Compliance: Theory and Practice in the Financial Services Industry

8B. Marketing Financial Products

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Outline

   Overview of Marketing Regime
   Securities Disclosure Documents
   Product Disclosure Statements
   Confirmations
   Advertising Restrictions
   Hawking Financial Products
   Unsolicited Off-market Offers

 


Overview of Marketing Regime

•     Marketing of securities is governed by Chapter 6D.
•     Marketing of other financial products is governed by Part 7.9.
•     Warrants are treated as other financial products rather than securities for these purposes (see CR rr6D.5.01 and 7.9.07A).
•     Securities are marketed under a Disclosure Document (DD) – prospectus (long form or short form) or offer information statement.
•     Financial products are marketed under a Product Disclosure Statement (PDS).

This dichotomy is achieved, in part, by s1010A, which provides that apart from s1017F (confirmations), Div 5A (unsolicited offers to purchase financial products off‑market), Div 5B (disclosure of short sales covered by securities lending arrangements), Div 5C (disclosure of information about CGS depository interests), Div 6 (short selling) and those parts of Div 7 (enforcement) that apply in relation to s1017F and Divs 5A, 5B and 6, nothing in Part 7.9 applies in relation to "securities", as defined in s761A.

It is also achieved by s700(1), which provides that for the purposes of CA Chapter 6D, "security" has the same meaning as it has in Chapter 7, save that it does not include a security offered by way of a rights issues referred to in para (e) of the definition of "security" in s761A, a CGS depository interests referred to in para (f) of the definition of "security" in s761A), or a simple corporate bonds depository interest in simple corporate bonds, where the simple corporate bonds were issued under a 2‑part simple corporate bonds prospectus.

Return to Outline


Securities Disclosure Documents

When is a Securities DD Required?
•     An offer of securities for issue needs disclosure to investors unless ss708 or 708AA say otherwise (s706).
•     An offer of securities for sale needs disclosure to investors only if the sale:
  •     amounts to an indirect issue of securities and s708 or 708A does not say otherwise (s707(3)); or
  •     is an off-market sale by a controller (s707(2)) or amounts to indirect off-market sale by a controller (s707(5)) and s708 does not say otherwise (s707(1)).

See generally, ASIC Regulatory Guide 254 Offering securities under a disclosure document.

CA s708 lists various types of offers that do not require disclosure to investors (see below).

CA s708AA provides that an offer of securities under a rights issue where the securities are in a class that is already quoted at the time of the offer and where certain other conditions are satisfied does not need disclosure to investors. In relation to this exception, see ASIC Regulatory Guide 189 Disclosure relief for rights issues.

CA s708A was a CLERP 9 addition to the law intended to improve the operation of the secondary sale provisions in the CA and facilitate placements. It exempts from the on-sale provisions in s707(3) offers of securities for sale that were received in a placement where the securities are in a class that is already quoted and investors have the benefit of information equivalent to that which would have been included in a prospectus for the placement. Such information can be made available to investors through: (a) a notice to the market at the time of the placement that verifies that the issuer has complied with its continuous disclosure and reporting obligations and provides the market with any information that has been excluded from continuous disclosure (often referred to as a "cleansing notice"); or (b) a prospectus for an issue of securities that is more or less contemporaneous with the placement. In relation to this exception, see ASIC Regulatory Guide 173 - Disclosure for on-sale of securities and other financial products.

In the past, there has been some confusion as to how offers of options should be treated for the purposes of the law (ie as an offer of the option or as an offer of the underlying security). CA s702 now provides that for the purposes of Chapter 6D: (a) an offer of an option over securities is not taken to be an offer of the underlying securities; (b) the grant of an option without an offer of the option is taken to be an offer of the option; and (c) an offer to grant an option is taken to be an offer to issue the security constituted by the option.

CA s707(3) - Sale Amounting to Indirect Issue
An offer of a body’s securities for sale within 12 months after their issue needs disclosure to investors if:
(a)   the body issued the securities without disclosure to investors under Part 6D.2; and
(b)   either:
  (i)   the body issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or
  (ii)   the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them;
and s708 or 708A does not say otherwise.

This section is an anti-avoidance measure to stop people trying to get around s706 by issuing securities to a person in circumstances that do not require a prospectus (eg because they are a professional investor) and then having that person on-sell them to other people, where a direct offer by the issuer to those people would have required a prospectus.

Before the enactment of s708A, (ii) above made it almost impossible to do a private placement of securities without a disclosure document or without imposing a restriction on the holder prohibiting their on-sale for 12 months. The CLERP 9 enactment of CA s708A (see above) was intended to correct that situation but it had its flaws. ASIC has endeavoured to fix those flaws in Regulatory Guide 173 Disclosure for on-sale of securities and other financial products, which also provides relief from the disclosure requirements for the on-sale of securities and other financial products in certain other situations.

For an example of where an on-sale of securities within 12 months was found to trigger s707(3), see ASIC v Axis International Management Pty Ltd (No 5) [2011] FCA 60.

CA s707(4) - The purpose test in s707(3)
For the purposes of s707(3):
(a)   securities are taken to be issued or acquired with the purpose referred to in s707(3)(b) if there are reasonable grounds for concluding that the securities were issued or acquired with that purpose (whether or not there may have been other purposes for the issue or acquisition); and
(b)   without limiting (a), securities are taken to be issued or acquired with that purpose if any of the securities are subsequently sold, or offered for sale, within 12 months after issue, unless it is proved that the circumstances of the issue and the subsequent sale or offer are not such as to give rise to reasonable grounds for concluding that the securities were issued or acquired with that purpose.

The effect of this section is to put the onus on the issuer to prove that the proscribed purposes did not exist if any securities issued without a DD are on-sold or offered for sale to someone not mentioned in s708 within 12 months.

CA s708 - Offers That Do Not Need Disclosure
•     Offers to "sophisticated investors":
  •     the minimum amount payable for the securities > $500,000;
  •     the amount payable for the securities plus the amounts previously paid by the person for the same securities that are held by the person > $500,000;
  •     it appears from a certificate given by a qualified accountant no more than 2 years (r6D.5.02) before the offer is made that the person to whom the offer is made:
    •     has net assets of at least the amount specified in regulations made for these purposes (currently $2,500,000: r6D.2.03(1)); or
    •     has a gross income for each of the last 2 financial years of at least the amount specified in regulations made for these purposes a year (currently $250,000: r6D.2.03(2)); or
  •     the offer is made to a company or trust controlled by a person who meets the requirements of the preceding bullet point (s708(8)).
•     Offers made through a financial services licensee where:
  •     the licensee is satisfied on reasonable grounds that the person to whom the offer is made has previous experience in investing in securities that allows them to assess:
    •     the merits of the offer;
    •     the value of the securities;
    •     the risks involved in accepting the offer;
    •     their own information needs; and
    •     the adequacy of the information given by the person making the offer;
  •     the licensee gives the person before, or at the time when, the offer is made a written statement of the licensee’s reasons for being satisfied as to those matters; and
  •     the person to whom the offer is made signs a written acknowledgment before, or at the time when, the offer is made that the licensee has not given the person a disclosure document in relation to the offer (s708(10)).
•     Offers to "professional investors" (s708(11)).
•     Offers of a body’s securities made to:
  •     a senior manager of the body or a related body or their spouse, parent, child, brother or sister; or
  •     a body corporate controlled by a person referred to in the previous bullet point (s708(12)).
•     Small scale offerings – ie personal offers that do not result in more than 20 issues or sales or the raising of more than $2million in any 12 month period (s708(1));
•     Offers of fully paid shares under dividend reinvestment plans or bonus share plans (s708(13)).
•     Offers of a disclosing entity’s debentures to existing debenture holders (s708(14)).
•     Issues or transfers of securities (other than options) for no consideration (s708(15)).
•     Offers of options where no consideration is to be provided for the issue or transfer of the options and no consideration is to be provided for the underlying securities on the exercise of the option (s708(16)).
•     Offers made under a compromise or arrangement under Part 5.1 (s708(17)).
•     Certain offers made to the creditors of a company under a deed of company arrangement (s708(17A)).
•     Offers of securities made as consideration for a takeover bid under Chapter 6 which is accompanied by a bidder’s statement (s708(18)).
•     Offers of debentures by ADIs or life companies (s708(19)).
•     Offers by "exempt bodies" (s708(20)) or "exempt public authorities" (s708(21)).

In relation to the first bullet point, ss708(9B) and (9C) provide that in determining the net assets or gross income of a person under s708(8), the net assets or gross income (as applicable) of a company or trust controlled by the person may be included. For these purposes, "control" is defined in CA s50AA.

For guidance on which accountants are qualified to certify that an investor's income or net assets makes them eligible to be a sophisticated investor for the purposes of CA s708(8), see ASIC Regulatory Guide 154 Certificate by a qualified accountant (as supplemented by Class Order CO 01/1256).

In relation to the second bullet point, in ASIC v Elm Financial Services [2005] NSWSC 1065, Barrett J said of s708(10):

    

"This is, as I have said, a relatively new provision. There was significant debate about it when its introduction was mooted. It was recognised at the time and must be re-emphasised now that s.708(10) casts particular responsibility upon a financial services licensee. The requirement that the licensee be 'satisfied on reasonable grounds' as to the matters stated in s.708(10)(b) is one that must be approached with diligence and care. The licensee has a statutory duty to make inquiry about all matters relevant to the opinion it must form and then, of course, to consider whether, in the factual circumstances, there exist the reasonable grounds for it to be satisfied as to the matters stated. Woolly thinking about some general concept of 'sophisticated investor' is entirely misplaced.

    

I mention this matter because it is made clear by the agreed facts that the licensed Elm companies were content to consider s.708(10) applicable where even the most cursory attention to the statutory criteria would have made it immediately clear that there were no reasonable grounds for forming the relevant opinions about the relevant investors."

In relation to the third bullet point, the definition of professional investor is modified in s708(11) to replace the reference in paragraph (e) of that definition to "a person who controls at least $10m (including any amount held by an associate or a trust that the person manages)" with a reference to "a person who has or controls gross assets of at least $10m (including any assets held by an associate or under a trust that the person manages)".

In relation to the fifth bullet point, ss708(2) - (7) contain guidance on what are personal offers and how you work out whether there has been a breach of the 20 investors or $2m ceilings under s708(1). For these purposes, you exclude any offers made that did not need a disclosure document because of some other provision in s708, offers made outside Australia and offers made under a disclosure document (s708(5)).

CA s708(13) also purports to exempt from disclosure offers of managed investment scheme interests under DRPs, switching facilities or CMTs. However these are now governed by Part 7.9 and so these references are no longer applicable.

As mentioned above, in addition to the exceptions to disclosure in s708, s708AA provides that an offer of securities under a rights issue where the securities are in a class that is already quoted at the time of the offer and where certain other conditions are satisfied does not need disclosure to investors.

 

CA s709 - Types of Disclosure Documents
Essentially 2 types:
•     an offer information statement may be used if the amount of money to be raised by the body by issuing the securities, when added to all amounts previously raised by:
  •     the body;
  •     a related body corporate; or
  •     an entity controlled by a person who controls the body or by an associate of that person;
  by issuing securities under an offer information statement is $10 million or less;
•     otherwise, a prospectus must be prepared.

CA s709 also provides that where ASIC has approved the making of offers of a particular kind with a profile statement instead of a disclosure document, you may do so. The profile statement must contain certain basic information in respect of the offer, refer to a lodged prospectus and inform investors that they can obtain a copy of the prospectus free of charge. ASIC issued a class order (CO 00/166) under former ASIC Regulatory Guide 153 Profile statements allowing profile statements to be used for offers of interests in unlisted registered managed investment schemes formed to carry on portfolio investment activities in cash, equities, property, fixed interest securities or related assets. These investments are of course now covered by the PDS regime in Part 7.9 rather than Chapter 6D and so this Regulatory Guide, as well as the profile statement provisions in s709, no longer have any practical effect. ASIC Regulatory Guide 153 has since been withdrawn.

Overview of Procedure for Offering Securities
•     Prepare disclosure document which contains the prescribed contents and does not contain any misleading or deceptive statements (ss710-715), is worded and presented in a clear, concise and effective way (s715A), is dated (s716) and to which all of the directors consent (s720).
•     Lodge the disclosure document with ASIC (s718).
•     Offer the securities, making sure that the offer and any application form is either included in or accompanies the disclosure document.
•     If it is found that the disclosure document lodged was materially deficient or a significant new and adverse matter arises, either:
  •     lodge a supplementary or replacement document, giving investors one month to withdraw their application and be repaid if they so wish; or
  •     return money to applicants (s724).
•     Hold application money received on trust until the securities are issued or transferred or the money returned (s722).
•     Issue or transfer the securities, making sure that:
  •     the investor used an application form distributed with the disclosure document (s723(1)); and
  •     any minimum subscription and/or listing condition has been satisfied (ss723(2) and (3)).

On the use of electronic prospectuses and application forms, see ASIC Regulatory Guide 107 Fundraising: Facilitating electronic offers of securities.

CA s710(1) - General Disclosure Test for Prospectuses
A prospectus for a body’s securities must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of:
•     in the case of an offer of shares or debentures:
  •     the rights and liabilities attaching to the securities;
  •     the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue (or issued) the securities;
•     in the case of an offer of legal or equitable interests in, or options over, securities:
  •     the rights and liabilities attaching to the interests/options and to the underlying securities;
  •     in the case of an option, the capacity of the person making the offer to issue or deliver the underlying securities; and
  •     if the person making the offer is (or is effectively deemed under s707(3) or (5) to be) the body that issued or is to issue the underlying securities or a person who controls that body - the assets and liabilities, financial position and performance, profits and losses and prospects of the body.
The prospectus must contain this information:
•     only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus; and
•     only if a person whose knowledge is relevant:
  •     actually knows the information; or
  •     in the circumstances ought reasonably to have obtained the information by making enquiries.

This last point effectively sets up a due diligence requirement for prospectuses – those responsible for the preparation of the prospectus (being those persons "whose knowledge is relevant" as defined in s710(3) below) must make reasonable enquiries to determine that it is complete and accurate.

Note that s710 still refers to offers of interests in managed investment schemes. These are drafting hangovers that weren’t picked up in the FSR reforms. These, of course, are now covered by Part 7.9 and not Chapter 6D.

CA s711 sets out specific disclosures that must also be included in a prospectus.

There are special, more limited disclosure requirements for prospectuses for continuously quoted securities, reflecting the fact that they are subject to the continuous disclosure regime in Chapter 6CA (s713). There are also similar, more limited disclosure requirements for offer information statements, reflecting the fact that these can only be used where the amount of money to be raised by the body by issuing the securities, when added to all amounts previously raised by it, its related bodies corporate and any other entity that is controlled by someone who controls the body or their associate, is $10 million or less (s715).

Further, there are special, more limited disclosure requirements that apply to offers of "simple corporate bonds", that are done via a 2-part prospectus under ss713A-713E.

CA s712 facilitates the production of shorter form prospectuses by allowing a prospectus simply to refer to material lodged with ASIC (such as a public company's constitution) and deeming that material to be included in the prospectus, provided the prospectus identifies the document containing the material and informs people of their right to obtain a copy of the document free of charge.

One of the trickier issues in this area is the extent to which the requirement to address an issuer's "prospects" in a disclosure document requires the inclusion of profit forecasts. For ASIC's view, see ASIC Regulatory Guide 170 Prospective financial information.

CA s710(2) – Relevant Factors for Disclosure Test
In deciding what information should be included under s710(1), have regard to:
•     the nature of the securities and of the body; and
•     the matters that likely investors may reasonably be expected to know; and
•     the fact that certain matters may reasonably be expected to be known to their professional advisers.

 

CA s710(3) – Whose Knowledge is Relevant for Disclosure Test
For the purposes of s710(1), a person’s knowledge is relevant only if they are:
•     the person offering the securities;
•     if the person offering the securities is a body - a director or proposed director of the body;
•     a person named in the prospectus:
  •     as an underwriter of the issue or sale;
  •     as a financial services licensee involved in the issue or sale;
  •     with their consent as having made a statement that is included in the prospectus or on which a statement made in the prospectus is based;
  •     with their consent as having performed a particular professional or advisory function.

See CA s729 for who is liable for misstatements in, or omissions from, a disclosure document.

Return to Outline


Product Disclosure Statements

General Matters
•     Part 7.9 only applies to offers and recommendations received, and issues made, in Australia (s1011A).
•     Part 7.9 only applies in relation to financial products that are issued in the course of a business of issuing financial products (s1010B(1)). Managed investment products and superannuation products are deemed to have been issued in the course of such a business (s1010B(2)).
•     Part 7.9 mainly applies to "regulated persons", being:
  •     issuers of financial products;
  •     sellers of the financial product if the sale takes place in the circumstances requiring a PDS described in s1012C(5), (6) or (8);
  •     financial services licensees and their authorised representatives;
  •     persons who are not required to hold an Australian financial services licence because they are covered by s911A(2)(j) or an exemption in regulations made under s911A(2)(k) or an ASIC determination under s911A(2)(l); or
  •     any person who is required to hold an Australian financial services licence but who does not hold such a licence (s1011B).

See generally ASIC Regulatory Guide 168 Disclosure: Product disclosure statements (and other disclosure obligations).

CA s911A(2)(j), referred to above, exempts trustees of self-managed superannuation funds from the licensing requirements in s911A.

Part 7.9 does not apply to "contribution plans" (s1010BA).

There are also substantial modifications to Part 7.9 in CR Schedule 10A for RSA products (Part 2), insurance options under contracts associated with superannuation interests (Part 3), FHSA products (Part 5), standard margin loans (Part 5A), most superannuation products (Part 5B), simple managed investment schemes (Part 5C) and certain superannuation funds (Parts 6 and 7).

CA s1011C provides that for the purposes of the PDS provisions in Part 7.9 Div 2: (a) an offer of an option over a financial product is not to be taken to be an offer of the underlying financial product; (b) the grant of an option without an offer of the option is taken to be an offer of the option; and (c) an offer to grant an option is taken to be an offer to issue the financial product constituted by the option.

CA s1012A - Obligation to Give PDS - Recommendation Situations
•     A regulated person must give a retail client a PDS for a financial product if they provide financial product advice to the client which includes a recommendation that the client acquire that product.
•     Generally this only applies to recommendations that a person acquire a product by way of issue rather than by way of transfer (see ss761E and 1010C), with the issuer responsible for preparing the PDS (s1013A(1)). However, in a sale situation requiring a PDS (see s1012C below), personal advice recommending the acquisition of a product by way of transfer from the seller will also require the giving of a PDS, with the seller responsible for preparing the PDS (s1013A(2)).
•     The PDS must be given at or before the time when the regulated person provides the advice.

There is an exception to the timing rule for certain prescribed superannuation products (s1012F and r7.9.04), which allows a PDS to be given after the issue of the product as soon as is reasonably practicable but in any event within 3 months.

There is also an exception to the timing rule in s1012G (as replaced in r7.9.15H) for products that do not require an application form under s1016A and that are subject to a cooling off period under s1019B, which allows a regulated person to delay giving a PDS where the client expressly instructs that they want the advice in relation to the product or the product itself immediately or at a specified time and it is not reasonably practicable to give the PDS when it would otherwise have been required to be given. In such a case, the regulated person must orally communicate information about the cooling of period in accordance with s1012G(3) and give the PDS to the client as soon as practicable after that time and in any event, no later than (i) the time when the confirmation requirement (if any) applicable to that product has to be complied with, or (ii) the end of the 5th business day after the day on which the financial product was issued or sold to the client.

CA s1012B - Obligation to Give PDS - Issue Situations
•     A regulated person must give a retail client a PDS for a financial product if:
  •     they make an offer to issue, or to arrange for the issue of, the financial product to the client;
  •     they issue the financial product to the client in circumstances where it is reasonable to believe that the client has not already received a PDS; or
  •     the client makes an offer to the regulated person to acquire the financial product by way of issue.
•     The PDS must be prepared by the product issuer (s1013A(1)) and given at or before the time when the regulated person makes the offer or issues the financial product to the client or, in the last case, before the client becomes bound by a legal obligation to acquire the financial product pursuant to the offer.

The second indented bullet point is intended to cover the situation where there technically is no offer or where the offer is made to or by a person other than the person to whom the product is issued. For example, in relation to some superannuation products, the offer to issue may be made to the employer while the product is actually issued to the employee. In such a case, the employee would still need to receive a PDS prior to the issue of the product under that bullet point.

As an example of the third indented bullet point - a person approaches a bank seeking to open a bank account or telephones an insurance company wishing to take out a particular insurance policy.

Note again the exceptions to the timing rule in s1012F and s1012G referred to in the notes to the previous slide.

CA s1012C - Obligation to Give PDS - Sale Situations
•     A regulated person must give a retail client a PDS for a financial product which it has offered to sell to the client or which a retail client has offered to acquire by way of transfer if the sale/transfer:
  •     amounts to an indirect issue of financial products (s1012C(6)) and s1012DA does not apply; or
  •     is an off-market sale by a controller (s1012C(5)) or amounts to indirect off-market sale by a controller (s1012C(8)).
•     The PDS must be prepared by the seller (s1013A(2)) and given to the client at or before the time the regulated person makes the offer to sell the product or, where the client makes the offer, before the client becomes bound by a legal obligation to acquire the financial product pursuant to the offer.

CA s1012DA was a CLERP 9 addition to the law intended to improve the operation of the secondary sale provisions in the CA and facilitate placements. It exempts from the on-sale provisions in s1012C(6) offers of managed investment products for sale that were received in a placement where the products are in a class that is already quoted and investors have the benefit of information equivalent to that which would have been included in a PDS for the placement. Such information can be made available to investors through: (a) a notice to the market at the time of the placement that verifies that the issuer has complied with its continuous disclosure and reporting obligations and provides the market with any information that has been excluded from continuous disclosure (often referred to as a "cleansing notice"); or (b) a PDS for an issue of the products that is more or less contemporaneous with the placement.

CA s1012C(6) - Sales Amounting to Indirect Issue
This section applies where:
(a)   the offer is made within 12 months after the issue of the financial product;
(b)   the product was issued without a PDS for the product being prepared; and
(c)   either:
  (i)   the issuer issued the product with the purpose of the person to whom it was issued selling or transferring the product, or granting, issuing or transferring interests in, or options or warrants over, the product; or
  (ii)   the person to whom the product was issued acquired it with the purpose of selling or transferring the product, or granting, issuing or transferring interests in, or options or warrants over, the product.

 

CA s1012C(7) - The Purpose Test in s1012C(6)
For the purposes of s1012C(6):
(a)   a financial product is taken to be issued or acquired with the purpose referred to in s1012C(6)(c) if there are reasonable grounds for concluding that the product was issued or acquired with that purpose (whether or not there were or may have been other purposes for the issue or acquisition); and
(b)   without limiting (a), a financial product is taken to be issued or acquired with that purpose if the financial product, or any financial product of the same kind that was issued at the same time, is subsequently sold, or offered for sale, within 12 months after issue, unless it is proved that the circumstances of the issue and the subsequent sale or offer are not such as to give rise to reasonable grounds for concluding that the product was issued or acquired with that purpose.

CA ss1012C(6) and (7) are modelled on the anti avoidance provisions in CA ss707(3) and (4) for securities (see above). They are subject to the exclusions in ss1012D and 1012DA, which largely mirror the exclusions in ss708 and 708A (see above). While in practice these provisions will mostly apply to the secondary sale of interests in registered managed investment schemes, they have the potential to apply across the full range of financial products.

Obligation to Give PDS – Other Situations
•     Product issuers are required to ensure as far as reasonably practicable that prospective beneficiaries under group financial products, such as group insurance products, receive a PDS before they elect to be covered by the product (s1012H).
•     Product issuers of superannuation and RSA products must provide employer-sponsors of superannuation funds with a PDS for any superannuation and RSA products that they are applying for on behalf of their employees (s1012I).
•     In the case of products acquired through custodial facilities (eg master funds and wrap accounts), the PDS must be given by the provider of the facility (s1012IA).

 

CA s1015C – How to Give a PDS
A PDS may be printed or in electronic form and must be:
(i)   given to the client, or to the client's agent, personally; or
(ii)   sent to the client, or the client's agent, at an address (including an electronic address) or fax number nominated by the client or the client's agent.

CA s1015C(2) defines what is meant by sending a document to a person at an address.

CA s1015C(3) defines who can act as agent of the client for the purposes of service. It excludes a financial services licensee, an authorised representative of a financial services licensee, a person who is exempt from the requirement to hold an Australian financial services licence, a person who is required to hold an Australian financial services licence but who does not do so, and any of their employees, directors or other representatives, acting in that capacity for the client. So, for example, you cannot satisfy the requirement to give a PDS to a client by giving it to their financial planner.

Situations in Which a PDS is Not Required
•     The client has already received an up to date PDS or the regulated person believes on reasonable grounds that this is the case (s1012D(1)).
•     Offers of products that the client already holds, where the regulated person believes on reasonable grounds that the client has received or has access to (and the client knows that they have access to) all the information that a PDS would be required to include through an earlier PDS and any ongoing disclosures, periodic reports or, in relation to managed investment products, through continuous disclosure under Chapter 6CA (s1012D(2)).
•    

Offers of interests in a self‑managed superannuation fund where the regulated person believes on reasonable grounds that the client has received or has access to (and the client knows that they have access to) all of the information that the PDS would be required to contain (s1012D(2A)).

•    

Offers of products where, because of s1013F (general limitations on extent to which information is required to be included in a PDS), no information would be required to be included in the PDS for the product (s1012D(2B)).

•     Offers of managed investment products where the client is:
  •     a senior manager of the responsible entity or of a related body corporate or their spouse, parent, child, brother or sister; or
  •     a body corporate controlled by a person referred to in the previous bullet point (s1012D(9A) and (9B)).
•     Small scale offerings of managed investment and other prescribed financial products – ie personal offers that do not result in more than 20 issues or sales or the raising of more than $2million in any 12 month period (s1012E).
•     Rights issue offers of interests in a listed managed investment scheme (s1012DAA).
•     Offers under distribution reinvestment plans or switching facilities to clients who already hold a product of the same kind (s1012D(3)).
•     Offers of managed investment products or other products prescribed by the regulations that are not options and where no consideration is to be provided for the issue or sale of the product (s1012D(5)).
•     Offers of options where no consideration is to be provided for the issue or sale of the option and no consideration is to be provided for the underlying financial product on the exercise of the option (s1012D(6)).
•     Issues or sales of an interest in a managed investment scheme or an option by way of transfer over a security that are made under a CA Chapter 6 takeover bid via a bidder's statement (s1012D(7)).
•     Offers of interests in an unregistered managed investment scheme by or to the responsible entity of the scheme where that entity is an exempt body, as defined in CA s66A (eg registered associations, clubs, societies and co-operatives) (s1012D(8)).
•     Offers of interim contracts of insurance, as defined in s11(2) of the Insurance Contracts Act 1984 (s1012D(9)).
•     Offers of bundled contracts of insurance that the client does not intend to acquire (r7.9.07D).
•     Offers of financial products that are declined by the client (r7.9.07E).
•     Offers of a basic deposit product, a facility for making non-cash payments that is related to a basic deposit product or travellers' cheque (r7.9.07FA).
•     Offers to clients that are not in the jurisdiction (r7.9.07FB).
•     In issue situations only, where the issuer is not able to contact the client (r7.9.07F).

CR r7.9.07FC also provides that the issuer of a renewable general insurance policy who provided a PDS when the policy was originally taken out does not have to give a full PDS when they renew the insurance cover but instead a Supplementary PDS that updates the original PDS.

The first bullet above (s1012D(1)) addresses the fact that there are a number of trigger points for the requirement to give a PDS which may lead to duplication eg a client may receive advice in relation to a particular product and receive a PDS at that time, then at some later time may seek the product from the issuer where, in the absence of this exemption, the issuer would have to give the client a PDS as well.

The small scale offering exclusion also applies to interests in unregistered managed investment schemes (r7.9.16A).

According to the Explanatory Memorandum for the Financial Services Reform Bill, the reason why the "no consideration" exemption (s1012D(5)) is confined to interests in managed investment schemes is that, in the case of other financial products, there may be an opportunity cost to the person in taking up the free product. If the person had not received the product free they may have chosen to pay for a similar product. It is important that they know the terms and conditions of the product to enable them to make an informed decision in these circumstances. Even if there is no opportunity cost, the person may be subject to ongoing obligations under the product which they should be informed about.

On the exception for rights issues in s1012DAA, see ASIC Regulatory Guide 189 Disclosure relief for rights issues.

Overview of Procedure for Offering Financial Products
•     Prepare PDS which is up to date (s1012J), contains the prescribed contents and does not contain any misleading or deceptive statements (ss1013A-1013K), is worded and presented in a clear, concise and effective manner (s1013C(3)), and is dated (ss1013G).
•     If the PDS relates to managed investment products that are either traded or intended to be traded on a financial market or other products specified in the regulations (currently none are specified), lodge the PDS with ASIC (s1015B) and, if the products are not yet able to be traded, wait for 7 days after lodgment before issuing or selling the products (s1016B). In all other cases, notify ASIC when you begin to use the PDS (s1015D).
•     Offer the financial products - in the case of managed investment products, superannuation products, investment life insurance products, RSA products, FHSA products, margin lending facilities and other prescribed products, making sure that the application form is either included in or accompanies the PDS (s1016A).
•     If it is found that the PDS lodged was "defective", either:
  •     lodge a supplementary or replacement PDS, giving investors one month to withdraw their application and be repaid if they so wish; or
  •     return money to applicants (s1016E).
•     Hold application money received on trust until the financial products are issued or transferred or the money returned (s1017E).
•     Issue or transfer the financial products, making sure that:
  •     in the case of managed investment products, superannuation products, investment life insurance products, RSA products, FHSA products, margin lending facilities and other prescribed products, the investor used an application form distributed with the PDS (s1016A); and
  •     any minimum subscription condition and/or listing condition has been satisfied (ss1016C and 1016D).
•     If the financial products are risk insurance products (both general and life), investment life insurance products, managed investment products, FHSA products, superannuation products or RSA products and the client exercises their right of return during the 14 day cooling-off period, refund them the required amount (ss1019A and 1019B).

For the purposes of the fourth bullet point above, "defective" has the meaning in s1021B (s1016E(5)).

ASIC has issued a class order exemption (CO 03/237) exempting PDS issuers from the requirement under s1012J of the Corporations Act to ensure a PDS is up to date at the time when it is given, provided the issuer makes the up-to-date information available through a web site, a toll-free telephone service, or other facility that provides convenient access for investors. The relief will only be available where the update does not include materially adverse information of a kind that must be disclosed in a supplementary PDS.

CR r7.9.15DB provides that if s1015B does not require a copy of a PDS to be lodged with ASIC, the PDS and any document or part of a document mentioned in the PDS must be retained by the person responsible for its preparation for 7 years after the date of the PDS.

CA s1013D – General Disclosure Requirements for PDS
A PDS must include the following statements, and such of the following information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product:
(a)   a statement setting out the name and contact details of:
  (i)   the issuer of the financial product; and
  (ii)   if the PDS relates to a sale situation - the seller;
(b)   information about any significant benefits to which a holder of the product will or may become entitled, the circumstances in which and times at which those benefits will or may be provided, and the way in which those benefits will or may be provided;
(c)   information about any significant risks associated with holding the product;
(d)   information about:
  (i)   the cost of the product;
  (ii)   any amounts that will or may be payable by a holder of the product in respect of the product after its acquisition, and the times at which those amounts will or may be payable; and
  (iii)   if the amounts paid in respect of the financial product and the amounts paid in respect of other financial products are paid into a common fund - any amounts that will or may be deducted from the fund by way of fees, expenses or charges;
(e)   if the product will or may generate a return to a holder of the product - information about any commission, or other similar payments, that will or may impact on the amount of such a return;
(f)   information about any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product;
(g)   information about the dispute resolution system that covers complaints by holders of the product and about how that system may be accessed;
(h)   general information about any significant taxation implications of financial products of that kind;
(i)   information about any cooling-off regime that applies in respect of acquisitions of the product (whether the regime is provided for by a law or otherwise);
(j)   if the product issuer (in the case of an issue PDS) or the seller (in the case of a sale PDS) makes other information relating to the product available to holders or prospective holders of the product, or to people more generally - a statement of how that information may be accessed;
(k)   any other statements or information required by the regulations;
(l)   if the product has an investment component - the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment; and
(m)  

unless, in accordance with the regulations and a determination by ASIC, information to be disclosed in accordance with paragraphs (b), (d) and (e) must be stated as amounts in dollars (r7.9.15A).

In relation to (d) and (e), this information must include the details of fees and costs set out in Part 2 of Schedule 10 (r7.9.16L) and be set out in a single section of the PDS with the heading ‘Fees and other costs’, which includes: (a) the Fees and Costs Template, comprising the template and the additional explanation of fees and costs set out in Part 2 of Schedule 10; (b) an example of annual fees and costs and associated notes as set out in Part 2 of Schedule 10; and (c) the boxed Consumer Advisory Warning Statement set out in Part 2 of Schedule 10 (r7.9.16N).

In relation to (l), see r7.9.14C.

In relation to (m), for ASIC's policy on compliance with the dollar disclosure regime, see Regulatory Guide 182 Dollar Disclosure.

There are special, more limited disclosure requirements for PDSs for continuously quoted securities, reflecting the fact that they are subject to the continuous disclosure regime in Part 6CA (s1013FA).

There are also modifications in the Regs to the PDS content requirements for warrants (r7.9.07A), market traded derivatives (r7.9.07B), MySuper products (rr7.9.07L-7.9.07W); carbon units and eligible international emission units (rr7.9.09A-7.9.09C); margin loans (rr7.9.11-7.9.11H), superannuation products (rr7.9.11K-7.9.11R), simple managed investment schemes (rr7.9.11S-7.9.11Z), general insurance products (rr7.9.15D, 7.9.15E and 7.9.15F), consumer credit insurance (r7.9.16) and unauthorised foreign insurers (r7.9.15).

Again, for ASIC's view on the extent to which a PDS should include profit forecasts, see ASIC Regulatory Guide 170 Prospective financial information.

ASIC has published guidance notes for product issuers preparing and reviewing PDSs: see Information Release 04-71.

Note that none of these general content requirements apply to those products for which there are now prescribed short form PDSs (ie FHSA products, superannuation products to which Subdivision 4.2B of Division 4 of Part 7.9 applies, simple managed investment schemes to which Subdivision 4.2C of Division 4 of Part 7.9 applies and standard margin loans).

Other General Disclosure Requirements for PDS
•     The title "Product Disclosure Statement" must be used on the cover of, or at or near the front of, a PDS. In any other part, the abbreviation "PDS" may be used (s1013B).
•    

The information included in a PDS must be worded and presented in a clear, concise and effective manner (s1013C(3)).

•     A PDS must also contain any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product (s1013E).
•     Despite anything in s1013D or 1013E, information is not required to be included in a PDS if it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the information in the PDS (s1013F(1)).

CA s1013F(2) provides that in considering whether it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find particular information in the Statement, the matters that may be taken into account include, but are not limited to: (a) the nature of the product (including its risk profile); (b) the extent to which the product is well understood by the kinds of person who commonly acquire products of that kind as retail clients; (c) the kinds of things such persons may reasonably be expected to know; (d) if the product is an ED security that is not continuously quoted, the effect of Chapter 2M as it applies to disclosing entities and of ss674 and 675; (e) the way in which the product is promoted, sold or distributed; and (f) any other matters specified in the regulations.

CA s1013C(2) – Information Only Needed in PDS if Actually Known
The information required by ss1013D and 1013E need only be included in a PDS to the extent to which it is actually known to:
(a)   the person responsible for its preparation;
(b)   in the case of a sale PDS - the issuer of the financial product;
(c)   any person named in the PDS as an underwriter of the issue or sale of the financial product;
(d)   any person:
  (i)   named in the PDS as a financial services licensee providing services in relation to the issue or sale of the financial product; and
  (ii)   who participated in any way in the preparation of the PDS;
(e)   any person who has given a consent referred to in section 1013K in relation to a statement included in the PDS;
(f)   any person named in the PDS with their consent as having performed a particular professional or advisory function; and
(g)   if any of the above persons is a body corporate - any director of that body corporate.

You will see that this is a very different approach to the disclosure regime for securities. You have directed disclosure on a number of key product features to assist in comparison between products, supplemented by a general obligation to include other material information. There is no express or implied requirement for the persons mentioned above to undertake due diligence enquires – the PDS only has to include information that they actually know.

Additional Disclosure Requirements
•     Person responsible for PDS must give further information about a financial product to prospective retail clients, financial services licensees and their authorised representatives on request if it has previously made the information generally available to the public and the information may reasonably influence a person’s decision, as a retail client, whether to acquire a financial product to which the PDS relates (s1017A).
•     Person responsible for PDS must notify retail clients holding products of any material change to, and of any significant event that affects, any of the matters specified, or that should have been specified, in the PDS that occurs while the client holds the product (s1017B).
•     Clients with interests in superannuation or RSA products may also request certain additional information from the person responsible for the PDS (s1017C).
•     Periodic statements must be given to retail clients holding financial products with an investment component (s1017D).

CA s1017B effectively sets up a continuous disclosure regime for issuers of financial products. However, it does not apply if the financial product is a managed investment product that is an ED security (s1017B(2)). Instead the continuous disclosure provisions in Chapter 6CA apply to these products.

The requirement to give periodic statements applies to managed investment products, superannuation products, RSA products, FHSA products, investment life insurance products, deposit products, margin lending facilities and any other products specified in regulations made for these purposes (s1017D(1)(b)).

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Confirmations

CA s1017F and CR r7.9.63A – Obligation to Issue Confirmation
•     As a general rule the issuer of a financial product is required to confirm any transactions by a retail client in relation to that product. The confirmation must be effected as soon as reasonably practicable either by:
  •     the product issuer giving the client a written or electronic confirmation of the transaction; or
  •     establishing a facility, which the client consents to use, enabling the client to obtain a confirmation for themselves.
•     In a sale or purchase effected through a financial services licensee, the licensee who effected the sale or purchase is required to confirm the transaction.
•     In a sale situation to which s1012C applies (sale requiring the preparation of a PDS) which is not effected through a financial services licensee, the seller is required to confirm the purchase by the client.

Note that s1017F is one of the few provisions in Part 7.9 to apply to securities as well as to other financial products (CA s1010A). Note also that the CA confirmation obligations do not apply to wholesale clients. To the extent that such obligations are not mandated under exchange or other market rules, these are matters to be negotiated between the licensee and the wholesale client.

We look at the specific confirmation requirements for ASX trades under the ASX Market Integrity Rules in lecture 11E. We also look at the modifications to these general rules for derivatives in lecture 12A and warrants in lecture 12B.

CA s1017F(4) – Transactions That Don’t Need Confirmation
Confirmations are not required in relation to:
(a)   additional contributions towards a financial product, the timing and amount of which, or the method of calculating the amount of which, was agreed when the product was entered into or are necessary as a result of some external factor such as an increase in a person's salary or the superannuation guarantee rate;
(b)   a variation of the rights attaching to a security;
(c)   a range of transactions in relation to deposit accounts which do not involve a direct interface with the client, such as crediting interest, withdrawals as a result of direct debit arrangements and debiting fees and charges;
(d)   a variation of the terms of all financial products in the class to which the financial product belongs; or
(e)   transactions specified in the regulations (see CR rr7.9.62 - 7.9.63I).

Instead, the client will generally be informed about these transactions through their periodic statement under s1017D.

General Content Requirements for Confirmations
•     A confirmation must give the client such information as they need, having regard to the information they have received before the transaction, to understand the nature of the transaction (s1017F(7)).
•     In particular, a confirmation must include details of:
  •     the issuer and the holder;
  •     the date and description of the transaction;
  •     any amount paid or payable by the holder in relation to the transaction (if known – see r7.9.63(1));
  •     any taxes and stamp duties payable (if known – see r7.9.63(2)); and
  •     any other matters prescribed by the regulations (s1017F(8)).
•     For products that are subject to a cooling-off period, the confirmation must also identify information about that regime (r7.9.63D).

In relation to the first bullet - a confirmation thus need not repeat information that was contained in the PDS.

CR r7.9.63F provides that a confirmation for the acquisition of financial product need only include, vis-a-vis the amount paid or payable by the holder in relation to the transaction, the amount the holder is required to pay to acquire the product.

CR r7.9.63G provides that a confirmation for a disposal of financial product must include the amount paid or payable to the holder as a result of the disposal.

CR r7.9.63B - Content of Confirmations for Acquisitions or Disposals
A confirmation for the acquisition or disposal of a financial product must:
•     identify the financial product and the number or amount of financial products that are the subject of the transaction;
•     if the transaction took place in the ordinary course of business on a licensed financial market, include the name by which that market is generally known and identify each licensed financial market of which the responsible person is a participant;
•     if the responsible person is dealing on their own behalf with a person who is not a financial services licensee, state that the responsible person is dealing in that way (unless the transaction is the issue of a product and the responsible person is the product issuer);
•     if the financial product is able to be traded on a market and the transaction did not take place in the ordinary course of business on a licensed market, include a statement to that effect; and
•     if the transaction involved more than one financial product, include the price per unit of the financial products.

 

CR r7.9.63C - Confirmations for Multiple Transactions
If:
•     the responsible person is a participant of a licensed market;
•     a transaction takes place in accordance with the market integrity rules and operating rules of the licensed market and forms part of a series of transactions made to complete an order; and
•     the client has given the licensee prior authorisation to do so,
the financial services licensee may give the client a single confirmation in respect of the series of transactions that specifies the average price per unit of financial products acquired or disposed of in the series of transactions.

A multiple transaction confirmation must be given as soon as practicable or otherwise as permitted by the market integrity rules or the operating rules of that licensed market. Where the confirmation specifies an average price, unless the operating rules of the licensed market specify otherwise, the client may request the licensee to provide a document that specifies the price per unit of the financial products sold or bought in each transaction in the series. You therefore have to have an order management system with this functionality.

An authorisation may be given (and can also be revoked) orally or in writing, but if given (or revoked) orally, the licensee must make a written record of the authorisation (or revocation) and send a copy of the written record to the client.

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Advertising Restrictions

CA s734 - Securities
•     A person must not advertise or publish a statement that refers directly or indirectly to an offer of securities that does not need a DD because of s708(1) (small scale offerings) (s734(1)).
•     Subject to the next bullet point, in all other cases, if an offer of securities needs a DD, you may only advertise the offer or publish a statement that refers directly or indirectly to the offer or that is reasonably likely to induce people to apply for the securities, if it includes a statement that:
  •     identifies the issuer and, where s707 applies, the seller;
  •     indicates either that a DD is available and where it can be obtained or, if a DD has not yet been lodged with ASIC, that it will be made available when the securities are offered and when and where it is expected to be made available;
  •     the offers of the securities will be made in, or accompanied by, a copy of the DD;
  •     a person should consider the DD in deciding whether to acquire the securities; and
  •     anyone who wants to acquire the securities will need to complete the application form that will be in or accompany the DD (ss734(5)(a) and (6)).
•     If the securities are not in a class that is already quoted and the advertisement or statement is published before the DD is lodged with ASIC, the statement must contain the following and nothing more:
  •     a statement that identifies the offeror and the securities;
  •     a statement that a DD for the offer will be made available when the securities are offered;
  •     a statement that anyone who wants to acquire the securities will need to complete the application form that will be in or will accompany the DD; and
  •     optionally, a statement of how to arrange to receive a copy of the DD (s734(5)(b)).

CA s734(3) provides that in deciding whether a statement indirectly refers to an offer or is reasonably likely to induce people to apply for securities, you should have regard to whether it: (a) forms part of the normal advertising of a body's products or services and is genuinely directed at maintaining its existing customers, or attracting new customers, for those products or services; (b) communicates information that materially deals with the affairs of the body; and (c) is likely to encourage investment decisions being made on the basis of the statement rather than on the basis of information contained in a disclosure document.

There are limited exceptions in CA s734(7) for notices or reports given to a market operator by entities whose securities are traded on that market, notices or reports of general meetings, corporate reports that don’t contain new material information and that don’t refer directly or indirectly to the offer, genuine news reports and independent research reports.

CA ss1018A and 1018B - Other Financial Products
•     A person must not advertise an offer, or intended offer, of financial products that does not need a PDS because of s1012E (small scale offerings) (s1018B).
•     In all other cases, if a financial product is or will be available to retail clients, you may only advertise the product or publish a statement that is reasonably likely to induce people to acquire the product if the advertisement or statement:
  •     identifies the issuer and, in a sale situation, the seller as well;
  •     indicates either that a PDS is available and where it can be obtained or, if it has not yet issued, that it will be made available when the product is released or otherwise becomes available and when and where it is expected to be made available; and
  •     indicates that a person should consider the PDS in deciding whether to acquire, or to continue to hold, the product (s1018A).

Unlike s 734(3) of the Corporations Law, s1018A does not list any factors to be taken into account in determining whether particular advertising is merely image advertising or is reasonably likely to induce people to acquire a financial product.

CA s1018A(4) provides broadly similar exceptions to the advertising rules as those set out in s734(7) for securities.

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Hawking Financial Products

CA s736 - Prohibition on Hawking of Securities
A person must not offer securities for issue or sale in the course of, or because of, an unsolicited meeting with another person or unsolicited telephone call to another person unless:
(a/b)   the offer does not need a DD because of s708(8) or (10) (sophisticated investors) or s708(11) (professional investors);
(c)   the offer is an offer of listed securities made by telephone by a licensed securities dealer;
(d)   the offer is made to a client by a licensed securities dealer through whom the client has bought or sold securities in the last 12 months; or
(e)   the offer is made under an eligible employee share scheme

For ASIC's view on the operation of the hawking provisions, see ASIC Regulatory Guide 38 The hawking prohibitions.

CA s992AA - Prohibition on Hawking of Interests in Managed Investment Schemes
A person must not offer interests in a managed investment scheme for issue or sale in the course of, or because of an unsolicited meeting with another person or an unsolicited telephone call to another person unless:
(a)   the offer is not to a retail client;
(b)   the offer is an offer of interests in a listed managed investment scheme made by telephone by a financial services licensee;
(c)   the offer is made to a client by a financial services licensee through whom the client has acquired or disposed of an interest in a managed investment scheme in the previous 12 months; or
(d)   the offer is made under an eligible employee share scheme

Note that the heading to s992AA describes it as a prohibition on hawking "managed investment products". However, the section on its face also applies to the hawking of interests in unregistered managed investment schemes.

CA s992A(1) - Prohibition on Hawking Other Financial Products
A person must not offer financial products that are not securities or managed investment products for issue or sale in the course of, or because of, an unsolicited meeting with another person (s992A(1)) unless the offer is not to a retail client (s992A(3A)).

CA s992A(1) does not apply to securities or managed investment products (CA s992A(2)) - the hawking of these products being dealt with in ss736 and 992AA, mentioned earlier.

ASIC has issued Class Order CO 02/641 Hawking — securities and managed investments to clarify that s992A(1) also does not apply to interests in managed investment schemes that are not managed investment products (ie interests in unregistered schemes).

CA s992A(3) – General Restrictions on Unsolicited Telephone Calls
A person must not make an offer to issue or sell a financial product in the course of, or because of:
(aa)   an unsolicited telephone call to another person; or
(ab)   an unsolicited contact with another person in another way that is prescribed by the regulations for these purposes;
unless the other person has been:
(a)   contacted only during the hours prescribed by the regulations and only if the person is not listed on the "No Contact/No Call" register in relation to the person making the contact;
(b)   given an opportunity to:
  (i)   register on a "No Contact/No Call" register maintained by the person making the contact at no cost to that person; and
  (ii)   select the time and frequency of any future contacts;
(c)   given a PDS before becoming bound to acquire a financial product;
(d)   clearly informed of the importance of using the information in the PDS when making a decision to acquire a financial product; and
(e)   given (i) the name and contact details of the product issuer; (ii) an indication of the nature of the information contained in the PDS relating to the product; and (iii) the option of receiving, by way of oral communication, any information that is required to be included in a PDS for the product (s992A(3), as modified by CR r7.8.22A),
or the offer is not to a retail client (s992A(3A)).

ASIC has issued Class Order CO 02/641 Hawking — securities and managed investments to clarify that s992A(3) does not apply to securities or interests in managed investment schemes (these are intended to be covered by ss736 and 992AA instead).

The prescribed hours are from 8 am to 9 pm on a day in the State or Territory in which the person to whom the offer is made is located, excluding Sundays, Christmas Day, Boxing Day, New Year's Day, Australia Day, Anzac Day, Good Friday and Easter Monday (CR r7.8.22).

Breach is a criminal offence carrying a penalty of 25 penalty units and/or imprisonment for 6 months for individuals and 125 penalty units for corporations. In addition, a failure to comply with this section gives the other person a right of return and refund exercisable within 1 month after the expiry date of the relevant cooling-off period for the financial product, or one month and fourteen days in the event that no cooling-off period applies to the financial product (s992A(4)).

CR r7.8.22A also adds to s992A(3) a requirement that a regulated person must not influence a client’s decision to elect not to receive the information mentioned in (3)(e) above, other than by asking the client if he or she wishes to do so.

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Unsolicited Off-market Offers

CA Part 7.9 Division 5A - Unsolicited Off-market Offers
•     Establishes a disclosure regime for unsolicited off-market offers to purchase financial products, where the offer is made in the course of a business of purchasing financial products or where the offeror is not in a personal or business relationship with the offeree.
•     The offeror is required to make the offer in printed or electronic form and disclose, amongst other things, the current market value of financial product or, if a current market value is not available, to provide a fair estimate of the value of the product and how it was derived.
•     The offer must remain open at least one month but not more than 12 months and the ability of the offeror to withdraw it is restricted.
•     In the event of a defective offer, the offeree has the right to terminate the contract or, if the contract has been completed, to have the financial product returned within 30 days.

These provisions effectively only apply to unsolicited offers made to retail investors (see CR r7.9.97). They were introduced to stop the nefarious activities of predators such as National Exchange Pty Ltd (see eg National Exchange Pty Ltd v ASIC [2004] FCAFC 90). Not surprisingly, that company was the subject of the first litigation in relation to Division 5A (see Aevum Ltd v National Exchange Pty Ltd [2004] FCA 1781).

Note that CA ss1010A and 1010B do not to apply to Division 5A. This is to ensure Division 5A operates in relation to all financial products, including securities, whether or not they are issued in the course of a business.

ASICR r2C provides that a person provides a financial service for the purposes of the ASIC Act if: (a) the person makes an unsolicited offer to purchase a financial product from another person otherwise than through a licensed financial market; and (b) the other person acquired the financial product as a retail client. This provision is intended to ensure that ASIC may prosecute a person making such an offer under the ASIC Act investor protection provisions (eg for unconscionable conduct).

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