With the Design and Distribution Obligations (DDO) due to commence 5 October this year, the release of ASIC Regulatory Guide RG 274 Product Design and Distribution Obligations (RG 274) in December 2020 was eagerly anticipated by the industry.
Of particular interest to Exchange Traded Fund (ETF) issuers was how the DDO would apply to Exchange Traded Products (ETPs).
The FSC has been supportive of issuers of ETPs issuing Target Market Determinations (TMDs) for products, however, in the context of the secondary market sales exemption which provides that the DDO regime is not intended to apply to the sale of products traded on secondary markets, it wasn’t clear how issuer and distributor obligations would apply to ETPs.
The FSC engaged with ASIC last year seeking clarification of the application of the DDO regime where products are freely traded by retail investors on a secondary market such as the ASX.
Following extensive industry engagement, the FSC was pleased to see ASIC provide further clarification on the application of the DDO regime to ETPs in RG 274. This includes the following clarifications;
- “while issuers must review their TMD as necessary, they are not required to cease on-market distribution in circumstances where a TMD is no longer appropriate….This is because, practically, an issuer of an ETP is not in a position to cease retail product distribution conduct in relation to a product traded on a financial market” (see RG 274.257 for more info).
- modified obligations for distributors where an ETP is acquired by consumers on financial markets, requiring distributors to report complaints and other relevant information to the issuer (RG 274.258).
- an ETP issuer’s reasonable steps obligation does not require it to ensure that “each on-market transaction involving retail clients is consistent with the TMD” and is instead required to take steps that are reasonably likely to result in retail product distribution conduct being consistent with the TMD. The ETP issuer can take into account the trading in an execution-only context, where the consumer acquires the ETP through brokers/online trading platform, and the steps it is reasonably able to take to reduce the risk of distribution that is not consistent with the product’s TMD (see paragraphs RG 274.259-274.261).
- If an ETP issuer is ‘actively marketing its product through a broker or other distribution channel’ then RG 274 sets out that there are likely to be steps the ETP issuer could reasonably take to ensure that the marketing approach is consistent with the TMD. (RG 274.262).
What can be taken from this is that in seeking to comply with the DDO obligations ETP issuers will need to consider how they are marketing and distributing the product, including whether the products are being sold as execution only or whether there is active marketing of the product through a broker or other distribution channel.
For more information on relevant DDO ETF developments, including the ongoing refinements to the template TMD for Funds Management, FSC members who are ETF product issuers can get involved with the FSC DDO ETF Sub Working Group.