ASIC has made an interim stop order on Storehouse Residential Trust (ARSN 135 182 074) (Fund), a registered managed fund promoted by K2 Asset Management Ltd (K2), due to deficiencies in the target market determination (TMD).

The interim order stops K2 from issuing interests in, giving a product disclosure statement (PDS) for, or providing financial product advice to retail clients recommending an investment in the Fund. ASIC made the interim order to protect consumers and retail investors from acquiring products that may not be suitable for their financial objectives, situation or needs.

ASIC considered that the target market in the Fund’s TMD was defined too broadly, did not properly consider the risks and features of the Fund and information within the TMD was inconsistent.

ASIC’s concerns included:  

• a mismatch between the investment risk profiles of the Fund (very high-risk) and risk profiles identified for investors within, or potentially within, the target markets (high and medium),
• the target market includes investors who intend to hold the funds as a core component (25–75%) and the Fund has very low portfolio diversification and is very high risk,
• consumers with an investment objective of capital preservation or income generation are potentially in the target market, where capital loss is a material risk and income distributions may not occur regularly,
• consumers with an investment timeframe of less than two years are potentially in the target market, where the suggested investment timeframe of the Fund is at least five years,
• the target market includes investors with a need to withdraw money annually when there are restrictions on withdrawals as the Fund is illiquid and underlying assets are aligned with periods of three to five years. There is no commitment to provide redemptions and withdrawals depending on the liquidity of the Fund.

ASIC also considered that the distribution conditions in the TMD are not appropriate to ensure that the Fund would likely be distributed to investors in the target market.

The TMD contained one distribution condition which stated the product is only suitable for distribution to consumers who have received general financial product advice. ASIC considered the TMD fails to set out distribution conditions for direct-to-consumer distribution or distribution via financial product advice where such distribution appears likely to occur.

ASIC will consider making a final order if the concerns are not addressed in a timely manner. K2 will have an opportunity to make submissions before a decision is made about any final stop orders.

Background 

As of 30 June 2022, Storehouse Residential Trust held $22.5 million in assets under management.

Under DDO, financial product issuers must define target markets for each of their products appropriately, with sufficient granularity, having close regard to the risks and features of the relevant product. Issuers also need to consider how their product will be distributed and have appropriate conditions in place to ensure the product is directed to the target market.

ASIC has targeted surveillances underway to check whether product issuers and distributors are complying with DDO.

Report 762 Design and distribution obligations: Investment products outlines ASIC’s observations on how issuers of investment products are meeting their obligations and highlights areas for improvement.

Editor's note:

Following the interim stop order, K2 made amendments to the TMD that addressed ASIC's concerns. The new TMD better defines the target market for the Fund around investor risk tolerance, investment objectives, investors need to withdraw money and the investment timeframe was amended. K2 also updated the distribution conditions in the TMD. As a result, on 15 September 2023, ASIC revoked the interim stop order and no final stop order was made.