If a restricted scheme XYZ invests in another registered scheme ABC (such as a master trust), does scheme XYZ need to monitor investments made by ABC to ensure there has been no breach of scheme XYZ’s in-house asset rule (as set out in section 176 of the FMC Act)?
No, investments made by registered scheme ABC will not count towards restricted scheme XYZ’s in-house asset rule. This is because the definition of ‘in-house asset’ in section 176(3) specifically excludes investments made into another registered scheme.
Our view is since the initial investment in registered scheme ABC is not considered to be an in-house asset, any investments made by the registered scheme should also not be considered an in-house asset.
What is a manager’s basic fee?
The manager’s basic fee is a subset of a fund’s overall management and administrative charges. It refers to the fees charged by the manager for their services.
In this respect, it distinguishes the management and administrative charges which originate from the manager from those which have been passed onto investors for services provided by other parties (underlying funds, auditors, supervisors etc).
We note that in some instances, third parties services are charged to the manager. The manager then charges these fees to the fund. These third-party service charges should not be classified as the manager’s basic fee.
Under Clause 78(2) of Schedule 4 of the FMC Regulations, annual reports for schemes that are not KiwiSaver, superannuation or workplace savings schemes must disclose the number of managed investment products (MIPs) on issue at the start and at the end of the accounting period. How can I comply with this where my scheme is non-unitised and therefore the number of MIPs on issue cannot be easily quantified?
You may include additional detail in the annual report, to make the information meaningful for scheme participants. For example, where a scheme is non-unitised, it would be appropriate to also disclose:
the total number of scheme participants at the start and at the end of the period; and
the total value of scheme participants’ accumulations, and the number of scheme participants that relates to, at the start and at the end of the period.
Similarly, where a scheme is unitised, disclosing in the annual report the number of MIPs (as required by Clause 78(2)) without also disclosing their value is unlikely to provide meaningful information for investors. Therefore, it would be appropriate to also disclose the value of those MIPs.
Statement of Investment Policy and Objectives (SIPO) limit break reporting
Is there a difference between the reporting requirements for an active limit break (i.e. caused by investment decisions, whether intentionally or unintentionally) and a passive limit break (i.e. caused by market movements)?
A material limit break must be reported regardless of its cause, whether it is passive or active, or whether it occurs in normal or stressed markets. We consider that existing guidance on SIPO limits to remain fully operative under recent and prevailing COVID-19 market conditions.
Where there has been a material limit break, the manager must report (whether immediately or on a quarterly basis as the case may be) to the supervisor (or the FMA if there is no supervisor) details of the limit break in accordance with regulation 96 of the FMC Regulations. Through this report, the manager, among other things, explains the cause of the material limit break and what the manager will do to prevent or minimise the risk of that type of limit break occurring again.
We also expect managers to work together with supervisors to have a common understanding of the manager’s systems, processes, and controls to detect, report, and correct limit breaks.
Should MIS Managers hasten to take corrective action to get back within SIPO limits to avoid immediate limit break reporting?
The FMA expects MIS managers to promptly make an active decision about how to remedy any limit break. We do not consider that a material limit break should be corrected within the 5 working day period for the primary purpose of avoiding immediate reporting of a material limit break.
The manager must consider the following duties and obligations when making a decision about what corrective action to take to rectify a limit break:
The SIPO’s investment policies and how the manager has disclosed to investors how it makes investment decisions, which should include how it will make rebalancing decisions. Refer to our SIPO guidance note on FMA’s expectations on investment policies; and
The manager’s overarching duties to act in the best interests of scheme participants, treat all scheme participants equitably, and exercise care, diligence and skill.
A MIS manager must within 5 working days, after becoming aware of a material limit break that remains unremedied at the end of the 5 working day period, report this as an immediate material limit break in accordance with regulation 94 of the FMC Regulations (immediate report) - see regulation 94 of the FMA Regulations of the FMC Regulations. A manager may have valid reasons for not having remedied a material limit break within that period, but after 5 working days the supervisor must be engaged by making the immediate report.
This does not imply that a material limit break must always be remedied within 5 working days. Ordinarily, we would expect a material limit break to be remedied within that period, but in times of market turbulence a manager may consider there are good reasons to take longer to fully remedy a material limit break. We expect a manager to have made an active decision, within 5 working days, about how to remedy a material limit break. If it is not remedied within that period, we expect the manager to have reasons for doing so and a plan to remedy it (and, as such, be able to explain it to its supervisor).
If the limit break remedy is expected to take longer than 5 working days, the manager should have early engagement with the supervisor.
We note that if a material limit break is not reported in an immediate report, it must still be reported to the supervisor (or the FMA is there is no supervisor) on a quarterly basis in accordance with regulation 95 of the FMC Regulations (quarterly report) - see regulation 95 of the FMC Regulations.
For managers exposed to other funds indirectly, in a situation where there is a limit break in an underlying fund, managers should seek appropriate information to make an informed assessment of the situation.
We expect supervisors to be satisfied that all limit breaks are managed appropriately, regardless of whether they are reported in an immediate report or a quarterly report.
Is it appropriate to change SIPO limits to avoid limit break reporting caused by recent market volatility?
SIPO limits should not be changed for the primary purposes of avoiding limit break reporting, but there may be appropriate reasons to consider SIPO limit changes. The guiding principle is that SIPO limits should be appropriate and aligned with the manager’s investment strategy. Managers are required to adhere to the investment strategy and to act in the best interests of scheme participants.
Recent market volatility may have revealed some disconnects between the SIPO limits and the fund’s investment strategy. In that case, it may be appropriate to make changes to SIPO limits to ensure the manager has sufficient flexibility to manage the fund according to the investment strategy in the SIPO. But it is generally not appropriate to change SIPO limits solely to reduce the likelihood of limit breaks occurring under volatile market conditions.
If a SIPO changes materially, the manager should provide sufficient notice to current investors to allow them to make an informed decision as to whether the scheme or a fund is still suitable for them. The manager should also review any investor disclosure including their Product Disclosure Statement (PDS) to ensure that an investor is provided with clear, concise, and effective information regarding the fund/scheme, and that information is consistent across the SIPO, PDS and other disclosure.
Sending information electronically
Can I send an electronic copy of the annual report to investors?
You can, as long as you obtain the investor's consent first. Once you have their consent you can email the annual report to them either as an attachment or as a website link or you can provide them access to a secure online platform where they can log into their account to read it.
Can I provide an electronic copy of the confirmation information to product holders?
Yes. Provided you have the product holder’s consent first, you can make it available through a secure electronic facility or, if the products were issued under a continuous issue PDS, you can email them the confirmation information within 10 working days after the last day of each reporting period. Alternatively, you can email it to them within 5 working days after the product was issued.
How soon should I correct a mistake in a fund update that has already been uploaded to the Disclose register?
Only re-submit the fund update as soon as practicable if the mistake is materially adverse from the point of view of the investor - see regulation 61 of the FMC Regulations. If the mistake is non-material, eg, it is missing the total percentage of portfolio weighting on the top 10 investments, the changes can be corrected in the next fund update. back to the Fund updates FAQ list>>
Annual return graph
Should the annual return graph show the disclosure years in ascending or descending order?
We prefer the graph to show years in ascending order e.g, 2012, 2013, 2014, 2015, 2016.
What axis label should be used for the last bar that shows average annual return?
Which value from the fund performance table should be used at the end of the second sentence of the statement, ‘At the end of the year, [name] received a return/incurred a loss after fund charges were deducted of $[specify]’ Should it be:
(a) Annual return after deductions for charges and tax; or
(b) Annual return after deductions for charges but before tax; or
(c) Fund charges?
The use of either (a), (b) or (c) above is acceptable. However, we prefer option (b) ie, annual returns after deductions for charges but before tax) because this reflects the effect of the fund charges only. Consider using footnotes to help clarify your example.
My fund provides a number of fee rebates to investors. Can these be included as part of the worked example of the return for a hypothetical investor in the fund update?
The worked example in the fund update is intended to provide information at a general level only. It must be calculated based on the fund’s actual total fund charges. The example cannot be modified to take into account rebates which are only available to some investors.
However, the fund update may include additional information about the effect individual discounts or rebates may have, when the manager genuinely believes such information is necessary to clarify the worked example. In deciding whether further information is required, the manager should consider whether the rebates are available to all investors, if so, the extent it will affect the worked example.
If our business does not hedge currency, do we need to include a statement about this?
You are required to include a statement about the extent of currency hedging for the specified fund if that information is material - see subclause 71(3) of Schedule 4 to the FMC Regulations. Therefore, you will need to consider each fund’s particular characteristics and determine whether currency hedging information is material and if a statement is required. As an example, it may be material to state that the fund does not hedge currency if it invests into international equities.
Where in the fund update should any statement of the extent of currency hedging be placed?
This should come after the ‘Top 10 investments’ subheading. However, you can place this statement under the target investment mix if you think it’s more appropriate. back to the Fund updates FAQ list>>
Top 10 investments
Can the total value of the 10 highest-value individual assets, as a percentage of the net asset value of the fund, exceed 100%?
Yes. The net asset value of the fund is the value of the fund’s assets less liabilities. The 10 highest-value individual assets as a percentage of net asset value may exceed 100% where, for example:
a fund has less than 10 assets (ie all its assets are in the top 10 investments list) and some liabilities, or
a fund has significant liabilities (eg, as a result of foreign exchange hedging).
Should the list of top 10 investments include assets that a fund has taken a short position on?
MIS managers must make a fund update publicly available within 20 working days after the last day of each quarter of each disclosure year.
If the managed fund is a restricted scheme or closed scheme, or the managed fund has a closed section, fund updates must be publicly available within 3 months after the last day of each disclosure year, or the balance date of the scheme in each year.
Details can be found in the FMC Regulations as follows:
2. You must include the following additional statement when a fund has performance fees: “See the product disclosure statement for more information about the basis on which performance fees are charged.”
3. Where an individual asset is an interest in a fund that is not a related underlying fund, and there is no one asset type that’s appropriate, it must be classified as an interest in a diversified fund. (Ref: clause 41(32) of the FMC Amendment Regulations 2015 which applies to Schedule 4, clause 70(5) of the FMC Regulations 2014)
4. If currency hedging is material to the specified fund, you must include a statement of the extent of currency hedging in your fund update. (Ref: clause 41(33) of the FMC Amendment Regulations 2015 which applies to Schedule 4, clause 71(3) of the FMC Regulations 2014)
If I am a restricted scheme, when does my obligation to provide a fund update commence?
A restricted scheme must produce a fund update within three months of the balance date for the scheme, or the last day of the scheme’s disclosure year. The obligation to provide a fund update only applies to schemes after their effective date of transition. This means that if the scheme’s balance date occurs prior to their effective date, the scheme will not be obliged to provide a fund update until the following balance date.
For example, a restricted scheme has a balance date of 31 March. It transitions to the FMC Act on 31 May 2016. The scheme will not be required to provide a fund update until 30 June 2017.
I am a licensed MIS manager producing my first fund update. Part of my fund is invested in New Zealand dollar-denominated bonds issued by foreign issuers (Kauri bonds). These bonds are registered, but not listed, in New Zealand. For the purposes of the asset categories specified in clause 1(4)of schedule 4 of the FMC Regulations should these bonds be categorised as ‘New Zealand fixed interest’ or ‘international fixed interest’?
We recognise the asset categories specified in clause 1(4) of schedule 4 could lead to some uncertainty in relation to certain fixed interest investments such as Kauri bonds. The FMA and the Ministry of Business, Innovation and Employment are currently working to clarify this issue. In the meantime, you could either categorise these bonds as ‘New Zealand fixed interest’ or ‘international fixed interest’ depending upon your assessment of the characteristics of the bonds.
Your PDS and SIPO should provide clarity around the types of assets the fund invests in. We will provide further guidance to assist MIS managers to take a more standardised approach to categorise fixed-income assets in the near future. back to the Fund updates FAQ list>>
The use and disclosure of buy/sell spreads
Does the FMA support the use of buy/sell spreads for MIS?
It is appropriate for trading expenses incurred when implementing the investment strategy of a fund to be borne by all fund investors. However, material costs driven by investors transacting in fund units should generally be borne by those transacting investors as a group over a particular period. Buy/sell spreads on entry and exit to the fund can be an appropriate tool to help to achieve this. The fundamental principle in considering the use of buy/sell spreads or any similar tool is fair treatment of investors.
Other tools that can properly allocate those costs include swing pricing and anti-dilution levies.
When necessary, MIS managers should work with their Supervisor to determine the tool most likely to ensure fair treatment of investors.
Does the FMA support the use of buy/sell spreads for KiwiSaver schemes?
Buy/sell spreads can be an appropriate tool for use in many MIS, including some KiwiSaver schemes. When considering if and when buy/sell spreads are suitable for their funds, KiwiSaver scheme managers should take into account likely fund inflows and outflows under different scenarios. KiwiSaver scheme managers should also be particularly diligent in avoiding making the scheme unnecessarily complex.
When would the use of buy/sell spreads be appropriate?
If buy/sell spreads are implemented, they could be a permanent feature of the fund, or they could be limited to times when the impact of trading expenses incurred due to investor transactions is material to fund returns. Regardless of the approach, as noted below they must be actively managed to ensure they result in the fair treatment of investors.If buy/sell spreads are implemented, they could be a permanent feature of the fund, or they could be limited to times when the impact of trading expenses, incurred due to investor transactions, is material to fund returns. Regardless of the approach, as noted below the spreads must be actively managed to ensure they result in the fair treatment of investors.
Managers will need to weigh the benefit of implementing buy/sell spreads against other factors, including any additional complexity both operationally and in regard to investor understanding. Similarly, MIS managers not using buy/sell spreads or a similar tool should consider if their use would promote fair treatment of investors. Currently, not all governing documents provide for the use of buy/sell spreads or other tools such as swing pricing or anti-dilution levies. MIS managers should consider if those governing documents should be amended to allow for their use if needed.
Depending on market conditions, costs may be skewed towards buying assets or towards selling assets. In such scenarios buy spreads and sell spreads should be separately determined to ensure they reflect trading costs incurred due to the relevant investor action (buy or sell).
Since the spread is meant to allocate trading costs to the appropriate investor, and to prevent ongoing investors from subsidising transacting investors (or vice versa), the spread should always be applied to the benefit of the fund and never to the benefit of the MIS manager.
The FMA will monitor the implementation and level of buy/sell spreads in conjunction with MIS Supervisors.
How should the use of buy/sell spreads be managed?
A liquidity management tool can only be used if allowed in, and in the manner allowed by, the scheme’s governing document. It should also be consistent with the PDS, SIPO, and any other offer documents. Supervisor approval may be required. Where Supervisor approval is not required, we recommend the Supervisor is consulted.
Fair treatment of all investors requires that any buy/sell spread should be maintained at an appropriate level. This implies that the MIS manager must monitor the underlying asset spreads, and the costs of fund transactions, and must adjust the spread so that it is neither too high nor too low. If it is too low, then ongoing investors are subsidising transacting investors. If it is too high, then transacting investors are subsidising ongoing investors.
Maintaining an appropriate spread would require that the MIS manager:
Set a threshold that would trigger a review of the level of the spread to determine if it is aligned with underlying costs.
Review the level of the spread on a periodic basis to ensure the level remains appropriate in the overall context of the market.
Should buy/sell spreads be disclosed in Product Disclosure Statements or fund updates?
If buy/sell spreads for issue or redemption of units or interests in a fund are charged to investors, then this information should be disclosed to investors, including in the PDS and fund updates.
However, there is no requirement to disclose trading expenses (see cl.2(1) of schedule 4 of the FMC Regulations for the definition of trading expense) such as buy/sell spreads or brokerage fees relating to underlying fund assets as part of fund charges where they are incurred by the fund (provided they reflect only the actual cost of buying and selling investments such as brokerage fees and spreads), though they will reduce reported returns. Because of this, and the fact that spreads go to the fund rather than to the manager, our view is that describing buy/sell spreads as ‘fees’ is not necessary.
How should buy/sell spreads be disclosed in Product Disclosure Statements or fund updates?
While noting the ‘fees’ comment in the paragraph immediately above, we consider that it is appropriate to treat buy/sell spreads in a similar way to individual action fees for PDS and fund update disclosure purposes. In the PDS this would include disclosure in the Key Information Summary and the section titled ‘What are the fees?
Clause 37 of schedule 4 of the FMC Regulations details how individual action fees must be disclosed. As buy/sell spreads may rapidly change in stressed market conditions, our view is that the information that 37(2) would require can be fulfilled by:
Disclosing indicative spreads under usual conditions, noting for example that in stressed market conditions they may materially increase (consider giving an example of what they may increase to); and
Noting how the actual spread will be set (e.g. it will reflect the estimated trading expenses incurred by the fund in carrying out the buy/sell request); and
Including a link to a publicly available document with further information such as current buy/sell spreads.
Issuers should take care to ensure that technical wording is minimised and disclosure is clear, concise and effective. In our view, even the wording ‘buy spread’ or ‘sell spread’ is quite technical and wording that describes the application and effect of the spread is more likely to be effective.
“[Name] invests $10,000 in the [specify fund name]. A [contribution cost] of [x] is [charged/incorporated in the price that he/she pays for her investment]. This brings the starting value of his/her investment to …”.
Any issuer webpage or other publicly available document linked to or referenced in the PDS that contains further information on buy/sell spreads should include the current buy and sell spreads, ideally in a table with the different buy and sell prices. This information should be disclosed in a clear, concise and effective manner.
However, if buy/sell spreads are not limited to estimated trading expenses incurred by the fund because of the buy/sell decision by an investor – i.e. they may go beyond this – then our view is that they should instead be described as a fee and the disclosure of the amount included in the PDS.
If buy/sell spreads are introduced to an existing fund, issuers should not only update their PDS and other disclosure, but should also consider how they will inform existing investors.
When is a buy/sell spread limited to trading expenses incurred because of the buy/sell decision of an investor?
In our view a buy/sell spread could reflect the immediate trading expenses incurred by the fund, or alternatively the average trading expenses incurred by the fund over the short to medium term (if over that term underlying average trading expenses are relatively consistent), due to such transactions.
It is important to note that funds incur trading expenses for reasons outside of investors buying or selling units – for example to rebalance or actively manage the portfolio. Such trading expenses are not relevant to investor buy/sell decisions and should not be included in buy/sell spreads.