Superannuation Reform Series Part III: Portfolio Holdings Disclosure

Long-awaited changes in relation to portfolio holdings disclosure have been proposed under the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, which was introduced in the Senate on 14 September 2017. These changes under the Bill will refine existing obligations under the Corporations Act 2001 (Cth) that require registrable superannuation entity (RSE) licensees to make publically available their portfolio holdings.

Rationale

According to the Explanatory Memorandum to the Bill (EM), the purpose of the proposed amendments is ‘to ensure that superannuation fund members, and others including financial analysts, have access to publicly available information about the portfolio holdings of superannuation funds, while minimising the compliance burden on RSE licensees’.

Momentum for the proposed amendments has been generated by concerns expressed by industry stakeholders. The EM notes that consultation on the existing regime indicated that ‘there were significant compliance costs in collecting and collating data for all assets held indirectly (held by third parties)’. Further, concerns have been raised by some superannuation funds about the requirement to disclose data relating to private equity investments, unlisted assets and other commercial-in-confidence arrangements.

Key provisions

Under the current law, RSE licensees must publish their superannuation fund’s portfolio holdings on the fund’s website twice a year. Under the Bill, RSE licensees will continue to be subject to this obligation. However, four important changes have been proposed:

• only information relating to investments in the first non-associated entity will need to be disclosed. Importantly, information held through non-associated entities will no longer be required to be disclosed. This circumscription of the regime reflects the reach of APRA’s ‘look through’ powers under the Financial Sector (Collection of Data) Act 2001 (Cth) to the first level of investment outside of a group structure;
• RSE licensees will need to disclose the value and weighting or exposure of each investment item that must be disclosed, as well as the total value and weighting. However, regulations may prescribe that for a particular kind of investment item, only the name of that kind of item needs to be disclosed, as well as the total value and weighting or exposure of all investment items of that kind;
• as it is assumed that RSE licensees will be able to obtain sufficient information from associated entities in order to comply with their obligations, the reporting obligations on parties to contracts and arrangements that acquire a financial product using the assets, or assets derived from assets, of a RSE licensee will be removed; and
• additional exemptions to the regime will be introduced, namely:
  •  trustees of pooled superannuation trusts, single member funds, and small APRA funds; and
  • investments of an investment option:
    • if the investment option has been closed to new members for at least five years (ie there has been a ‘soft’ or ‘hard’ close for at least five years);
    • that are ‘not material’ (which will be determined under regulations);
    • that solely support defined benefits;
    • that are a risk life policy, an investment account contract or a life policy where the contributions and accumulated earnings cannot be reduced by negative investment returns or a reduction in the value of the assets; and
    • that the trustee chooses, provided that the value of those assets does not exceed 5% of the assets (excluding derivatives) of the investment option, they are commercially sensitive, and disclosure would be detrimental to the interests of the members (eg private equity or venture capital investments).

Observations

The proposed amendments are, in general, to be welcomed. However, in respect of the amendments regarding ‘look throughs’ to first non-associated entities, which are intended to be achieved through a requirement to identify each investment item that is:

• held by the RSE licensee or an associated entity; and
• ‘is not an investment in an associated entity of the [RSE licensee]’,

it is unclear what the second requirement is intended to cover. For example, if a RSE licensee invested in a wholly-owned subsidiary that in turn invested in other assets, this requirement appears to exclude the shares in the associated entity of the RSE licensee.

If the Bill is enacted, the portfolio holdings disclosure requirements will commence on 31 December 2018 and, therefore, will require disclosure within 90 days of that date. At present, the Bill is before the Senate Economics Legislation Committee for reporting by 23 October 2017.