Portfolio Holdings Disclosure regulations: key aspects of the revised regime

By Philip Marquet, Geoff Sanders
Financial Services

Good news on the required disclosure front 7 min read

The long-awaited Portfolio Holdings Disclosure (PHD) regulations were made on 11 November 2021, which will give superannuation trustees certainty about the manner in which portfolio holdings information needs to be disclosed to the public.

The good news for superannuation trustees and their external managers, particularly with the first reporting date of 31 December 2021 just around the corner, is that the form of the required disclosure is much simpler than the exposure draft regulations had suggested it might be.

Summary – a simpler approach than anticipated

The Corporations Amendment (Portfolio Holdings Disclosure) Regulations 2021 (Regulations) set out the manner in which a superannuation trustee must disclose its portfolio holdings, and provide a number of (very simplistic) examples of the way that information needs to be presented. In a significant departure from the exposure draft, the Regulations now allow for a range of assets to be disclosed on an aggregated basis. Overall, this should materially simplify the amount of disclosure required and (except perhaps in limited circumstances) should provide greater protection for commercially sensitive information.

Key aspects of the revised regime

Despite being law for the best part of a decade, it is now confirmed that the first reporting date for the PHD regime will occur on 31 December 2021.

In short, the PHD rules are designed to provide additional transparency to superannuation fund members (and others) by requiring trustees to take a 'snapshot' of the portfolio composition of each of their investment options as at 30 June and 31 December each year. That information must be made available on a publicly accessible part of a fund's website within 90 days thereafter.

While the core obligations of the regime are set out in the Corporations Act (and are unchanged), much of the detail about what information should be disclosed (and how) is set out in the Regulations made on 11 November 2021.

Happily for superannuation trustees, the Regulations provide for much simpler disclosure than had been foreshadowed in the earlier exposure draft.

The key aspects of the revised regime, which we believe largely address trustees' well-founded and long-held concerns around the forced disclosure of commercially sensitive investment information are set out below.

Distinction between internally and externally managed investments becomes key (for some asset classes)

While the requirements still require look-through disclosure to the first non-associated entity level of a fund's holding structure, the importance of that test has been greatly diminished by the introduction of a distinction between 'internally managed' or 'externally managed' investments. That is, for unlisted asset types (ie unlisted equities, property, infrastructure and alternatives) as well as fixed income assets, the key question for trustees is now whether the relevant assets are 'internally managed' or 'externally managed', rather than whether an investment is controlled or not controlled by the trustee.

While those terms are not defined (and there is therefore some degree of uncertainty around the concepts), the concepts appear to be seeking to make a distinction between assets that are managed by an in-house investment team at the fund (ie 'internally managed' investments) and assets that are in a day-to-day sense managed (through whatever legal structure – ie it could be through a mandate, a fund-of-one, a pooled fund or even a co-investment) by an investment manager that is not an associate of the trustee.

This is undoubtedly a significant relief for trustees and their managers.

Importantly, where such assets are 'externally managed', the value of those assets is only required to be disclosed on an aggregated basis, with a single line item referring to all such assets managed by the relevant fund manager. That is, if the super fund has exposure to a range of private equity assets through arrangements in various forms with the same manager group, a single line item would be included which discloses only the name of the manager and the aggregate value of the super fund's assets managed by that manager (for that asset class). There is no longer a need to disclose the precise name of the pooled fund, co-investment vehicle or even underlying investment asset, nor the carrying value of those specific assets.

This is undoubtedly a significant relief for trustees and their managers.

Even for internally managed unlisted assets, no disclosure of individual unlisted asset values is required

Even for 'internally managed' unlisted and fixed income assets, while additional detail is required to be disclosed about the precise asset (eg it will be necessary to list the address of real property and the fund's percentage holding of the property, and it will be necessary to disclose the name and percentage holding of unlisted infrastructure assets), it will no longer be necessary for superannuation trustees to disclose the value of such assets. Instead, merely the aggregate value of all internally managed assets of that asset class (eg all internally managed real estate assets or all internally managed infrastructure assets) will need to be disclosed.

Leaving aside unfortunate situations where a super fund has only a single internally managed asset of a particular asset class, or a single (readily identifiable) externally managed asset with a particular manager, the removal of the need to disclose commercially-sensitive information about individual asset values is a material improvement to the regime.

Aggregation of derivatives by kind, asset class and currency

There is no longer a requirement for superannuation trustees to disclose individual derivative contracts. Instead, derivatives are to be aggregated in three different ways for the purpose of disclosure – by kind, asset class and currency – which is significantly simpler than the requirements previously set out in the exposure draft.

No exemptions and no materiality threshold

Perhaps unsurprisingly given the other concessions, the Regulations do not include any general exemptions for particular kinds of assets, nor is there a materiality threshold – therefore, every asset in a superannuation fund's portfolio is potentially relevant for the purposes of PHD disclosure (subject to the above rules regarding aggregation).

What are the practical implications?

Overall, we believe the Regulations strike a far better balance between the legitimate interests of members to see where their superannuation assets are invested, and the impracticalities and potential commercial downsides of over-disclosure than the industry had expected.

This should mean that compliance with the new regime from 31 December 2021 is significantly more straightforward than it might have been based on some of the earlier proposals.

This should mean that compliance with the new regime from 31 December 2021 is significantly more straightforward than it might have been based on some of the earlier proposals. It should also avoid the very real risks of superannuation funds – who had raised genuine concerns around seeing their asset values splashed all over public websites – finding themselves as unwanted investment partners for managers and co-owners of assets.

Nonetheless, there of course remain various challenges for trustees in implementing the new regime. Below we outline a few key points for superannuation trustees to bear in mind as they adjust to the new requirements.

Volume of data

The PHD regime still requires the disclosure of a significant amount of information, including a full listing of listed equity holding positions (including holding values). We expect that the volume of data disclosed will be significant and trustees will still have their work cut out for them in preparing for the first reporting date of 31 December 2021. Importantly, we note that there is no change to the investments which are within the scope of the PHD regime (ie each investment item allocated to each investment option) – the changes only simplify the way that information needs to be presented.

Consent to disclosure may still be required in some cases

For unlisted assets in particular, superannuation trustees will need to ensure they can disclose the relevant information without breaching any confidentiality obligations owed to their fund managers or co-owners of jointly held assets. However, given that most of the disclosure is now on an aggregated basis (at least for the sensitive valuation information), we are hopeful that this is less likely to be controversial than it would have been under the earlier models.

Tricky questions remain

Despite the materially improved simplicity of the requirements, the Regulations are (perhaps necessarily) expressed at a high level and don't deal with all of the different ways superannuation trustees may have exposure to particular assets. For example, the Regulations don't expressly explain how trustees are expected to disclose securities which are loaned pursuant to securities lending programs, and there will be a range of hard calls to be made over whether particular investment structures involve an internally or externally managed investment given the lack of legislative clarity around that important concept. As always, there will therefore be some tricky cases where difficult judgment calls will be required.