Following media coverage and industry commentary on these guidelines, ASX and some of the issuers of warrants have consulted further with APRA and the ATO on the use of instalment warrants by super funds. In the interests of facilitating better understanding and compliance with the guidelines, additional information in relation to certain aspects of their guidance document is provided below.
Scope of APRA and ATO Guidelines
ASX notes that the guidelines have been issued by APRA in its capacity as regulator of large super funds, and by the ATO in its capacity as regulator of small super funds (self managed super funds). As such, the guidelines deal only with superannuation regulation and do not relate to tax issues.
Appropriate Investment Strategy
An important message in the instalment warrant guidelines was a general reminder that super fund trustees must always ensure that: they have considered the appropriateness of investments in the context of the fund's whole investment strategy if necessary with external professional advice; they are familiar with the risks involved in the use of various investments prior to making an investment; they have in place adequate and effective risk management procedures to manage risks associated with investments prior to making an investment; and they have disclosed to members the details of the investment strategy.
In this respect instalment warrants are no different to other products available to super fund trustees. In support of these objectives ASX offers a range of educational courses aimed at ensuring investors and advisors understand the risks and benefits associated with a variety of exchange-traded investments (including instalment warrants). Participation in these courses would be useful in demonstrating to the regulators that the trustees have a comprehensive understanding of the risks and that the related controls are in place.
Superannuation Industry Supervision (SIS) Act Compliance
The guidelines, as issued, are not intended to operate as a blanket prohibition against investing in instalment warrants nor do they sanction such investments as being appropriate in any given fund. The instalment warrant guidelines only prohibit fund trustees from using shareholder applications (a process whereby existing shares are converted to instalments) to purchase instalment warrants. APRA and the ATO have determined that such an application process creates a charge over an asset of the fund. The option of purchasing instalment warrants through either an on-market purchase or cash application is available to fund trustees.
Generally, the purchase of instalment warrants through rollover applications (a process whereby expiring instalment warrants are converted to new instalment warrants) does not breach section 67 of the SIS Act provided that the applicant did not purchase their existing instalment warrant holding via a shareholder application. The trustees would be expected to have in place a clearly demonstrable process of reviewing the suitability or otherwise of rolling over at the prescribed roll over dates.
While APRA and the ATO have reiterated their position that instalment warrants in general may not breach the section 67 prohibition on super funds against borrowing, trustees should consider each warrant in the light of the facts of the case.
Following the discussions with APRA and the ATO, ASX's Head of Quoted Products, Richard Murphy said: "Instalments are a uniquely Australian product whose genesis was the Commonwealth Government's innovative sale of the Commonwealth Bank and Telstra via instalment receipts.
Instalments represent the cutting-edge of exchange-traded leveraged investments, not just here in Australia but in a global sense. The Australian instalment market has grown exponentially over the past five years - a testament to the enterprising, inventive spirit of the Australian securities industry.
ASX is proud of its contribution towards building this market together with the investment banks from just a handful of instalments in the late 1990s to nearly 900 today. As part of this contribution ASX has established a stringent regulatory environment ensuring that brokers are appropriately qualified to give advice on these financial products. In addition ASX offers a thorough range of educational services both for advisors and for investors."
