ASIC has issued an interim stop order on a registered managed fund promoted by K2 Asset Management due to deficiencies in the target market determination (TMD).
It considered the target market in the TMD of Storehouse Residential Trust, which held $22.5 million in assets under management as of 30 June 2022, was defined too broadly, did not properly consider the risks and features of the fund, and information within the TMD was inconsistent.
The interim order stops K2 from issuing interests in, giving a product disclosure statement for, or providing financial product advice to retail clients recommending an investment in the fund.
The Storehouse Residential Trust provides investors with access to a diversified residential property-based investment portfolio, focused on assets located in Australia’s major cities. It is available for both retail and wholesale investors.
Under DDO, financial product issuers must define target markets for each of their products appropriately, with sufficient granularity, having close regard to the risks and features of the relevant product. Issuers also need to consider how their product will be distributed and have appropriate conditions in place to ensure the product is directed to the target market.
ASIC’s concerns regarding Storehouse Residential Trust include:
- A mismatch between the investment risk profiles of the fund (very high risk) and risk profiles identified for investors within, or potentially within, the target markets (high and medium).
- The target market includes investors who intend to hold the funds as a core component (25–75 per cent) and the fund has a very low portfolio diversification and is very high risk.
- Consumers with an investment objective of capital preservation or income generation are potentially in the target market, where capital loss is a material risk and income distributions may not occur regularly.
- Consumers with an investment time frame of less than two years are potentially in the target market, where the suggested investment time frame of the fund is at least five years.
- The target market includes investors with a need to withdraw money annually when there are restrictions on withdrawals as the fund is illiquid and underlying assets are aligned with periods of three to five years. There is no commitment to provide redemptions and withdrawals depending on the liquidity of the fund.
The regulator also considered that the distribution conditions in the TMD are not appropriate to ensure that the fund would likely be distributed to investors in the target market.
The TMD contained one distribution condition which stated the product is only suitable for distribution to consumers who have received general financial product advice. ASIC considered the TMD fails to set out distribution conditions for direct-to-consumer distribution or distribution via financial product advice where such distribution appears likely to occur.
A final order may be issued if the concerns are not addressed in a timely manner.
K2 will have an opportunity to make submissions before a decision is made about any final stop orders.
