ASIC’s private markets push: what industry should prepare for

Engaging with industry to shape the future of private markets 7 min read

Private capital continues to be a key focus for ASIC. It recently released 50 public submissions¹ following the publication of its Discussion Paper in February,² and last week hosted its first public symposium on public and private markets.

ASIC is taking an open and collaborative approach with industry to Australia's private markets, as it seeks to understand the private capital landscape. It has said it is open to all actionable ideas that are within ASIC's 'gift to give' and welcomed the industry feedback it has received to date. It indicated that in:

• Q3 – it will release a public markets roadmap; and
• Q4 – it will release a private markets roadmap.

In this Insight, we outline the areas we think those Q3 and Q4 roadmaps might cover, how ASIC is likely to approach those focus areas, how it might enforce its areas of concern based on our past experience, and what it means for you.

Key takeaways

• ASIC has outlined its key focus areas and priorities for private capital: private credit, valuations, conflicts of interest, fee disclosures and data and transparency.
• It will continue its surveillance work and industry consultation for the remainder of the year through its compulsory information gathering processes and meetings. ASIC noted its surveillance of private credit, announced publicly in March, has revealed some 'interesting' things on which it will issue a report later this year. This points to the strong potential for regulatory uplift when read alongside ASIC's summary of responses to its Discussion Paper that private credit is good for the economy and investors, if done well, but that there may be work to do to ensure it is sustainably done well.³
• There are already a number of enforcement investigations (including current court actions) focussed on more egregious alleged misconduct within smaller funds. Larger funds should be on notice that having identified areas of concern in the smaller players, our experience is that ASIC often seeks to leverage the impact of enforcement by taking action against larger players in the market.
• Fund sponsors should review their valuation, conflicts of interest and fee disclosure practices and consider carefully whether amendments should be made to reflect current best practice and keep a close eye on any statements from ASIC.

ASIC's next steps

ASIC has said that while it is in no rush to regulate, it is considering a number of key focus areas, including valuations, conflicts of interest, fee disclosures and data and transparency. Industry panellists at the ASIC symposium indicated that more guidance in the areas of valuation and liquidity in particular would also be welcome.

ASIC is pursuing its priorities through surveillance activities (issuing compulsory document and information requests) and meeting with key industry stakeholders. It has said this activity will continue for at least the remainder of the year.⁴

How is ASIC likely to approach its key private capital focus areas?

ASIC is likely to interrogate its stated focus areas in the following ways:

• Continuing its surveillance work through issuing notices for information and documents and undertaking meetings with key market participants.
• Building its knowledge of the private markets, and what it considers the risks, and attitudes to those risks in the private markets, and publishing further reports, guidance and its roadmaps.
• Starting its process of scanning the private markets for case studies to investigate and/or commence enforcement action so that it can begin changing attitudes in private markets to the risk areas it has identified—it may look to do so through:
  • potential breaches of the AFSL obligations under the Corporations Act or ASIC Act, including the obligation to act efficiently, honestly and fairly (s912A(1)(a), Corporations Act) and comply with conflicts, competence and risk management obligations—in other contexts ASIC has been testing the limits of the obligation to act efficiently, honestly and fairly to have appropriate systems and controls to mitigate and manage and broad range of risks (which could extend to valuations and conflicts of interest, amongst others);
  • to the extent an entity is a responsible entity of registered managed investment funds—the duties to act honestly, with care and diligence and in members' best interests. Based on ASIC's recent review of Compliance Plans of Responsible Entities, the content requirements for Compliance Plans may be an early target for ASIC to seek to enforce standards through the proxy of how they are documented; and
  • potentially other financial product obligations, including those set out in Part 7.10 of the Corporations Act (eg misleading or deceptive conduct and insider trading, amongst other things).

What to expect moving forward

• Expect ASIC's surveillance activity to continue through its compulsory information gathering processes—the focus for the time being is on learning about how the private markets operate and considering options for the regulatory toolbox.
• That said, there are already a number of enforcement investigations (including current court actions) focussed on more egregious alleged misconduct within smaller funds. ASIC is learning about how that alleged misconduct was facilitated, including through manipulating valuations and reporting of financials and how the current regulatory framework fell short in preventing the misconduct.
• While ASIC may initially continue to focus in on what it considers subpar behaviour in the smaller and retail-facing parts of the market, our experience is that—having fixed upon the key issues of concern (ie valuations)—it has historically sought to leverage the impact of enforcement action by targeting larger players. This has the effect of attracting the attention of the media and the broader market, and (ASIC hopes) uplifting standards as a whole.
• One of ASIC's stated areas of focus is 'gatekeeper' entities (like superannuation trustees). While its initial enforcement focus might be on the smaller end of the market, we can expect it to shift focus quickly to how larger funds may have helped facilitate alleged misconduct by investee entities—even inadvertently—including by failing to apply appropriate processes and procedures to their investment decisions, their onboarding and ongoing monitoring procedures and how those interact with their broader statutory duties.
• Fund sponsors should review their valuation, conflicts of interest and fee disclosure practices and consider carefully whether amendments should be made to reflect current best practice, having regard to comparable regulatory jurisdictions.
• Market participants should also keep a keen eye on any guidance or comments to the market from ASIC in this space and act quickly to uplift if guidance is issued. Given ASIC's public statements to date and its targeted focus on private markets, it is a reasonable assumption that private credit may be the first cab off the rank for updated guidance and regulatory uplift.