Funds Update – 15 March 2024

In this Funds Update for 15 March 2024:

1. Court decision on reasonable steps re conflicted remuneration
2. Crypto-asset found to not be a financial product
3. ASIC publishes enforcement and regulatory update for October to December 2023

Court decision on reasonable steps re conflicted remuneration

On 29 February 2024, the Federal Court handed down its decision on a case involving reasonable steps in relation to the prohibition on conflicted remuneration. This was the first time a court has considered the construction of section 963F of the Corporations Act 2001 (Cth) (Act), which requires Australian financial services licence (AFSL) holders to take reasonable steps to ensure that their representatives do not accept conflicted remuneration.

Jackson J made a number of statements of principle that are relevant to what an obligation to take ‘reasonable steps to ensure…’ requires, including:

• If steps are to be taken to ensure that something is not done, it seems that an organisation with that role must at least:
  • state clearly its position on the matter;
  • communicate that position to new recruits;
  • not give its authorisation to the promotion of or advice in relation to a product without checking that the product does not involve conflicted remuneration;
  • follow through if the check gives cause for concern;
  • periodically remind representatives about the existence and content of the prohibition; and
  • check to see whether it is being breached.
• The requirement to ‘take reasonable steps’ does not require the AFSL holder to take every reasonable step that could be taken; rather the section leaves the question of precisely what to do, provided that what is done is objectively reasonable.
• The degree of difficulty and practicability of any given steps, as well as the costs associated with them, are relevant considerations. However, the seriousness of the obligation and use of ‘ensure’ means that steps that result in significant cost, inconvenience or difficulty to a licensee may still be reasonable ones.
• The relevant circumstances may also include characteristics of the representative: an experienced representative with a good track record of compliance might require less intensive supervision than an inexperienced one, or one who has previously demonstrated ignorance or disregard of the requirements of Chapter 7 of the Act.

We consider that these principles have the potential to assist in interpreting the DDO reasonable steps obligation in section 994E of the Act and supports issuers and distributors having a documented policy in relation to compliance with the relevant laws, as well as training and monitoring/audit systems.

For more detail on this case, please read the HSF article published here.

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Crypto-asset found to not be a financial product

On 14 March 2024, the Federal Court handed down its decision on a case involving whether a crypto-asset related investment was a financial product (a debenture).

The decision is one of a number of recent enforcement actions brought by ASIC against entities offering crypto-related investments without an AFSL.

In this case, ASIC alleged that the crypto-asset related investment was a debenture because customers deposited money and would be repaid their investment amount in the future, with a level of return.  The court found that the crypto-asset related investment did not satisfy the definition of a debenture under section 9 of the Act.

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ASIC publishes enforcement and regulatory update for October to December 2023

On 9 March 2024, ASIC published its enforcement update for October to December 2023.

In this update, ASIC emphasised its continued enforcement focus on greenwashing by funds and referred to two infringement notices issued in late 2023 in relation to:

• a fund’s exposure to controversial weapons investments despite its ESG policy stating such investments would be excluded; and
• alleged misleading statements about the application of a carbon emissions exclusion screen.

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