An ASIC surveillance about personal investment switching by directors and senior executives of superannuation trustees has identified concerns with trustees’ management of conflicts of interest.
ASIC looked at a sample of 23 trustees (including trustees of industry and retail funds), and focused on conduct during the time of increased market volatility arising from the COVID-19 pandemic.
Directors and senior executives of superannuation funds are potentially privy to price-sensitive valuation information. ASIC undertook this surveillance to look into concerns about whether fund executives were using this information for personal gain by switching investment options based on their knowledge of the timing of the revaluation of unlisted assets.
The surveillance revealed conduct that fell below ASIC’s expectations.
ASIC Commissioner Danielle Press said, ‘We expected superannuation trustees to have robust conflict of interest policies that dealt adequately with investment switching, including by their directors and executives. What we found instead was often a clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter this risk.
‘This is very concerning given the level of sophistication and governance required of trustees when managing millions of dollars in assets on behalf of fund members,’ Ms Press said.
ASIC’s key concerns with trustees’ management of conflicts of interest include:
- Failure to identify investment switching as a risk: The majority of trustees either did not identify a director or an executive having an interest in the superannuation fund for which she or he works as a ‘relevant interest’ (for the purposes of their conflicts management policies) or identify investment switching as giving rise to a conflict of interest. This meant there was often a commensurate lack of controls or guidance for how any associated conflicts should be managed.
- Disparity in board-level engagement: There was significant disparity among trustees in the level of engagement by their boards on the issue of conflicted investment switching by directors and executives. This flowed into the prescriptiveness of relevant policies outlining restrictive measures to adequately deal with this issue. Some boards were proactively engaged, while others were not able to demonstrate that they had considered the issues at all.
- Lack of restrictive measures: Almost half of the trustees (10 of the 23) did not have preventative controls such as trade pre-approvals or switching blackout periods to limit executives’ ability to switch investment options. Even when trustees had restrictive measures in place that covered investment switching, directors and executives were sometimes given a blanket exclusion from the policies even though the policies applied to all other employees.
- Inadequate oversight of investment switching: Many trustees did not have mechanisms in place to regularly review switching activity by their directors and executives, including checks to ensure compliance with policies. Trustees were instead reliant on directors and executives self-reporting any breaches of the policies.
- Lack of oversight of related parties: A common issue was a failure by trustees to identify switching by related persons (such as a spouse) of directors and executives as giving rise to a perceived or potential conflict of interest. Even where the trustee’s policies might have extended to cover related persons, there was often no or very limited ability for the trustee to identify these individuals or monitor their trading activity.
However, some trustees that did not have oversight processes in place for investment switching by their directors and executives at the time of the surveillance have since indicated that they were looking to implement such processes moving forward.
Commissioner Press said, ‘Directors and executives of superannuation funds may have knowledge of their trustee’s decisions around valuations of unlisted assets or the authority to influence such decisions. Trustees must have effective conflicts management frameworks to prevent the misuse of such information.
‘Policies should cover the identification, control, management and regular monitoring of conflicts as well as the consequences for non-compliance. Such protections will help trustees manage the risk that their executives’ own interests or those of a related party results in loss of confidence in the fund or in detriment to members,’ she said.
ASIC will continue to follow up with trustees about areas for improvement in their conflict management frameworks.
ASIC is also continuing to gather additional information and consider next steps on some of the trading activity identified during the surveillance. ASIC will consider appropriate regulatory action where misconduct causing consumer harm is identified. This includes potential enforcement action against individuals for improper use of information.
Background
ASIC’s surveillance looked at superannuation trustees’ conflicts of interest policies and practices, information on investment switching by their directors and executives, the valuations of unlisted assets and compliance reviews. ASIC issued notices to superannuation trustees to collect this information covering the 2020 calendar year.
Although this switching activity does not generally involve the acquisition or disposal of a new financial product to which the ‘insider trading’ prohibition attaches, investment switching with the benefit of price-sensitive information that is not available generally is similar to insider trading and may contravene other provisions of the law.
Both ASIC and APRA have a regulatory role in relation to conflict obligations. ASIC administers the Corporations Act 2001, which provides that trustees must have in place arrangements for the management of conflicts of interests involved in providing a superannuation trustee service. RG 181 Licensing: Managing conflicts of interest outlines ASIC’s general approach to compliance with this statutory obligation and provides general guidance for Australian financial services licensees on controlling and avoiding conflicts of interest.
APRA administers conflict obligations that apply to superannuation trustees under the Superannuation Industry (Supervision) Act 1993 and APRA’s Prudential Standard SPS 521 Conflicts of Interest. APRA intends to use ASIC’s findings to assist with its entity-specific supervision and future reviews of the conflicts management prudential framework. ASIC’s findings will also help to inform APRA’s work on unlisted asset valuation practices.
