FEE AND COST DISCLOSURE REGIME BEST PRACTICE TOOLKITDraft

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1 FEE AND COST DISCLOSURE REGIME BEST PRACTICE TOOLKIT Issue date: 22 June 2017

2 Background AIST has developed this draft Manual for use by AIST member funds. Since development of this draft Manual, an RG97 Industry Wide Working Group has been established. The RG 97 Industry Wide Working Group has been established with the encouragement of ASIC to provide a forum for all parts of the financial services industry in Australia impacted by ASIC Class Order 14/1252 to share views, develop solutions to unresolved issues and help develop industry guidance on compliance with ASIC Class Order 14/1252. Participants of the group represent all sectors of the industry, including fund managers, retail and industry superannuation funds and peak industry bodies. As at 22 June 2017, the following are key issues for inclusion within an industry wide manual which await finalisation through the Industry Wide Working Group: 1. A definition of, and calculation methodology for, transaction costs. 2. Calculation methodologies for OTC derivative costs. 3. Detailed mapping of what is a fee and what is a cost. 4. A definition of property management costs 5. Resolution of a template for collecting fee and cost information from investment managers. AIST notes that it has included one version as Appendix D (separate document). 2 Page

3 How to use this Toolkit This Fees and Costs Disclosure Toolkit is designed to assist trustees to understand and comply with Schedule 10 of the Corporations Regulations 2001 (Cth) (Corporations Regulations) as amended by Class Order 14/1252, ASIC Corporations (Amendment and Repeal) Instrument 2015/876 (ASIC Instrument 2015/876) and ASIC Corporations (Amendment) Instrument 2016/1224 (ASIC Instrument 2016/1224). Appendix A contains Schedule 10 of the Corporations Regulations, as amended by Class Order 14/1252, ASIC Instrument 2015/876 and ASIC Instrument 2016/1224. This Toolkit contains recommendations for a best practice approach to compliance. Whilst consistency in disclosure is one of the purposes of the regime, each trustee is structured and organised differently and will have different practices and procedures. If you are considering adopting the practices outlined in this Toolkit, you should first decide which of the practices is relevant to your situation and test them out to see if they work for you. A determination not to follow a practice set out in this Toolkit does not mean that the practice is inconsistent with the law. Alternative practices may be equally compliant with the fees and costs disclosure regime and preferable for the particular fund. Trustees must always form a view on how to comply with the fees and costs disclosure regime in a manner which achieves the best outcomes for their members. This Toolkit does not constitute any form of professional advice (including legal advice) and should not be used as a substitute for obtaining your own advice. You should take your own advice and consider your own circumstances. Structure of this Toolkit This Toolkit has been structured in the following way: high level principles (section 2) regulatory background (section 3) at a glance what is a fee or cost and how it should be disclosed; what is an interposed vehicle (section 4) common investment structures (section 5) 3 Page

4 an outline of common fees and costs in the financial services industry (section 6) what is an interposed vehicle (section 7) obtaining information (section 8) calculations and documentation (section 9) disclosure Product Disclosure Statements (section 10.1) and significant event notices (section 10.3) Questions and answers from ASIC In addition to Regulatory Guide 97, ASIC has published on its website a series of questions and answers on fees and costs disclosure. This Toolkit identifies that there is a question and answer issued by ASIC which is relevant to a particular topic by use of the following: SEE ASIC QUESTIONS AND ANSWERS FEES AND COSTS DISCLOSURE The references are to the Fees and Costs Questions as at the date of this Toolkit. However, the Fees and Costs Questions are updated from time to time. Accordingly, it is possible that a question referred to in this Toolkit has been re- numbered or replaced since the Toolkit has been issued. Accordingly, you should take this into account when considering these references. Best practice WHAT IS BEST PRACTICE While this Toolkit has been designed to assist trustees of superannuation funds to maintain strong prudential frameworks and to implement best practice, AIST wishes to highlight that there are several key issues which are covered within this Toolkit which AIST believes need to be adopted by funds in order to achieve best practice. 4 Page

5 In particular, where a trustee complies with the following sections of this Toolkit, it can promote to its members that it is acting in accordance with industry best practice: what is a fee or cost and how are they to be disclosed section 4.2 interposed vehicles - sections 7.2, 7.3 and 7.4 obtaining information sections 8.4, 8.5, 8.6, 8.7 calculations and estimates sections 9.1, 9.5, 9.6 and 9.7 disclosure section Warning & Disclaimer The Toolkit is intended to assist trustees but does not replace or exhaustively replicate primary sources of a trustee s s legal obligations, such as general law, legislation, regulations, prudential standards and regulatory guidance. While the Toolkit identifies issues requiring particular care, other content within the Toolkit should not be regarded as any less significant. Trustees will have to make their own judgements on how to apply the information in this Toolkit and should seek professional advice if uncertain. This Toolkit should not be relied upon to demonstrate compliance with any legal obligation or standard of conduct expected of trustees, responsible entities or their directors. While this Toolkit is a valuable tool for a trustee considering its obligations, it will not guarantee compliance or sound prudential outcomes. Copyright The information in Appendix A and Appendix B is sourced from the Federal Register of Legislation at the date of this Toolkit. For the latest information on Australian Government law please go to 5 Page

6 Table of Contents 1. Introduction 1 2. High level principles and beliefs Purpose of fees and costs disclosure regime Fees and Cost Disclosure Principles Operational principles 4 3. Regulatory background Overview Transition and timing 6 4. At a glance what is a fee or cost and how they should be disclosed what is an interposed vehicle What is an interposed vehicle? What is a fee or cost and how they should be disclosed 9 5. Common investment structures Profit- for- member superannuation funds Types of fees and costs Custody fees Carried interest Borrowing costs Transaction costs Interposed vehicles Overview 15 6 Page

7 7.2 Asset test PDS test Platform test Downstream entities Interposed vehicles and unlisted assets Obtaining fees and costs information Internal resources and related parties Relying on managed fund PDSs Outline of process Obtaining fees and costs information on the first layer of interposed vehicles Obtaining fees and costs information on downstream entities Quality of information Template for requesting fees and costs information on interposed vehicles Timeframes for obtaining costs information of interposed vehicles Calculation of costs and making reasonable estimates Making of reasonable estimates Use of expense reserves Meaning of fee and cost Forward looking vs retrospective Gross vs net amounts Effect of taxation Calculating performance fees and performance- related fees Calculating transactional and operational costs Calculating costs of OTC derivatives 28 7 Page

8 9.10 Attributing costs of interposed vehicles Internal processes and policy documentation Disclosure PDSs Updating PDSs Significant event notices 39 Appendix A Schedule 10 (as amended) 42 Appendix B Explanatory Statements 43 Appendix C - Global perspective and references Appendix D - template for collecting fee and cost information from investment managers Separate document 8 Page

9 DRAFT TOOLKIT 1. Introduction AIST strongly believes in measures to improve greater transparency of fees and costs. Transparency assists determine whether any fees and costs which impact on a member s net return (and therefore retirement savings) are of value to the member. AIST notes the comments from the World Bank 1 which highlights that competition by itself appears to be inadequate to drive lower costs if individual choice alone is involved. Lack of transparency is a big issue in determining costs. AIST believes that disclosure has 3 objectives: 1. Enabling transparency and comparability for members. 2. Enabling analysis of the superannuation system s fees and costs. 3. Enabling trustees to be in a position to benchmark fees and costs. 1 The World Bank, (2016). Outcomes based assessment for private pensions: a handbook. [online] The World Bank. Available at: [Accessed 11 Apr. 2017]. 1

10 2. High level principles and beliefs 2.1 Purpose of fees and costs disclosure regime The fees and costs disclosure regime primarily consists of the rules in Schedule 10 of the Corporations Regulations. Schedule 10 has been amended by the Superannuation Legislation Amendment (MySuper Measures) Regulation 2013 (Cth), together with all the amendments contained in ASIC Class Order 14/1252, ASIC Instrument 2015/876 and ASIC Instrument 2016/1224. The purpose of Schedule 10 is to promote the comparability of products 2. The purpose of the amendments to Schedule 10 in 2013 was to ensure greater consistency in interpretation of indirect costs for superannuation products and of management costs for managed investment products 3. AIST supports the fees and costs disclosure regime and notes that the objectives of disclosure and reporting are threefold: consumer protection; enabling analysis of the superannuation and managed fund industries, including benchmarking of fees and costs; and enabling trustees to gauge whether a fee and cost proposal is fair and reasonable. In determining positions on the fees and costs disclosure regime, AIST recommends that trustees act in a manner which is consistent with and which furthers the purpose of the regime. Accordingly, if there is significant doubt regarding the need to disclose a particular fee or cost, best practice is for a trustee to err on the side of disclosure. Similarly if there is significant doubt regarding the appropriate methodology, a trustee should select a methodology which best promotes the purpose of the fees and costs disclosure regime. 2.2 Fees and Cost Disclosure Principles To assist trustees to act in accordance with the purpose of the fees and costs disclosure regime, AIST encourages trustees to adopt and apply the principles outlined below. These principles help articulate the key outcomes being sought through the fees and costs disclosure regime. They will also help trustees in their interpretation and application of the regime and, in doing so, will support greater consistency of disclosure, improve the comparability of data and lead to improved governance and conduct outcomes. 2 See ASIC Report 398: Fee and cost disclosure: Superannuation and managed investment products, July See the Explanatory Statement to ASIC Class Order 14/

11 Principle 1 Principle 2 Principle 3 Principle 4 Improved transparency reflects good superannuation fund culture and governance Transparent disclosure of all fees, underlying costs and conflicts of interest is reflective of good governance culture and conduct within a superannuation fund. Enhanced transparency supports good governance and conduct and helps reduce conflicts of interest which might arise between superannuation fund members and those managing the superannuation savings of members can adversely affect a member s net superannuation return. Processes supporting disclosure should be designed to be in the best interests of members and disclosure should be clear, concise and effective. Consistency AIST policy: While recognizing that differences do currently exist, it is desirable that disclosure requirements should apply in a consistent manner to all superannuation funds and - while this manual currently does not cover these across managed investment schemes, regardless of the fund s structure, investment approach or asset allocation. This also aids comparability. So far as is possible, consistency across asset classes is needed, e.g. infrastructure investments should be treated in the same way as property investments. A level playing field across all disclosure and reporting requirements is a key goal to assist with enabling consistency. All disclosed costs should be based on actual amounts or a reasonable estimate, unless the fees and costs disclosure regime stipulates an alternative method for quantifying cost. Key terms in gathering data, disclosure documents, and reporting data to the regulators need to be consistently labelled and defined. Comparability Information on fees and costs should enable members to compare the costs of different superannuation funds and compare the costs of different managed investment schemes, regardless of the superannuation fund or managed investment scheme structure, investment approach or asset allocation 4. Transparency should be provided It is a goal that Trustees should disclose all fees and costs which impact on member s net superannuation returns, including the costs borne directly by the trustee and costs which are indirectly charged and which reduce investment returns. Currently, costs needing to be disclosed are those relating to investment in the assets rather than costs incurred in those assets (eg. listed companies). Transparency is needed to both inform members and the market and enable proper analysis of the financial services system. All indirect costs should be disclosed, other than the costs of, or incurred in, the asset with the real or end asset. 4 IOSCO Good practice 10 was used to help draft this principle. 3

12 All investment managers (whether in- house or outsourced) should disclose all fees and costs (including indirect). Information about fees and costs should be provided in enough detail not to mislead members by omission. Investment jargon should be avoided to the maximum extent possible. Principle 6 Principle 7 Principle 8 Disclosure which is informative and understandable for members Fees and costs should be disclosed in a clear and comparable format that is informative and useful to both prospective and current members. Disclosure should help members distinguish between what is essential and what is less important. Disclosure documents should be as clear, concise and effective as possible. Disclosure documents that include summarized information about fees and costs should explain clearly where and how both current and prospective members can obtain more detailed information about those fees and costs 5. Regulatory alignment As a goal, there should be regulatory alignment between APRA s reporting framework and the disclosure of fees and costs in member- facing disclosure documents should align with APRA s reporting framework, including the alignment of MySuper and Choice disclosure and reporting. AIST policy: This will enable ASIC, APRA and independent commentators to monitor the impact of fees and costs and assess the level of competition and efficiency in the superannuation system. It is understood that APRA may require further, more granular information for its prudential purposes. Global alignment AIST policy: In recognition that Australia is part of a global investment market, alignment with disclosure requirements of key capital markets is desirable. 2.3 Operational principles Given both the need for transparency, consistency, and comparability as well as differing structures across the financial services sector, AIST has listed a number of operational principles. These operational principles involve a more granular examination as to how standardisation, comparability, level playing fields (etc.) might be better delivered and are designed to help give guidance where prescription may (because of varying superannuation fund structures) not assist. Principle 1 Calculation methodologies and due diligence processes should be documented It is important that calculation methodologies and due diligence processes be documented. This is a useful aide to the enforcement and monitoring framework. 5 IOSCO Good practice 6 was used to help draft this principle. 4

13 Principle 2 Principle 3 Principle 4 Principle 6 Principle 7 Principle 8 Fees and costs of new products should be reasonably estimated The fees and costs of new products should be estimated on a reasonable basis andhaving taken reasonable steps to arrive at a reasonable estimate, the reasons should be documented. No investment- related costs should be contained in administration costs and vice versa Soft commission arrangements should be eliminated or managed AIST policy: Because soft commission arrangements may create conflicts of interest, such conflicts should either be eliminated or managed (eg through disclosure) in the best interests of members 6. Transactions should be entered into for the benefit of the superannuation fund or managed investment scheme and its members and not to generate an order flow and/or dealing commission) 7. Performance fees and performance- related fees should be verifiable and disclosed Performance fees and performance- related fees should be verifiable. It is important for members to be adequately informed of the existence of any performance fee and of its potential impact on the return they will get on their investment 8 Best endeavours to gain information Trustees should use their best endeavours to seek information that the information presented to them contains a comprehensive assessment of the costs that are incurred on their behalf by asset managers. Trustees should monitor changes of fees and costs and document their processes for doing so. 6 IOSCO Good Practice 14 and IOSCO Best Practice 13 were used to help draft this principle. 7 IOSCO Good Practice 15 was used to help draft this principle. 8 IOSCO Good Practice 3 and 5 were used to help draft this principle. 5

14 3. Regulatory background 3.1 Overview Enhanced fee disclosure measures, consisting of the consumer advisory warning, fees and costs table, Additional explanation of fees and costs and Example of annual fees and costs, were inserted into Schedule 10 of the Corporations Regulations in New rules for superannuation products requiring disclosure of indirect costs, including a revised fees and costs table and new fee definitions, were introduced into Schedule 10 for superannuation products as part of the Stronger Super reforms in Different trustees took different positions on compliance. ASIC Class Order 14/1252 was introduced following ASIC s findings in Report 398 Fee and cost disclosure: Superannuation and managed products where AISC s review of industry practices indicated that there was significant variation in the disclosure of fees and costs both before and after the 2013 amendments. ASIC consulted further on the fees and costs disclosure regime throughout ASIC Instrument 2015/876, issued in November 2015, embodies the outcomes of that consultation period. As a result of continuing consultation, ASIC issued ASIC Instrument 2016/1224 in December At the time of issuing ASIC Instrument 2015/876, ASIC released an update to Regulatory Guide 97 (RG 97) and has since updated RG 97 a number of times. The updated RG 97 contains guidance on compliance with the fees and costs disclosure rules in the Corporations legislation, including the fees and costs disclosure regime. ASIC has also issued a number Fees and Costs Questions and Answers to provide greater clarity on specific fees and costs issues. 3.2 Transition and timing There are different transitional rules depending on the type of member- facing document 9. Provided certain conditions are satisfied in relation to a Product Disclosure Statement (PDS) involving lodging with ASIC a notice by 31 January 2017 and a report by 28 February 2017, the PDS must comply with Class Order 14/1252 by 30 September However, there remains an ability to opt in from an earlier date both in relation to PDS and periodic statements. All periodic statements whose outer limit for giving the statement is on or after 1 January 2018 must comply with ASIC Class Order 14/1252 (paragraph 9). There is also an ability to opt in from an earlier date. SEE ASIC QUESTIONS AND ANSWERS 1 FEES AND COSTS DISCLOSURE 9 See paragraphs 8 to 9 of Class Order 14/1252 (as amended). 10 Trustees should take note that the commencement date is 30 September 2017, and not 1 October

15 For superannuation products, the outer limit for giving an annual statement is six months and one month for exit statements. As a result, annual statements issued for 12 month reporting periods ending on or after 1 July 2017 and exit statements for members who exit a superannuation product on or after 2 December 2017 must comply with Class Order 14/1252. Where a trustee opts into Class Order 14/1252 early for a PDS, the trustee must clearly display on the PDS or on its website that Class Order 14/1252 applies to the document (paragraph 8(b)). Where the statement is included in a PDS, it is recommended that this statement appear: on page 1 of an 8 page PDS on or before the contents page of any incorporated material which contains information about fees and costs, and on or before the contents page of any long form PDS. Where the statement is included on a website, it is recommended that this statement be included on the webpage which contains direct links to the PDS and be satisfied that a member would normally see the statement prior to accessing the PDS. Where a trustee has opted into the fees and costs disclosure regime earlier for a periodic statement, the periodic statement must contain a statement that Class Order 14/1252 applies to the document (paragraph 9(b)). It is recommended that this statement be included in the section of the periodic statement which outlines total fees and costs. 7

16 4. At a glance what is a fee or cost and how they should be disclosed what is an interposed vehicle While this Toolkit provides more detailed information in later sections, here is a quick overview. 4.1 What is an interposed vehicle? Trustees must disclose the costs in an underlying investment in an underlying investment if it is an interposed vehicle. An underlying investment is an interposed vehicle if it satisfies either an asset test or a PDS test, and the platform test is not satisfied. Under the asset test, an underlying investment is an interposed vehicle if the trustee has reasonable grounds to believe that more than 70% of its assets are financial products, such as shares, that are not excluded from being counted. The assets which are excluded are those which provide access to real property and infrastructure entities or which provide control over a second entity that has 70% or less of assets invested in financial products. To take the following example for a balanced fund or balanced investment option: 8

17 In this example: Listed Equities, Private Equity and Fixed Income: both the Level 2 and Level 3 entity would be interposed vehicles under the asset test, however, the Level 4 entity would not Property and Infrastructure: Neither the Level 2 nor the Level 3 entity would be interposed vehicles under the asset test because the Level 2 entity is a means of accessing real property or infrastructure. The trustee would need to consider the PDS test to determine whether either or both are interposed vehicles The PDS test requires consideration of the information in the PDS and other materials issued by the trustee to determine whether or not a member reading the material would consider the entity is an interposed vehicle. 4.2 What is a fee or cost and how they should be disclosed Placeholder BEST PRACTICE SECTION This section is awaiting text from the Industry Wide Working Group 9

18 5. Common investment structures There are a variety of different ways in which trustees invest the assets of a fund. 5.1 Profit- for- member superannuation funds Common structures in profit- for- member superannuation funds include through mandates awarded to investment managers, unlisted pooled vehicles and direct investments (using in- house expertise). Trustees of profit- for- member superannuation funds do not normally charge trustee fees or performance fees. Rather, the costs of investing (including investment management fees and, the costs of running an investment team and trustee office eg salaries) are regularly paid from the fund. In practice, many profit- for- member funds manage costs through the use of one or more expense reserves whereby relevant costs are paid for from the reserve, and the reserve is funded through the deduction of fees from member accounts. For example, administration fees may be deducted from member accounts and paid into an administration expense reserve and all administration costs of the superannuation fund are paid from that reserve. While the administration fee would be set on a cost recovery basis, it would be rare that the total administration fees paid in a year to the reserve exactly matched the administration costs paid by the fund that year. Many trustees of profit- for- member superannuation funds will appoint investment managers. A majority of the investment managers appointed are unrelated to the trustee, but some trustees will appoint a related party investment manager. Fee structures in mandates involve the payment of a fee to the investment manager which, in some cases, include a performance fee. Where the investment manager manages MySuper assets, the performance fee must satisfy section 29VD of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). It is possible that the portfolio of assets managed by the investment manager includes interposed vehicles, and fees are charged by the interposed vehicles and costs are incurred by the interposed vehicles for which fees and costs would also need to be considered. Unlisted pooled vehicles generally consist of limited partnerships, mutual funds and companies when offered by foreign fund managers, and trusts when offered by Australian fund managers. Fees may be charged by the general partner in a limited partnership, the mutual fund, the company or the trustee of the trust. Performance fees (or carried interest or carry in the case of private equity and hedge funds structured as limited partnerships) may also be payable. The limited partnership, mutual fund, company or trust may invest in an interposed vehicle which may also incur fees and costs. The trustee of a profit- for- member fund may also make a direct investment. Depending on the structure adopted by the trustee to make direct investments, there could be feeder funds which have investment- related and administration- related costs. 10

19 6. Types of fees and costs 6.1 Custody fees Fee structures differ between custodians. Some custodians charge a bundled fee, while others charge separate fees for the safekeeping of assets and other administration services. Many will also separately charge settlement fees per transaction which may differ between asset classes and markets. 6.2 Carried interest Refer to section for information on the disclosure of carried interest. Carried interest (or carry ) is common in limited partnership structures for private equity and hedge funds. It generally involves a share of the profits of an investment paid to the general partner in excess of the amount that it contributes to the partnership. Economically, carried interest has a similar purpose to performance fees being to reward the general partner for enhancing performance. 6.3 Borrowing costs Refer to section for information on the disclosure of borrowing costs. Borrowing costs arise when a responsible entity or interposed vehicle borrows money to fund the purchase of an asset. Trustees of superannuation funds do not normally themselves incur significant borrowing costs because of the prohibition against borrowing (subject to certain limited exceptions) in section 67 of the SIS Act. However, section 67 does not prevent them from investing in interposed vehicles which borrow. The following table summarises different types of borrowing costs associated with the purchase of an asset: Type of cost Explanation When incurred? Interest Establishment fee A fixed or variable rate amount that the financier charges on amounts lent to a borrower Payable on the signing of a loan agreement or on the first advance under it. The fee is usually calculated as a percentage of the total amount of the financier s commitment and is payable before or on first drawdown of the loan Ongoing Upfront 11

20 Commitment fee Line fee Payable on account of the financier putting aside funds, or making arrangements to ensure its ability, to make the loan. The fee is usually payable at intervals through the term of the loan, calculated on either the total amount of the financier s commitment, or in some cases only on the amount of the commitment which is undrawn by the borrower Line fees on revolving facilities are payable on the total approved facility limit. Line fees are the equivalent of commitment fees, but in the context of a letter of credit or bank credit facility Upfront Upfront Administrative fees Payable to the agent and/or Ongoing security trustee of a syndicated facility, and usually payable annually Margin fees Equivalent to an interest Ongoing charge, payable to a broker who has lent funds for the purpose of investing Securities lending describes the common market practice by which securities are transferred temporarily from one party (the lender) to another (the borrower) with the borrower obliged to return them (or equivalent securities) either on demand or at the end of any agreed term. The costs incurred by the lender of securities are also considered to be borrowing costs. 6.4 Transaction and operational costs Refer to section 9.8 for information on the calculation of transactional and operational costs. Refer to section for information on the disclosure of transactional and operational costs. What are transaction costs? Transaction costs are incurred when assets are bought or sold. Different transaction costs arise depending on the assets involved. For example, the transaction costs incurred in buying or selling listed securities and derivatives are different to the transaction costs in buying or selling land, and private equity and infrastructure businesses. 12

21 There is no generally accepted definition of transaction costs. However, this paper adopts the following definition found in International Financial Reporting Standard 9: Financial Instruments:... incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. An incremental cost is one that would not have occurred if the entity had not acquired, issued or disposed of the financial instrument. Transaction costs can be divided into explicit and implicit costs. Explicit transaction costs are amounts which are paid out from a fund to implement a transaction. Implicit transaction costs are amounts which impact transaction prices. Examples of explicit transaction costs for financial assets include brokerage and commission, buy/sell spreads of underlying funds, settlement costs (including settlement costs charged by custodians), clearing costs, stamp duty and foreign exchange costs (including spreads). Examples of explicit transaction costs for unlisted assets like land, private equity and infrastructure include due diligence costs (eg tax and other experts), stamp duty and legal costs. Two types of implicit costs are bid- ask spreads and market impact costs. A bid- ask spread is the difference between the best bid and the best offer (also known as bid- offer spread ) 11 or the difference between the highest price the buyer is willing to pay and the lowest price the seller is willing to accept. For example, ABC Co wants to purchase 1,000 shares at $10 (bid) and XYZ Co wants to sell those shares for $10.50 (ask). The difference between the bid and offer is 50 cents, meaning the bid- ask spread is 50 cents. The bid- ask spread is determined by supply and demand and so can be a measure of liquidity of an asset. In another sense, it measures the negotiation process on price. A bid- ask spread should not be confused with a product s buy/sell spread. A bid- ask spread is the difference between the bid price and the ask price for an asset. A buy/sell spread is an amount charged by a trustee on units they issue to recover transactional and operational costs incurred 12. Bid- ask spreads apply to assets such as listed equities, fixed interest and OTC derivatives, while buy/sell spreads apply only to unlisted unit trusts. One situation where the bid- ask spread is not a transaction costs is where the trustee is buying an asset and the seller crosses the spread. Market impact costs involve the fact that depending on other market events and movements during the execution of an order, the order may itself have an impact on the transaction price (for example, for transactions in assets with a low liquidity). The market impact of a transaction can be difficult to quantify because it depends on a variety of factors: type of instrument, size of order, timing of the transaction, execution quality, liquidity of the underlying market, etc. 11 ASIC Report 452, Review of high- frequency trading and dark liquidity, October Often, member accounts are valued based on the sell price and so the full buy/sell spread is factored in at the time of acquisition of units. Account balances are then adjusted as the sell spread is adjusted. 13

22 Capitalised costs Where a cost is added to the cost base of an asset, the cost is considered to be capitalised. Capitalised costs are often incurred when building or financing assets. Such costs may include advice fees, due diligence and other acquisition or disposal fees and costs which are capitalised into the valuation for CGT purposes. RG97 includes guidance that makes it clear that the fact that a cost is capitalised does not mean that it does not need to be disclosed. From an accounting perspective, capitalised costs are not expenses as a lump sum amount in the period they were incurred but are recognised over a period of time on a depreciated basis. Recovering transaction costs There are a variety of ways in which transaction costs can be recovered. These include through the imposition of an explicit buy/sell spread, the deduction of a transaction cost allowance from the unit price (so that a single unit price or mid- price is charged) or through the deduction of transaction costs from the assets of an investment option or managed fund. More information on how transaction costs are recovered through unit pricing can be found in ASIC Regulatory Guide 94 Unit pricing: Guide to good practice dated August If a buy/sell spread is charged, trustees should understand whether the buy/sell spread only recovers transaction costs arising from applications and redemptions or whether it also covers transaction costs arising from day- to- day trading. 14

23 7. Interposed vehicles 7.1 Overview An interposed vehicle is a body, trust or partnership that meets either an asset test or a PDS test, and the body, trust or partnership is not excluded under a platform test. The interposed vehicle test applies where property attributable to a superannuation product is invested in the body, trust or partnership. Such an investment can occur where an equity / ownership interest is held in the body, trust or partnership. It can also occur where the investment consists of a life policy (ie an investment account contract or an investment- linked contract) or a debt interest. SEE ASIC QUESTIONS AND ANSWERS 13 FEES AND COSTS DISCLOSURE Identification of interposed vehicles is important because the costs associated with investing through interposed vehicles are indirect costs. When considering whether an entity is an interposed the vehicle, AIST recommends adopting the following approach: If the platform test applies, the entity is not an interposed vehicle. Look at each investment held by the fund or investment option or another interposed vehicle. With each investment, identify if there is an investment in or through a body, trust or partnership (e.g. units in an unlisted unit trust, shares in a private company, a partnership interest in a limited partnership, shares in a listed investment company, units in an exchange traded fund, debentures or a life policy). If there is an investment in a body, trust or partnership, consider whether the asset test is satisfied. If the asset test is satisfied, apply the platform test. If the asset test is not satisfied, consider whether the PDS test applies. If the PDS test applies, apply the platform test. The following flowchart summarises the asset test and the PDS test: 15

24 Is the entity a body, partnership or trust? No Entity is not an interposed vehicle Yes Is property attributable to the product invested in or through the entity? No No Having regard to the PDS and other material, could the interest in the entity be reasonably regarded as the means by which the benefit of investments is obtained (rather than the investment itself)? Yes Does the entity have more than 70% of its assets by value invested in relevant securities or financial products? No Yes No No products? Entity is an interposed vehicle Yes Does the PDS state that a member may give instructions? Yes Does the trustee / RE publish a list of documents which includes the financial Yes No Is the arrangement a s1012ia custodial arrangement? Yes For the asset test, the test is what the trustee believes or has reasonable grounds to believe. In contrast to this, both the PDS test and the platform test both involve an objective consideration of the relevant factors eg PDS and marketing material. Accordingly, neither the PDS test nor the platform test are determined by a trustee s subjective belief. Mandates are not of themselves interposed vehicles. However, investments held within a mandate may be interposed vehicles. 16

25 It is recommended that trustees make their determinations of whether an entity is an interposed vehicle by reference to objective and reasonable factors, and document and retain relevant records of their determinations. 7.2 Asset test Broadly, the asset test will be satisfied if the trustee believes or has reasonable grounds to believe that more than 70% of the assets of the entity are invested in financial products (clause 101B(1)). According to RG 97, the 70% limit was chosen as it is indicative that the entity s principal business or activity is that of investing. In applying this test: the trustee must consider the value of the assets of the entity being tested (and not the number of assets) securities and other financial products held by the entity being tested in real property and infrastructure entities must be disregarded the trustee must disregard securities that confer control 13 over a second entity, unless more than 70% of the assets of the second entity are invested in financial products ( Control Exception ). The focus of the asset test on assets and control mean that structure is an important factor in applying the asset test and so an understanding of investment structures is necessary for the asset test. Having undertaken an assessment of an entity, re- assessment would not ordinarily be required while an investment is held. However, a re- assessment should be undertaken if new or additional information is obtained by the trustee or if the trustee has reason to believe that the previous assessment may no longer be applicable for example, because the structure may have changed during the period of holding the vehicle in the relevant financial year. BEST PRACTICE SECTION To satisfy the asset test, the trustee will need to have information that gives them reasonable grounds to believe that an entity meets the elements of the asset test. These grounds may arise from knowledge about the particular factual circumstances of the entity or about the investment strategy applied in an interposed vehicle through which financial products in the entity are held. In this regard, RG 97 refers to the unanimous judgment in George v Rockett (1990) 170 CLR 104 where the High Court held that reasonable grounds for a state of mind requires the existence of facts which are sufficient to induce the state of mind in a reasonable person that is, the trustee must have more than a mere reason to suspect. If the trustee is of the view that there are reasonable grounds to believe at least 70% of the assets of the entity consist of financial products, the entity is an interposed vehicle. On the contrary, if the trustee does not believe the information it has meets the reasonable grounds standard, the asset test is not met. SEE ASIC QUESTIONS AND ANSWERS 14 FEES AND COSTS DISCLOSURE 13 For these purposes, control takes on the meaning in section 50AA of the Corporations Act 2001 (Cth). 17

26 Examples of entities that would be interposed vehicles under the asset test are: life insurance companies; listed investment companies; exchange- traded funds; pooled superannuation trusts; private equity funds; and hedge funds. SEE ASIC QUESTIONS AND ANSWERS FEES AND COSTS DISCLOSURE Examples of entities that would not be interposed vehicles under the asset test are: ASX listed companies, such as BHP Billiton Ltd, Brambles Ltd, RIO Tinto Ltd, Transurban Group, Telstra, Woolworths Ltd and Woodside Petroleum; listed and unlisted infrastructure funds; and REITs and unlisted property funds. 7.3 PDS test Under the PDS test, an entity is an interposed vehicle if, having regard to the PDS for the relevant superannuation product or managed fund and other information issued by the trustee, a security or interest in the entity could reasonably be regarded from a member s perspective, as the means by which the benefit of the investment is obtained in other words, it is a vehicle to access the end investment, rather than being the end investment. It is best practice to follow a two- step process as follows: Step 1: review the PDS and other information issued by the trustee that may reasonably be expected to be given to members and identify what they say about the entity. Regard should be had to: ü the entire PDS and not just one aspect of it ü the investment objective set out in the PDS for the investment option(s) to which the investment is attributed ü the investment strategy and asset class set out in the PDS for the relevant investment option(s), and ü any other information in the PDS about the investment option(s), such as the description of the asset class. Step 2: determine whether or not a member would reasonably consider, from the PDS and other information, that the entity is the end investment taking into account: ü the words in the PDS and other information, as well as the context in which they appear for example, less weight should be given to information in the fine print ü the likely level of understanding of an average member BEST PRACTICE SECTION As the focus of the PDS test is on disclosure, the particular structures for different types of investments (eg REITs) do not affect the outcome of this test. 18

27 7.4 Platform test Under the platform test, a vehicle is not considered to be an interposed vehicle if: the PDS Guide / Financial Services Guide for the platform states that a member may give instructions, directs or requests for financial products to be acquired; the issuer of the PDS has published a list of financial products in relation to which the instructions, directions or requests may be given that includes a security or interest in the entity; and the arrangement under which the instructions would be acted on is a custodial arrangement as defined in section 1012IA(1) of the Corporations Act 2001 (Cth) ( Corporations Act ). 7.5 Downstream entities Trustees should record and document determinations made in this context and retain relevant records to support the taking of reasonable inquiries and steps for at least seven years. 7.6 Interposed vehicles and unlisted assets The following table summarises the position on interposed vehicles as it applies to different types of private equity and infrastructure investments: SEE ASIC QUESTIONS AND ANSWERS 22 FEES AND COSTS DISCLOSURE Interposed vehicle under the asset test? Interposed vehicle under the PDS test? Listed infrastructure fund No No, if held in an equities portfolio. Unlisted infrastructure fund No Yes Yes, if held in an alternates portfolio. Infrastructure operating company No No, if it is considered to be part of the end investment Unlisted private equity fund Yes Yes BEST PRACTICE SECTION Private equity operating company No No, if it is considered to be part of the end investment 19

28 8. Obtaining fees and costs information 8.1 Internal resources and related parties Fees and cost information held internally should be incorporated into indirect cost calculations, regardless of the original purpose for collecting or compiling that information for example, for APRA reporting purposes or as a result of due diligence when purchasing the asset. Information held by related parties should be provided to the trustee for disclosure. While it is difficult to identify any circumstances where it would not be appropriate for a related party to provide fees and costs information to a trustee, where unusual circumstances do arise which justify the non- reporting of fees and costs information, it is recommended that these circumstances be documented, for example, in the due diligence materials for a PDS. 8.2 Relying on managed fund PDSs For a superannuation product that invests in an unlisted managed fund, the managed fund would often (but not always) be an interposed vehicle. Where the managed fund was an interposed vehicle, the trustee would need to include the fees and costs of the managed fund in their indirect costs. In calculating the fees and costs to disclose in the PDS for the superannuation product, the trustee should incorporate the fees and costs information in the PDS for the managed fund. However, there are a number of differences between fees and costs disclosure for superannuation funds and managed funds. Accordingly, the PDS for the managed fund would be unlikely to contain all the fees and costs information that the trustee would need to disclose. While the trustee should not ignore the fees and cost information in the PDS, it should consider what additional steps it will take (if any) to obtain the required additional information. Where a trustee considers that the managed fund PDS disclosure is reasonable and not materially misleading or deceptive (eg the investment in the managed fund represents an immaterial part of an investment option and the additional information would be likely to affect the fees and costs disclosure by the materiality threshold outlined in section 11.2 below), a trustee may consider simply relying on the information in the managed fund PDS 14. However, where the additional information would be likely to affect the fees and costs disclosure by more than the materiality threshold, the trustee should seek additional fees and costs information. 8.3 Outline of process At a high level, AIST recommends that the process for obtaining fees and costs information involve: 14 Care needs to be taken. For example, if there were a number of managed fund investments in the one investment option, it is unlikely that a trustee could rely solely on the information in the PDSs for those managed funds. 20

29 sending requests for fees and costs information to investment managers and fund managers in the first layer of interposed vehicles using standard form requests; follow up at least twice those who have not responded within the requested timeframe; review the information obtained for consistency between investment managers and fund managers and determine if there are any outliers; and for any outliers, ask additional questions to test the fees and costs information provided and determine whether or not the amounts need to be re- calculated. Trustees will need to balance competing factors the longer the investment manager or fund manager has to provide the information, the more accurate the information will be. On the other hand, trustees will need to ensure that they have sufficient time to collate the fees and costs information obtained from multiple sources, and to scrub and test the information and ask further questions. 8.4 Obtaining fees and costs information on the first layer of interposed vehicles The fees and costs disclosure regime does not impose a legal obligation on funds managers or investment managers to provide fees and costs information to trustees. Accordingly, trustees must look to other means to obtain fees and costs information. Best practice involves: trustees requesting fees and costs information from all investment managers and direct investments on the first layer of interposed vehicles regardless of the expectations of receiving that information; where an investment manager or direct investment does not provide the requested information, trustees taking reasonable efforts to follow up the investment manager or direct investment; if follow up efforts with an investment manager are not successful, trustees considering their powers under the terms of the investment management agreement and point the manager towards the relevant contractual clauses which obliges it to provide the information; and if follow up efforts with a direct investment are not successful, trustees considering the range of powers open to it to support the provision of information. This includes considering its powers to issue a notice pursuant to section 13(4B) of the Financial Sector (Collection of Data) Act 2001 (Cth) and rights to obtain information found in governing rules and side letters. If the cost of enforcing legal rights to obtain information outweighs the benefits arising from greater certainty in the expected cost amount then it may not be reasonable to take legal action to enforce those rights. For all new direct investments, it is best practice for trustees to: BEST PRACTICE SECTION undertake appropriate due diligence on the investment to understand the costs that might be incurred by the fund in relation to the investment 15 ; and 15 For superannuation funds, see section 52(6)(vii) of the SIS Act and APRA Prudential Standard SPS

30 the agreement with the direct investment contains appropriate contractual obligations to facilitate the provision of relevant fees and costs information. Schedule 10 does not contain any express limits on the obligation to disclose fees and costs information of interposed vehicles. Accordingly, trustees should fully understand any limits that a direct investment seeks on the contractual obligation to provide fees and costs information and take appropriate legal advice. For example, where a direct investment seeks to limit the obligation to provide fees and costs information where it is prevented to do so by law, the trustees should ensure that they fully understand what laws could apply in this situation before determining whether or not to accept the limitation. A refusal by a direct investment to agree to such provisions does not of itself prevent a trustee from entering into the investment, but the trustee should take the direct investment s position on fees and costs disclosure into account when determining whether to invest. 8.5 Obtaining fees and costs information on downstream entities It is best practice for trustees to: seek to rely on investment managers to provide fees and costs information on interposed vehicles which are downstream entities; seek to rely on direct investments to provide fees and costs information on interposed entities in which the direct investment invests; and request fees and costs information about downstream entities from all investment managers and direct investments regardless of the expectations of receiving that information. Trustees should make this expectation clear when seeking fees and costs information from investment managers and direct investments, and be satisfied that any contractual obligations to provide fees and costs information extends to information about downstream entities. Accordingly, where a trustee obtains fees and costs information from an investment manager or direct investment, the trustee should clearly understand whether the information includes fees and costs of any interposed vehicles. Where the requested information about downstream entities is not provided, it is best practice for a trustee use reasonable efforts to obtain that information from the investment manager or direct investment, and consider its contractual and other legal powers to support the request. 8.6 Quality of information BEST PRACTICE SECTION BEST PRACTICE SECTION A number of legal obligations are impacted by the quality of fees and costs information, including: the offences in Division 7 of Part 7.9 of the Corporations Act of providing defective PDSs and the defences in that Division where a trustee can show it took reasonable 22

31 steps to ensure that the disclosure document or statement would not be defective; and the definition of indirect costs which refers to making a reasonable estimate of costs. In light of these legal obligations, the following represents best practice: trustees should use audited information where that is available. If audited information is relied upon, it is less likely that the disclosure will be misleading or deceptive; where only unaudited information is available, trustees should consider whether there is anything which suggests that information would be unreliable and would produce misleading or deceptive results. If nothing shows it to be unreliable, then trustees should use unaudited information. Even if the information is not entirely reliable, the trustee should consider whether the risk of the PDS being misleading or deceptive is greater if the information is excluded. If the trustee determines that the information cannot be relied on, it must then consider other means for forming a reasonable estimate of those costs; and where a trustee is only provided with information about some costs but not others, it should include that information in its calculations and make a reasonable estimate of the other costs. 8.7 Template for requesting fees and costs information on interposed vehicles A template has been developed for requesting fees and costs information on interposed vehicles. It is best practice for trustees to use the template when requesting fees and costs information from an investment manager and direct investment. This template is contained at Annexure D, a separate document. Please note that this template has not been endorsed by the Industry Wide Working Group no template has been endorsed as yet. 8.8 Timeframes for obtaining costs information of interposed vehicles Trustees will need to collect certain fees and costs information quarterly for APRA reporting purposes. However, this information need not be audited and it may not contain all the information required for disclosure purposes. BEST PRACTICE SECTION As a result, the timeframe for requesting full fees and costs information of interposed vehicles each year should link to the timeframe for issuing an annual statement. It is recommended that requests for fees and costs information be sent four months before the annual statement is due to be issued. Trustees should contact the investment manager and direct investment within a reasonable time of sending a request for information to obtain confirmation of whether information will be provided (eg one month). 23

32 9. Calculation of costs and making reasonable estimates 9.1 Making of reasonable estimates Estimates of costs will be need to be prepared by: BEST PRACTICE SECTION a trustee in relation to the fees and costs of the superannuation product or managed fund where it does not know the exact amount of a fee or cost of the product or fund; a trustee in relation to the fees and costs of an interposed vehicle where it cannot obtain information about the fees and costs of the vehicle; and the operator of an interposed vehicle in relation to its fees and costs where it does not know the exact amount of a fee or cost of the vehicle. In practice, it is expected that a trustee should know or be able to readily obtain information on most of the fees and costs incurred by the superannuation product or managed fund itself. There will be situations where a trustee may need to make an estimate of some of these costs, but such situations will be limited. Best practice is for trustees to make a reasonable estimate of all fees and costs of a superannuation product or managed fund, even where that information is not known. For example, a trustee may not be able to readily obtain information on the brokerage costs incurred by a product. In this case, the trustee should obtain information on what brokerage normally costs for brokers of that type and form an estimate of the brokerage costs of the product based on that information. Where a trustee is not able to obtain information about a cost incurred by a superannuation product or managed fund, it is best practice for the trustee to form a reasonable estimate of the amount through other means (eg an estimate based on the costs in a similar investment portfolio) and work with the investment manager and custodian to obtain a reasonable estimate of that cost for future years. More commonly, trustees will need to make reasonable estimates of the indirect costs of interposed vehicles, particularly where those interposed vehicles do not provide fees and costs information. Where a trustee cannot obtain information about the interposed vehicle, the trustee must consider how it could form a reasonable estimate of the vehicle s costs. The legal obligation is to ensure that estimates are reasonable in the circumstances. However, it may be possible to estimate different amounts for a fee or cost due to factors such as different methodologies or different assumptions. Trustees should be aware that selecting a lower estimate may result in a document being misleading or deceptive or, at best, becoming out of date quickly. For new products, it is best practice to base a reasonable estimate on what the trustee expects to occur, having regard to the arrangements for the product, the types of assets and investment strategy, amongst other information that they may have. SEE ASIC QUESTIONS AND ANSWERS 7, 8 AND 12 FEES AND COSTS DISCLOSURE 24

33 RG 97 states that in making a reasonable estimate, a trustee may use information they have and make reasonable assumptions. ASIC will accept an estimate that the issuer believes is their best estimation, if the trustee has taken reasonable steps to formulate it. In some cases further steps may be reasonable, specifically to obtain information about costs for disclosure. ASIC outlines the following as ways by which a trustee make a reasonable estimate: using any information normally provided by the interposed vehicles seeking further information from the interposed vehicles directly or indirectly using information otherwise gathered to make decisions about acquiring or disposing of the investment using information about costs of similar investments or in similar markets; making inquiries and undertaking research into the typical costs of the relevant kind of investment, and estimating the costs based on the amounts the issuers would incur if they were to make the investments themselves, rather than rely on a third- party provider. A trustee could also consider engaging an expert consulting firm to provide estimates for certain types of fee and cost amounts. 9.2 Use of expense reserves Where the costs of a superannuation product are paid for from an expense reserve which has been funded from the deductions of fees from member accounts, to prevent double counting, it is recommended that a trustee to reflect the amount which has been deducted from member accounts or fund assets in the administration fee or investment fee. This is because the amounts deducted from the member account reflect the true cost to the member. The actual costs paid from the fund need not be set out as part of the fees and costs disclosure. 9.3 Meaning of fee and cost See the At a Glance section at the front of the Toolkit (section 4) for some common charges and guidance on whether they are a fee or a cost. The disclosure of fees and costs is complex because some costs are disclosed as a fee for example, investment- related costs incurred by a superannuation fund are disclosed as an investment fee. Notwithstanding this, it is important to determine which amounts are fees and which amounts are costs. The distinction is important because: in the fees and costs table, fees must be calculated prospectively (for the 12 months from the date of the PDS) in a PDS and, except for new products, costs must be calculated retrospectively (ie. for the financial year before the PDS was issued) In the statutory fee example, responsible entities must calculate fees that are not charged directly to member accounts using the indirect cost ratio methodology set out in clause 104(2) (clause 218A(3) of Schedule 10). 25

34 a trustee (but not a responsible entity) can elect to disclose some or all costs of interposed vehicles of a superannuation product as an indirect cost, and material or significant increases in fees (but not costs) must be notified at least 30 days beforehand but material or significant increases in costs can be notified afterwards. For the purposes of the fees and costs disclosure regime, trustees should treat amounts that a product issuer charges (including the trustee and responsible entity) as a fee, and all other amounts as a cost (including fees charged by interposed vehicles and costs of a trustee recovered from a fund under its rights of indemnity or reimbursement). For example, while investment management fees have the word fee in the description, they are a cost under this approach as they are not an amount charged by a trustee.a shorthand way of thinking about this is to consider that amounts which go into a product issuer s pockets is a fee, and amounts which the product issuer is invoiced for is a cost. 9.4 Forward looking vs retrospective In the main fee table of a PDS, fees charged by trustees should be calculated on a prospective basis. For example, if the trustee has determined to increase its fees and the increase will commence three months after issuing the PDS, the amount disclosed in the PDS should reflect this change. The indirect cost ratio and the cost component of investment fees and administration fees disclosed in a PDS for a superannuation product should be calculated for the financial year prior to the issue of the PDS (clauses 104(2) and (2A)). The cost component of management costs (other than performance fees) disclosed in a PDS be calculated for the financial year prior to the issue of the PDS (clause 104A). However, if the product or investment option was not offered at least 11 months before the date of the PDS, the amount to be disclosed is to be determined based on the trustee s reasonable estimate of the amount that will apply for the current financial year, adjusted to reflect a 12 month period (clause 104(2) and (2A) and clause 104A of Schedule 10). Except for new investment options and new products, investment management fees must be disclosed on a retrospective basis. Costs incurred in a prior year are generally easier to calculate but are not necessarily a reliable indicator of what those costs will be in future years. For example, changes to investment strategy (eg change in asset allocation) and changes to service providers (eg investment managers) can materially change the costs payable. A trustee should consider whether the change is sufficiently fundamental to effectively result in the establishment of a new investment option or fund. Otherwise, a trustee will need to consider what additional disclosure it should include to manage the risk of disclosure being misleading or deceptive, such as by disclosing that the amounts are based on a prior year which is not a reliable indicator of future year amounts or by also disclosing the estimated amount for the future 17. The SEN may also need to disclose the resulting changes in fees and costs. SEE ASIC QUESTIONS AND ANSWERS FEES AND COSTS DISCLOSURE 17 If an estimate of fees or costs for the current or a future year is included in a PDS, there must be reasonable grounds for the forecast and appropriate disclosure included to reduce the risk of 26

35 9.5 Gross vs net amounts Amounts included in the indirect cost ratio should be calculated on a total average net asset value (clause 104(1)). It is best practice to calculate all fees based on a percent of total or net assets, however defined. Trustees should disclose the gross amount of fees and costs. For example, where a cost is netted off against particular sources of income and the trustee, responsible entity or interposed vehicle normally records the net amount in its accounts, the amount to be disclosed under the fees and costs disclosure regime is the gross amount. BEST PRACTICE SECTION 9.6 Effect of taxation In a PDS, fees or costs must be shown gross of income tax (but including GST and any applicable stamp duty) and net of any applicable reduced input tax credits. The Explanatory Statement to the regulations which originally inserted Schedule 10 provided that disclosure in this manner is required as the impact of any entity level tax deductions and the extent to which they will be passed on to members or product holders through lower after tax fees or costs is not known at the time of preparing a PDS. On the other hand, the Explanatory Statement provides that for periodic statements, it is essential that the actual amount charged or incurred by the member or product holder is indicated on the statement. For this reason, transactions, fees and costs must be shown net of income tax and GST and any applicable stamp duty that is, inclusive of any income tax deduction which may have reduced the actual amount of a fee or cost charged. 9.7 Calculating performance fees and performance- related fees Refer to section 9.7 for explanatory information on performance fees and performance- related fees. Refer to section for information on the disclosure of performance fees and performance- related fees. 9.8 Calculating transactional and operational costs Refer to section 6.4 for explanatory information on transaction costs. Refer to section for information on the disclosure of transactional and operational costs. Meaning of transactional and operational costs Transactional and operational costs are defined to include: brokerage; SEE ASIC QUESTIONS AND ANSWERS FEES AND COSTS DISCLOSURE BEST PRACTICE SECTION providing a misleading or deceptive forecast. The inclusion of a forecast could also mean the forecast becomes out- of- date or misleading or deceptive as information becomes available. 27

36 buy- sell spreads; settlement costs (including custody costs); clearing costs; and stamp duty on an investment transaction. However, this list is not exhaustive. The explicit transaction costs discussed in section 6.4 should also be considered transactional and operational costs. ASIC s view is that the definition extends to the implicit transaction costs discussed in section 6.4. AIST is considering its position on this issue. Calculating transactional and operational costs 9.9 Calculating costs of OTC derivatives SEE ASIC QUESTIONS AND ANSWERS FEES AND COSTS DISCLOSURE Refer to section for information on the disclosure of OTC derivative costs Attributing costs of interposed vehicles There is significant complexity in determining what costs of an interposed vehicle should be attributed to the superannuation product. The following principles should be adopted when undertaking cost calculations: costs of an interposed vehicle should not be offset by income of the superannuation fund costs of an interposed vehicle should not be offset by income of another superannuation fund to avoid double counting, costs can be offset by amounts generated from other costs for example, transactional and operational costs can be offset by amounts generated from a buy/sell spread Internal processes and policy documentation There is no express legal obligation to set out fees and costs disclosure compliance in a policy or process documentation, but trustees must have adequate compliance arrangements. However, having policy or process documentation will assist in a trustee in satisfying the legal defence of taking reasonable steps to ensure that a PDS is not defective. In any event, AIST recommends that a trustee prepare and maintain the following: a positions document which outlines the legal positions the trustee has adopted on different aspects of the fees and costs disclosure regime; either a separate board approved fees and costs due diligence policy, or expand the board approved disclosure document due diligence policy for the fees and costs disclosure regime; and a procedures document which outlines the how the trustee will obtain fees and costs information and when it will do so, and how to make reasonable estimates when it cannot obtain that information. Ideally, these documents should be independently reviewed at the time of establishment, every three years and whenever materially changed. 28

37 10. Disclosure 10.1 PDSs Introduction Main fees and costs table For superannuation products, Schedules 10 and 10D of the Corporations Regulations require disclosure in table form of the following: investment fees administration fees buy/sell spreads switching fees exit fees intra- fund advice fees indirect cost ratio. Depending on the superannuation product, transactional and operational costs may be included in the main fees and costs table as part of one or more of investment fees, buy / sell spreads and indirect cost ratio. Performance fees and performance- related fees may be included in investment fees and / or indirect cost ratio. Investment fees are normally disclosed on a percentage per annum basis. Administration fees may be disclosed as either a dollar amount per period (eg per week or per month), a percentage per annum or a combination of the two. Transactional and operational costs, other than OTC derivative costs which are transactional and operational costs, are not included in any of the amounts in the main fees and costs table for managed funds. All performance fees and performance- related fees should be included in management costs. A trustee should include information on investment fees, management costs, buy/sell spreads and indirect cost ratio per investment option. It is open to a trustee to include all this information in the main fees and costs table or to include a range in the fees and costs table together with a reference to a second table which sets out this information (clause 205 of Schedule 10). A statement with information about past experience has a greater risk of being misleading or deceptive if it is presented in a manner that implies it constitutes a projection illustrating the likely future value of the amount or in a way that creates the impression that substantially the same amounts will be incurred in the future. Accordingly, if a trustee believes that there is a risk that costs information disclosed in a PDS calculated retrospectively may change in the future, it should clarity which amounts are calculated retrospectively using terminology such as Estimated to be XX % pa for the 12 months to 30 June 20XX. A statement with information about past experience also has a greater risk of being misleading or deceptive unless it draws attention (unambiguously and without reservation) to the fact that the past experience will not necessarily be repeated. However, ASIC s position is that only the required information can be included in the main fees and costs 29

38 table (except in limited circumstances) and it considers that the law prohibits the inclusion of a warning in the main fees and costs table. However, for costs that may change in the future, to help reduce the risk of being misleading or deceptive, a trustee should include a warning in a footnote to the main fees and costs table and in the appropriate sections of the Additional Explanation of Fees and Costs, such as Past costs are not a reliable indicator of future costs. Additional explanation of fees and costs Clause 209 of Schedule 10 requires the following information to be included in the Additional Explanation of Fees and Costs: information on performance fees, including the amount of the fees or an estimate of the amount if the amount is not known; details of transactional and operational costs, such as brokerage and buy/sell spreads, including the amount or an estimate of the amount if the amount is not known; and details of borrowing costs, including a description of the cost and the amount or an estimate of the amount if the amount is not known. AIST recommends to: disclose amounts of performance fees / performance- related fees as a ratio for the investment option, calculated on the same basis as an indirect cost ratio; disclose total amounts of transactional and operational costs (including any transactional and operational costs of interposed vehicles) as a ratio for the investment option, calculated on the same basis as an indirect cost ratio; disclose amounts of borrowing costs as a ratio for the investment option, calculated on the same basis as an indirect cost ratio; identify amounts which are calculated retrospectively using terminology such as Estimated to be XX % pa for the 12 months to 30 June 20XX ; and where there is a risk of costs changing in the future, include a warning such as Past costs are not a reliable indicator of future costs Administration fee An administration fee is a fee that relates to the administration or operation of a superannuation fund and includes costs that relate to that administration or operation, other than: borrowing costs; administration costs that are not paid out of the superannuation fund that the trustee has elected in writing will be treated as indirect costs and not fees, incurred by the trustee of the fund or in an interposed vehicle or derivative financial product; and costs that are otherwise charged as an investment fee, a buy/sell spread, a switching fee, an exit fee, an activity fee, an advice for or an insurance fee, (clauses 101 and 209A of Schedule 10). The following are common examples of amounts which would normally be expected to be included as an administration fee: 30

39 fees charged by the trustee for administration and operation of the superannuation fund; fees charged by an administrator appointed by the trustee; where such fees are charged separately, administration fees charged by a custodian appointed by the trustee; audit costs; costs of providing member communications (for example, call centres); APRA and AUSTRAC levies; costs of product development; overheads, including accommodation, internal staff costs in member services teams and information technology; amounts allocated to operational risk reserves and other reserves; and costs of professional indemnity, directors and officers and other insurance. However, if these administration costs are paid for from a reserve, then it is the amount deducted from member accounts and paid into the reserve that must be disclosed to members in PDSs and periodic statements (see section 9.2 above) Investment fee An investment fee generally includes fees that relates to the investment of the assets of a superannuation fund and: fees in payment for the exercise of care and expertise in the investment of those assets (including performance fees); and costs that related to the investment of assets of the fund, other than: o borrowing costs; and o indirect costs that are not paid out of the superannuation fund that the trustee has elected in writing will be treated as indirect costs and not fees, incurred by the trustee of the fund or in an interposed vehicle or derivative financial product; and o costs that are otherwise charged as an investment fee, a buy/sell spread, a switching fee, an exit fee, an activity fee, an advice for or an insurance fee, (clauses 101 and 209A of Schedule 10). Investment fees include both investment- related costs of the superannuation fund and investment- related costs of interposed vehicles (ie indirect costs), but do not include investment- related costs of interposed vehicles disclosed as part of the indirect cost ratio or borrowing costs (as defined in Schedule 10). SEE ASIC QUESTIONS AND ANSWERS 24 FEES AND COSTS DISCLOSURE The following are common examples of amounts which would normally be expected to be included as an investment fee: fees charged by the trustee that relate to the investment of the assets of a superannuation fund; investment fees, including performance fees, charged by an interposed vehicle; management fees, including performance fees, charged by an investment manager, general partner or trustee of a trust in which the superannuation fund invests; 31

40 explicit costs of derivative financial products; custody fees charged by a custodian or prime broker appointed by the trustee or an interposed vehicle, other than those included in the administration fee; securities lending fees charged by a custodian or prime broker; income retained by a custodian or prime broker in lieu of charging a fee for securities lending activities (or charging a higher fee); broker fees and commissions; internal staff costs in investment teams; explicit transactional and operational costs; fees paid to asset consultants; costs associated with failed deals / bids, including costs of legal and tax professionals; valuation costs; and OTC derivative costs. SEE ASIC QUESTIONS AND ANSWERS 7 AND 9 FEES AND COSTS DISCLOSURE Normally, the purchase price of an asset and income taxes are not investment fees. Importantly, the amount of a fee disclosed in a PDS should include the amount of any goods and services tax (GST), less reduced input tax credit, and any stamp duty on that fee or cost (clause 204(7) of Schedule 10). However, some costs may be capitalised into the value of the asset for accounting purposes. The accounting treatment of these amounts does not affect their treatment under the fees and costs disclosure regime. These amounts should not be treated as part of the purchase price under the fees and costs disclosure regime and a trustee should take reasonable steps to calculate or estimate these amounts and include them in the investment fee. If investment costs are paid for from a reserve, then it is the amount deducted from member accounts and paid into the reserve that must be disclosed to members (see section 9.2 above) Indirect cost ratio The concept of the indirect cost ratio has developed since it was first introduced in In practice, it is essentially limited to administration- related costs and investment- related costs in interposed vehicles that the trustee has elected to disclose as indirect costs. While the default position is that costs of an interposed vehicle are included as an investment fee or administration fee (as appropriate) in the fees and costs table, a trustee can elect to disclose these costs as an indirect cost ratio (see the definitions of investment fee and administration fee in clauses A of Schedule 10). However, a trustee cannot disclose costs incurred by the superannuation fund directly as an indirect cost ratio. An election to disclose costs of an interposed vehicle as an indirect cost ratio must be made in writing, and must be made before the PDS is issued. The fees and costs disclosed in periodic statements issued from the date of the PDS should adopt an approach which is consistent with the written election. A trustee may not make any election, it may elect to disclose all costs of interposed vehicles as an indirect cost ratio or it may elect to disclose only certain costs as an indirect cost ratio. 32

41 AIST recommends that a copy of the written trustee election be included with the due diligence materials maintained for the PDS. To assist trustees in satisfying their general legal obligations and duties as well as the PDS due diligence defence, AIST recommends that trustees consider including reasons for the election in the due diligence materials. AIST notes that this Toolkit may subsequently include some examples of what might be good practice as to when such an election may be made. AIST also recommends that the election be made each time a PDS is rolled over. Trustees should also ensure that the election is made by an appropriately authorised person within the organisation. This could be the board of directors, a board or management committee or an individual with the requisite delegation. Where a trustee elects to disclose costs of an interposed vehicle in an investment option in the indirect cost ratio, it must provide a single indirect cost ratio amount for that investment option (clause 104(1) of Schedule 10). Example 1: XZY Pty Limited does not charge any fees but the investment costs incurred by the superannuation fund were estimated to be 0.5% in 2016 and are estimated to be 0.4% in The administration costs of the superannuation fund were estimated to be 0.4% in 2016 and are estimated to be 0.5% in The administration- related costs of interposed vehicles were estimated to be 0.3% in 2016 and are estimated to be 0.4% in 2017 and the investment- related costs of those interposed vehicles were estimated to be 0.5% in 2016 and are estimated to be 0.6% in If XYZ made no indirect costs election, XZY would disclose in its PDS at the end of 2016: Investment Fee: 1.0% pa = 0.5% pa (investment costs of the superannuation fund for 2016) + 0.5% pa (investment- related costs of interposed vehicles for 2016) Administration Fee: 0.7% pa = 0.4% pa (administration costs of the superannuation fund for 2016) + 0.3% pa (administration- related costs of interposed vehicles for 2016) If XYZ elected to disclose the costs of interposed vehicles as indirect costs, the PDS would show: Investment Fee: 0.5% pa (investment costs of the superannuation fund for 2016) Administration Fee: 0.4% pa (administration costs of the superannuation fund for 2016) Indirect cost ratio: 0.8% pa = 0.5% pa (investment- related costs of interposed vehicles for 2016) + 0.3% pa (administration- related costs of interposed vehicles for 2016) Importantly, XYZ cannot elect to disclose the costs of the superannuation fund as part of the indirect cost ratio. 33

42 Example 2: ABC Pty Limited charged a 1% pa fee in 2016 but will increase this amount to 1.2% in It pays all costs of the superannuation fund from the proceeds of that fee. The administration- related costs of interposed vehicles were estimated to be 0.3% in 2016 and are estimated to be 0.4% in 2017 and the investment- related costs of those interposed vehicles were estimated to be 0.5% in 2016 and are estimated to be 0.6% in Say half of the trustee fee is administration- related and half is investment- related and ABC made no indirect costs election, ABC would need to disclose in its PDS at the end of 2016: Investment Fee: 1.1% pa = 0.6% pa (proportion of trustee fee for 2017) + 0.5% pa (investment- related costs of interposed vehicles for 2016) Administration Fee: 0.9% pa = 0.6% pa (proportion of trustee fee for 2017) + 0.3% pa (administration- related costs of interposed vehicles for 2016) If ABC elected to disclose the costs of interposed vehicles as indirect costs, the PDS would show: Investment Fee: 0.6% pa (proportion of trustee fee for 2017) Administration Fee: 0.6% pa (proportion of trustee fee for 2017) Indirect cost ratio: 0.8% pa = 0.5% pa (investment- related costs of interposed vehicles for 2016) + 0.3% pa (administration- related costs of interposed vehicles for 2016) Indirect costs Indirect costs are defined in clause 101A of Schedule 10 as:... any amount that: (a) (d) a trustee of the entity knows, or reasonably ought to know or, where this is not the case, may reasonably estimate, will directly or indirectly reduce the return on the product or option that is paid from or reduces the amount or value of: (i) (ii)... the income of or the property attributable to the product or option; or the income of or property attributable to an interposed vehicle in or through which the property attributable to the product or option is invested; and... would, if the amount had been paid as a cost out of a superannuation entity, be an investment fee or administration fee for the superannuation product or, if the amount had been paid out of scheme property of the registered scheme, be a management cost of the managed investment product. Accordingly, indirect costs include: first limb: amounts which have reduced or will reduce (as applicable) whether directly or indirectly the return on the investment option or managed fund that is paid from 34

43 second limb: amounts which reduce the amount or value of the income of or property attributable to an interposed vehicle in or through which the property attributable to the investment option or managed fund is invested. To prevent double counting, an amount is not an indirect cost under the first limb or the second limb where it is charged to a member as a fee, where it is a fee as defined in clause 209A of Schedule 10 or where it is an insurance fee. Trustees should ensure they apply both the first limb and the second limb when determining whether the fees and costs of a downstream entity should be included in the indirect costs of the superannuation product or managed fund. Indirect costs are also deemed to include certain OTC derivative costs (see section 9.9). Income tax is not an indirect cost, but stamp duty is. SEE ASIC QUESTIONS AND ANSWERS 10 AND 11 FEES AND COSTS DISCLOSURE Where an investment consists of a debt instrument where a specified amount of interest is paid regardless of any costs of the entity issuing the instrument, there should be no indirect costs in relation to that debt instrument Disclosure of performance fees and performance- related fees Refer to section 9.7 for information on the calculation of performance fees and performance- related fees. A performance fee is defined in Schedule 10 as an amount paid or payable, calculated by reference to the person of a superannuation product, an investment option or a managed fund. Schedule 10 defines performance to include income and capital appreciation. ASIC s position in RG 97 is that the term does not include performance fees paid under a mandate when the mandate does not relate to the fund as a whole or to a particular investment option. Further, it considers that fees based on the performance of an interposed vehicle through which a subgroup of assets of an investment option are held, or for the management of a subgroup of assets of an investment option or a managed fund, should not be called a performance fee in the PDS. Performance- related fees are not defined in the law, but are considered to be performance fees which do not satisfy the legal definition of performance fee. For example, performance fees payable to an investment manager who manages a sub- group of assets within an investment option or managed fund.. A trustee should include performance fees and performance- related fees as an investment fee of a superannuation product, unless incurred by an interposed vehicle and the trustee has elected to disclose the amount as an indirect cost ratio. 35

44 A trustee need only include the formula for calculating performance fees / performance- related fees in the main fees and costs table. However, the Additional Explanation of Fees and Costs must set out information on performance fees including: a statement about how performance fees affect administration fees and investment fees for the superannuation product the method for calculating the fees, and the amount of the fees, or an estimate of the amount if the amount is not known. The statutory fee example must also include estimates of performance fees and performance- related fees. AIST recommends that the Additional Explanation of Fees and Costs include information on all performance- related fees regardless of whether they strictly satisfy the legislative definition. Trustees should itemise in a table in the Additional Explanation of Fees and Costs the estimated performance- related fee amount for the managed fund or, if applicable, each investment option. Where a trustee considers that inclusion of performance fees calculated on a retrospective basis would result in the PDS being misleading or deceptive, it should still include the amount calculated retrospectively but should consider what other information to include in the document to reduce the risk of being misleading or deceptive. In summary: A trustee should include a formula in the main fees and costs table for both performance fees and performance- related fees. In the Additional Explanation of Fees and Costs, a trustee should disclose a forward looking amount for performance fees charged by the trustee. In the Additional Explanation of Fees and Costs, a trustee should disclose a forward looking amount for performance- related fees. Many performance- related fees will not be performance fees for the purposes of the fees and costs disclosure regime. Performance- related fees can be included in the indirect cost ratio if they are incurred by an interposed vehicle Disclosure of carried interest Refer to section 6.2 for explanatory information on carried interest. Trustees should disclose carried interest in the same manner as performance fees Disclosure of borrowing costs Refer to section 6.3 for explanatory information on borrowing costs. 36

45 For superannuation products, borrowing costs (whether of the superannuation fund or interposed vehicle) should not be included in the main fees and costs table, however, the Additional Explanation of Fees and Costs must include details of borrowing costs, including amounts of borrowing costs. For these purposes, borrowing costs has a more limited meaning. It includes only those costs which relate a credit facility which is not a derivative financial product under which credit is provided. Accordingly, borrowing costs relating to a derivative financial product are not a borrowing cost for disclosure purposes Disclosure of transactional and operational costs Refer to section 6.4 for explanatory information on transaction costs. Refer to section 9.8 for information on the calculation of transactional and operational costs. Trustees must include in the investment fee / indirect cost ratio explicit transactional and operational costs, to the extent they are not recovered from a buy / sell spread (if one is charged), and OTC derivative costs. However, implicit transactional and operational costs, excluding those applicable to OTC derivative costs, are not a component are a cost of the assets of the product, not a cost relating to those assets. Accordingly, they need not be included in the investment fee / indirect cost ratio. For trustees, details of transactional and operational costs are required to be disclosed under the Additional Explanation of Fees and Costs (clause 209(j) of Schedule 10), including those that may be recovered (in whole or in part) through a product s applied buy- sell spread that is, total gross transactional and operational costs. Where a buy/sell spread is charged, in addition to setting out total gross transactional and operational costs, it is best practice to set out the amount of those costs recovered through the buy/sell spread and the amount which reduced returns as follows: Total Transactional and operational costs minus Transactional and operational costs recovered from the buy/sell spread equals Total transactional and operational costs which reduced returns Where the buy- sell spread recovery exceeds the total transactional and operational costs, amount in the final row should be disclosed as nil. SEE ASIC QUESTIONS AND ANSWERS 15 TO 17, 24 FEES AND COSTS DISCLOSURE Set out below is a breakdown of the various transactional cost components and how they need to be disclosed in a PDS for managed investment products and superannuation products. The overview is limited to the calculation of transactional and operational costs only and does not take into consideration other fees or costs which should be contemplated as part of a product s overall fee and cost disclosure. 37

46 Additional guidance with regards to the treatment of transactional and operational costs for superannuation products investing into a managed investment product is also provided. When disclosing transactional and operational costs in the Additional Explanation of Fees and Costs, disclosure should set out how any transactional and operational costs resulting from member applications and redemptions will be borne. If such costs are recovered (in whole or in part) through a product s buy- sell spread, this should be stated (clause 209(j)(iii) of Schedule 10). Different definitions of buy/sell spread are found in Schedule 10, depending on whether it is a buy/sell spread for a superannuation product or a managed fund. For a superannuation product, a buy- sell spread is a fee to recover transaction costs incurred by the trustee in relation to the sale and purchase of assets of the entity. Importantly, the amount is deemed to be a fee and it can only relate to transaction costs incurred by the trustee and not in interposed vehicles (clause 101 of Schedule 10 and section 29V(4) of the SIS Act). Further, the amount charged in a buy/sell spread must be no more than it would be if it were charged on a cost recovery basis (section 99C of the SIS Act). As it is a fee for superannuation products, the amount disclosed in a PDS must be the amount a member would pay looking forward. However, this does not prevent a trustee from determining the amount of a buy/sell spread by reference to prior year transactional and operational costs Disclosure of over the counter derivative (OTC) costs Refer to section 9.9 for information on the calculation of OTC derivative costs. OTC derivatives can have explicit costs for example, an option premium. However, as ASIC believes that they can be used in a similar manner to interposed vehicles, being to gain ongoing economic exposure to movements of particular assets, clause 101A(3) of Schedule 10 includes the notional cost of obtaining this exposure as indirect costs. These amounts are sometimes called implied or implicit OTC derivative costs. Trustees should include both explicit and implicit OTC derivative costs as an investment fee or in the indirect cost ratio. SEE ASIC QUESTIONS AND ANSWERS 19 TO 21 FEES AND COSTS DISCLOSURE 10.2 Updating PDSs A PDS must be up- to- date at all times (section 1012J of the Corporations Act). Further, penalties can be imposed if a PDS is materially misleading or deceptive. If a PDS becomes out of date, the Corporations Act generally requires the document to be rolled over or, where relevant, a Supplementary PDS issued. However, where certain conditions are satisfied, ASIC Corporations (Updated PDSs) Instrument 2016/1055 effectively permits a trustee to update the PDS using its website. 38

47 One of the conditions for using the website is that the updated information includes no materially adverse information. Materially adverse information means information of a kind the inclusion of which in, or the omission of which from, a PDS would render the document defective within the meaning of section 1021B of the Corporations Act. The definition of defective essentially involves a statement that is or would be materially adverse from the point of view of a reasonable person considering whether to proceed to acquire the superannuation product or managed fund. As a result, a materiality threshold applies when determining whether a website can be used to update a PDS. The importance of the website update mechanism increases under the fees and costs disclosure regime when costs information can become out of date quickly, particularly when some amounts are reasonable estimates. Annual reviews after the end of each financial year During a financial year Trustees have an obligation to monitor changes to fees and costs during the financial year. Further, they must provide fees and costs information for the relevant reporting period where a member exits. This does not mean that trustees need to obtain full fees and cost information more than once a year. However, those who collect information only once a year will need to determine a means by which they can be reasonably satisfies that there has been no changes during the year which would result in a material increase in the amounts disclosed in a PDS and that the information collected for the previous financial year provides a Changes in performance- related fees 10.3 Significant event notices Trustees will need to consider their obligations to provide SENs to members about the fees and costs disclosure regime. Trustees 18 should consider their SEN obligations both at the time of complying with the fees and costs disclosure regime for the first time and on an ongoing basis. Is a SEN required? Section 1017B of the Corporations Act requires a trustee to notify members of any material change to a matter, or significant event that affects a matter, SEE ASIC QUESTIONS AND ANSWERS 2 FEES AND COSTS DISCLOSURE 39

48 being a matter that would have been required to be specified in a PDS prepared on the day before the change or event occurs. If the only change to fees and costs disclosure as a result of compliance with the new fees and costs rules is a reclassification of amounts, then a SEN may not need to be provided. However, a SEN may be required if the changes involve an increase in the amounts disclosed. Example 1: The fees and costs disclosure regime does not result in an increase in total amount of fees and costs disclosed The fees and costs table for the pre- Class Order PDS discloses: Type of fee Amount How and when paid Investment fee 0.40% pa Indirect cost ratio Nil The fees and costs table for the post- Class Order version of the PDS discloses: Type of fee Amount How and when paid Investment fee 0.35% pa Indirect cost ratio 0.05% pa In this situation, a SEN is not required as there has been no material change to the PDS. The total amount of costs disclosed to members has not changed. Example 2: The fees and costs disclosure regime does result in an increase in the total amount of fees and costs The fees and costs table for the pre- Class Order PDS discloses: Type of fee Amount How and when paid Investment fee 0.40% pa Indirect cost ratio Nil The fees and costs table for the post- Class Order version of the PDS discloses: Type of fee Amount How and when paid Investment fee 0.55% pa Indirect cost ratio 0.05% pa In this situation, a SEN is required as there has been a material change to the Produce Disclosure Statement. The total costs disclosed to members has increased by a material amount. On an ongoing basis, trustees will also need to provide a significant event notice to update for material changes to the fees and costs information disclosed in the PDS. To ensure all existing members have access to the same information which is provided to new members, it is recommended that a significant event notice for changes to fees and cost amounts should be provided at the same time as the PDS is updated. 40

49 When must a SEN be given? A change that is an increase in fees or charges (other than an increase in a fee that results from an increase in costs) must be notified at least 30 days before the change (section 1017B(5), as amended). Other changes, including increases in fees due to an increase in costs, can generally be notified afterwards (and up to 12 months afterwards if the trustee reasonably believes that the change is not adverse to the member s interests and accordingly the member would not be expected to be concerned about the delay in receiving the information). Accordingly, even where fee and cost amounts increase due to compliance with the new fees and costs regime, prior notice is not required. Whether a trustee will have 3 months or 12 months after the compliance date will involve a level of judgment. It is recommended that members be notified as soon as practicable after rolling over a PDS for compliance with the fees and costs disclosure regime and by no later than when they provide annual statements in On an ongoing basis, it is recommended that trustees notify members of material increases to fees and costs within 3 months of rolling over the PDS or issuing a Supplementary PDS for the increase. Accordingly, trustees should consider timeframes for giving SENs with fees and costs information when rolling over their PDSs. It is recommended that trustees provide members with a SEN as soon as practicable after rolling over the PDS and by no later than when they provide the next annual statement. What must be in a SEN? A SEN must give the member the information that is reasonably necessary for the member to understand the nature and effect of the change. Accordingly, a SEN for fees and costs changes should contain full details of the new fees and costs information for each investment option in the superannuation product or managed fund. How can a SEN be provided or made available? AIST strongly encourages trustees to develop electronic means of providing SENs for changes to fees and costs information, such as through utilising the publish and notify mechanism in ASIC Instrument 2015/647 and providing updated information on its public website. 41

50 Appendix A Schedule 10 (as amended) (To be included) 42

51 Appendix B Explanatory Statements (to be included) 43

52 Appendix C Global perspective and references We recognise and will examine ways to support the work being undertaken internationally, which generally focuses on investment managers developing guidance, including: OICU- IOSCO Good Practice for Fees and Expenses of Collective Investment Schemes August 2016 The Financial Conduct Authority in the UK Note: October 2016 discussion paper issued regarding transaction cost disclosure: releases/fca- publishes- proposals- transactions- cost- disclosure Note: November 2016 Asset Management Market Study Interim Report: studies/ms interim- report.pdf Global Investment Performance Standards The Transparency Taskforce the- transparency- task- force/ Transparency International Federation of the Dutch Pension Funds _no2_english.pdf LCP investment manager fee survey investment- management- fees- survey pdf 44

53 About AIST The Australian Institute of Superannuation Trustees is a national not- for- profit organisation whose membership consists of the trustee directors and staff of industry, corporate and public- sector funds. As the principal advocate and peak representative body for the $700 billion not- for- profit superannuation sector, AIST plays a key role in policy development and is a leading provider of research. AIST provides professional training and support for trustees and fund staff to help them meet the challenges of managing superannuation funds and advancing the interests of their fund members. Each year, AIST hosts the Conference of Major Superannuation Funds (CMSF), in addition to numerous other industry conferences and events. *** 45