation (an associated managed investment scheme);

•

$10 million into shares in WYE;

•

$20 million into Oniv Trust (a PST); and

•

$20 million into Nestar Holdings (a non-associated managed investment scheme).

Subsequently:

•

Eagle Six Corporation directed $20 million (of the $50 million) into Atar Limited (an associated entity) and $30 million into Prodime Corporation (a non-associated entity);

•

Oniv Trust directs $5 million (of $20 million) into government bonds, $15 million into Flint Corporation (a non-associated entity); and

•

Nestar Holdings directed $20 million into shares in KPF.

Finally:

•

Atar Limited directed $20 million into shares in WJL; and

•

Prodime Corporation directed $30 million into the Westbank Estate commercial property.

PHD regime requirements

The table below sets out the disclosure requirements for the investment items that Top Super has allocated to High Growth Fund.

Investment item	Disclosable item	Reason
Eagle Six Corp $50 million	No	Eagle Six Corp is an associated entity of Top Super
Atar Ltd $20 million (of the $50 million invested in Eagle Corp MIS)	No	Atar Ltd is an associated entity of Top Super
Shares in WJL $20 million (of the $20 million invested in Atar Ltd)	Yes	WJL shares are held by Atar Ltd, which is an associated entity of Top Super
Prodime Corp $30 million (of the $50 million invested in Eagle Six Corp MIS)	Yes	Eagle Six Corp (an associated entity of Top Super) invests in Prodime Corp, which is not an associated entity of Top Super
Westbank Estate $30 million (of the $30 million invested in Prodime Corp)	No	Prodime Corp (non-associated entity of Top Super) invests in Westbank Estate
Shares in WYE $10 million	Yes	WYE shares are held directly by Top Super
Oniv Trust $20 million	No	Oniv Trust is a PST in which Top Super invests
Government Bonds $5 million (of the $20 million invested in Oniv Trust)	Yes	Government bonds are held directly by Oniv Trust, a PST in which Top Super invests
Flint Corp $15 million (of the $20 million invested in Oniv Trust)	Yes	Oniv Trust (a PST) invests in Flint Corp (non-associated entity of Top Super)
Nestar Holdings $20 million	Yes	Top Super invests directly in Nestar Holdings, which is not an associated entity of Top Super
Shares in KPF $20 million (of the $20 million invested in Nestar Holdings).	No	KPF shares are held by Nestar Holdings (non-associated entity of Top Super)

7.25 Whether an entity is an associated entity of the RSE is determined in accordance with section 50AAA. The provision provides various circumstances that an entity is an associated entity of an RSE, including where the entity is a related body corporate or is controlled by the RSE.

7.26 The provision also provides that an entity is an associated entity of an RSE if:

•

the RSE invests in the entity or has beneficial ownership in an investment asset of the entity which the RSE controls;

•

the RSE has significant influence over the entity; and

•

the interest in the entity or the beneficial ownership in the investment asset of the entity which the RSE controls is material to the RSE.

7.27 Significant influence and materiality is assessed on a case-by-case basis. Various factors need to be taken into consideration when making an assessment of whether an RSE has significant influence over an entity, including guidance and factors provided in the AASB accounting standards. Ultimately, whether an RSE has significant influence over a particular entity turns on the facts of each case.

7.28 The Accounting Standard AASB 128 Investments in Associates and Joint Ventures (AASB 128) defines significant influence as 'the power to participate in the financial and operating policy decisions of the investee but ... not control or joint control of those policies.'

7.29 The AASB 128 also provides some indicators in determining whether an entity has a significant influence on another entity:

If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.

The existence of significant influence by an entity is usually evidenced in one or more of the following ways:

(a)

representation on the board of directors or equivalent governing body of the investee;

(b)

participation in policy-making processes, including participation in decisions about dividends or other distributions;

(c)

material transactions between the entity and its investee;

(d)

interchange of managerial personnel; or

(e)

provision of essential technical information.

Exemptions from the disclosure requirements

7.30 There are a number of exclusions from the PHD requirements to reduce the compliance burden on RSEs where the benefit of disclosure of investment details for members and their employers is outweighed by the compliance burden associated with publically disclosing the information.

7.31 The trustee(s) of an RSE is exempted from the PHD requirements if the RSE is a pooled superannuation trust, single member fund or a small APRA fund. Pooled superannuation trusts have no individual members, and single member funds and small APRA funds only have one member or a very small number of members who can obtain information on their fund's portfolio holdings through other means. [Schedule 6, item 1, subsection 1017BB(4)]

7.32 Pooled superannuation trust and MySuper product has the same meaning as in the SIS Act and small APRA fund has the same meaning as in prudential standards determined under section 34C of the SIS Act. [Schedule 6, item 3, definitions of 'pooled superannuation trust', 'MySuper product' and 'small APRA fund' in subsection 1017BB(6)]

7.33 The trustee(s) of an RSE is also exempted in respect of the RSE's investment option that has been closed to new members for at least five years (legacy products). This exemption recognises that these investment options are not able to be accessed by new members, so the costs that the requirements impose on superannuation funds will ultimately be borne by the members and thus outweigh any benefits that asset level disclosure may provide. [Schedule 6, item 1, paragraph 1017BB(5)(a)]

7.34 Furthermore, the exemptions from the PHD requirements cover an investment item that is:

•

not a material investment for an investment option in accordance with regulations;

•

invested solely to support a defined benefit interest; and

•

invested in a life policy or an investment account contract described in paragraph 1017BA(4)(a).

[Schedule 6, item 1, paragraphs 1017BB(5)(b) to (d)]

7.35 The ability for regulations to provide that an investment is not a material investment is carried over from the current law (see subsection 1017BB(4)).

7.36 The exemption in respect of defined benefit interest is to exempt investments allocated to a defined benefit fund on the basis that their returns are not dependent on the fund's holdings. This provision will also exempt the defined benefit element of a hybrid fund but not the accumulation element, for which the prescribed information will have to be disclosed. This exemption will apply as long as the assets which support the defined benefit element of a hybrid fund can be identified. If that is not possible or is difficult to achieve, the amendment does not prevent RSEs from voluntarily disclosing PHD information relating to defined benefit funds.

7.37 The exemption in respect of a life policy or an investment account contract as describe in paragraph 1017BA(4)(a) is to reflect that the benefits provided to members of such products are not dependent on the performance of the underlying investments of the fund.

7.38 In addition to the exemptions listed above, regulations may exempt a kind of investment item held by the fund. This power provides the 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. [Schedule 6, item 1, paragraph 1017BB(5)(e)]

7.39 For avoidance of doubt, an investment item is not a disclosable item if it is not a material investment, is invested solely to support a defined benefit interest, is invested in a life policy or an investment account contract, or is a kind of investment item prescribed by regulations to be exempt. [Schedule 6, item 1, note to subsection 1017BB(5)]

7.40 The trustee(s) of an RSE may determine up to five per cent of the assets (excluding derivative assets) attributable to each of their investment options for which they are not required to make information publicly available. In order to qualify for this exemption, the prescribed information that would otherwise have to be disclosed about the investment items must be commercially sensitive and the disclosure of the information must be detrimental to the interests of the members of the fund. [Schedule 6, item 1, subsection 1017BB(5A)]

7.41 This provides RSE trustees with the flexibility to select a limited number of investment items which comply with the prescribed criteria for which the information required under subsection 1017BB(1) does not have to be made publicly available.

7.42 Examples of where the disclosure of information in relation to an investment would be detrimental to the interests of the members of the fund include situations where:

•

the disclosure of the investment would negatively impact the potential return from a particular investment; or

•

an investment would not be available if the investment information was to be disclosed, and the RSE was of the view that the members of the fund would benefit from the making of that investment.

7.43 The types of investments that are likely to fall within this exemption are asset classes such as private equity and venture capital investments.

7.44 This is subject to the ability of regulations to prescribe that the total value and the total weighting or exposure of these commercially sensitive assets needs to be disclosed. That is, each commercially sensitive asset does not need to be disclosed separately. [Schedule 6, item 1, subsection 1017BB(5A)]

Consequential amendments

7.45 Amendments made by the Senate to this Schedule that were tabled by the Opposition clarifies that for purposes of section 1017BB, an investment option means:

•

an investment pool maintained within the entity or

•

a platform product.

[Schedule 6, item 3, subsection 1017BB(6) definition of 'investment option']

7.46 This definition is intended to capture all superannuation products - including choice products and clarifies that all types of superannuation products are subject to the PHD regime.

7.47 The reporting obligations on parties to contracts and arrangements under which financial products or other property are acquired using the assets, or assets derived from assets, of an RSE will be repealed. These obligations were primarily designed to enable trustees to obtain information from non-associated entities. They are no longer required because the amended PHD obligations only extend to associated entities. [Schedule 6, item 4, sections 1017BC, 1017BD and 1017BE]

7.48 A number of amendments are required as a consequence of the repeal of sections 1017BC, 1017BD and 1017BE. [Schedule 6, items 5 to 16, 18, and 20 to 22, paragraph 1020E(1)(c), paragraph (d) of definition 'defective' in subsection 1020E(11), section 1021NC, section 1022B, subparagraphs 1041H(3)(a)(iii) and 1041K(1)(a)(iii), section 1541, table items 308AG, 308AH and 308AI in Schedule 3, and subsparagraph (c)(iii) of the definition of 'regulatory provision' in section 38A of the SIS Act]

Application and transitional provisions

7.49 The new application date of 31 December 2019 is established for the PHD reporting obligation in subsection 1017BB(1). [Schedule 6, item 17, section 1540]

7.50 Part 10.22A, containing section 1541A, is inserted to provide the location for the transitional provisions relating to the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation) Act 2017. The amendments made by this Act will apply to a reporting day that is on or after 31 December 2019. [Schedule 6, item 19, section 1541A]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Portfolio holdings disclosure

7.51 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.52 Schedule 6 to this Bill amends the Corporations Act to refine the requirements for RSE licensees to make publically available their portfolio holdings.

Human rights implications

7.53 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

7.54 This Schedule is compatible with human rights as it does not raise any human rights issues.