General
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.
References: Schedule 4, clause 1 and 63 of the FMC Regulations.
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.
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.
Fund updates
Correcting previous fund updates
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.
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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?
As this is not prescribed, it’s important it is clear for investors so they can understand the values in the graph. You can label it ‘Average annual return’ as this is commonly used and is consistent with the statement that must be included below the bar graph - see subclause 62(4) of Schedule 4 to the FMC Regulations.
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Fees Table – individual action fees
If individual action fees are not charged by the fund, does the fund update have to include the statement required by subclause 65(2) of Schedule 4 to the FMC Regulations?
We prefer the statement to be modified so it clearly states investors are not charged individual action fees for specific actions or decisions - see regulation 59 of the FMC Regulations.
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Example of how this applies to an investor
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.
References: Schedule 4, clause 66 and regulation 59 of the FMC Regulations.
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Currency hedging
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.
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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?
No. Fund updates are required to list the 10 highest-value individual assets of the specified fund at the date of publishing. As individual assets must be directly held by the fund, taking a short position on an asset means the fund does not hold the asset, therefore do not include this in the list of top 10 investments.
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Changes to quarterly fund updates
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:
Amendments to fund update requirements
The Financial Markets Conduct Amendment Regulations 2015 (FMC Amendment Regulations 2015) introduced new requirements for Managed Investment Scheme quarterly fund updates. These requirements are found in clauses 41(19) – 41(33).
These amendments are in effect and need to be factored into your quarterly fund updates.
We’ve provided a list of the key amendments below, but as this is not a comprehensive list we recommend you also get a full legal review of your next fund update.
The key amendments to note are:
1. You may add a section headed ‘market update’ and provide a brief comment on the market conditions relevant to the fund.
(Ref: clause 41(21) of the FMC Amendment Regulations 2015 which applies to Schedule 4, clause 55(3) of the FMC Regulations 2014)
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.”
or set out the information required by clause 33 of the FMC Regulations 2014 for the specified fund.
(Ref: clause 41(28) of the FMC Amendment Regulations 2015 which applies to Schedule 4, clause 63(7A) of the FMC Regulations 2014)
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.
References: Regulation 56(2) of the FMC Regulations.
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Categorising assets
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 currentlyworking 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.
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