On Monday, ASIC announced it had placed an interim stop order preventing Vasco Responsible Entity Services from offering or distributing the Pivotal Diversified Fund to retail investors due to deficiencies in the fund’s target market determination (TMD).
The interim order prevents Vasco from issuing interests in, giving a product disclosure statement for, or providing general advice to retail clients recommending an investment in the fund and is valid for 21 days unless revoked earlier.
ASIC stated that it had made the interim order to protect retail investors from potentially investing in a fund that may not be suitable for their financial objectives, situation or needs.
The regulator explained that the Pivotal Diversified Fund is invested in various managed funds, including hedge funds, a fund invested in residential and commercial real estate developments and a private equity fund.
“The underlying investments in the hedge funds are exposed to a very high-risk strategy that generates absolute returns by trading in listed equities and by using short selling, leverage and derivatives,” it said.
“The managed fund invested in property development projects is subject to project financing, valuation and construction risks, and the private equity fund is illiquid and leveraged.”
ASIC said it was concerned that Vasco has not appropriately considered the aforementioned features and risks in determining the target market for the Pivotal Diversified Fund.
The regulator considered that the target market inappropriately includes investors with a potentially high risk and return profile when the risks associated with the fund’s investments are very high, and with a “medium” investment time frame of up to six years.
ASIC also considered that the TMD did not meet the appropriateness requirements of design and distribution obligations (DDO) because it did not include any distribution conditions.
“ASIC expects Vasco to consider the concerns raised regarding the TMD and take immediate steps to ensure compliance,” the regulator said.
“ASIC will consider making a final order if the concerns are not addressed in a timely manner. Vasco will have an opportunity to make submissions before a decision is made about a final stop order.”
A total of 22 interim stop orders have been issued by ASIC under DDO to date, including the order for Pivotal Diversified Fund.
ASIC reminded financial product issuers that they must define target markets for their products appropriately under DDO, having regard to the risks and features of their products.
“Issuers also need to consider how their product will reach the target market and have appropriate distribution conditions in place to ensure the product is directed towards the target market,” the regulator added.
