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Self Managed Super Fund (SMSF) Article
Trustees need to know PDS rules

By Tony Negline.

This article may be out of date.

20th August 2008

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Anyone who wants to sell a financial services product to a potential investor must issue a Product Disclosure Statement so that the consumer can make an informed choice.  A PDS must set out the significant details of a product including its risks, benefits and costs.  “All information contained in a PDS must be worded and presented clearly, concisely and effectively,” says ASIC in its Regulatory Statement 168.

These documents are often long and turgid and the Rudd Government has commenced work on trying to simplify them.

Do SMSF trustees have to issue a PDS given that the trustees of these funds also have to be the members and at first glance are meant to know what they are doing?

Theoretically a SMSF trustee should issue a PDS when:

Clearly there are multiple occasions when a PDS could be issued.  Fortunately trustees do not have to issue another PDS if a previously issued document is still current.

The financial services rules potentially exempt SMSF trustees from automatically having to issue a PDS if the trustee believes, on reasonable grounds, that a SMSF member either has, or is able to obtain all the information that a PDS should contain.

ASIC has said that it believes a SMSF does not necessarily have to issue a PDS.  As all trustees of a SMSF are also the members then there is a necessarily close relationship between all trustees and members.

ASIC takes the view that a trustee/member merely has to have access to relevant information.  The information does not need to be formally handed over to a member but can remain at the accountants office and be freely available to the member if they ever felt the need to examine it.

The two main accounting bodies, CPA Australia and the Institute of Chartered Accountants essentially agree with ASIC.

“At this stage there is no wholesale need for a PDS to be prepared,” the ICAA told its members in 2004.  A PDS might be required “where one member dominates the fund or where you have a member who is not a trustee”.

The CPA’s Superannuation Policy Adviser, Michael Davison, said that while issuing a PDS may be good business practice for advisers to help educate clients about their SMSF, it is definitely not mandatory.

The ICAA told its members that a PDS can be made up of, “A copy of the trust deed, membership rules, investment strategy and options and details regarding the death benefit payment should meet these requirements.  The one piece of information which is not at the client's disposal is information in relation to accounting, tax and audit costs.  This would be addressed by the issue of a letter giving estimates of these costs.”

Within the financial planning community there seems to be an acceptance that a PDS should be issued.  The main motivation of financial planners would seem to be a desire to limit their own professional liabilities.  Put simply financial planners believe it is easier to assume someone has no knowledge and therefore needs a PDS rather than assume the person has sufficient savvy to work out what a product is all about without a PDS.

The legal fraternity also seem to think that issuing a PDS is a good idea.  A good portion of them think that because it will minimise risk for all concerned it's better to issue a PDS.  However the lawyers do not seem to agree on what the PDS should contain.

Some lawyers and trust deed providers argue that a PDS should contain a copy of the trust deed.  Others argue that the PDS requirements clearly state that the document should be a stand-alone document and not include any other documents.  One lawyer believes that putting a trust deed in a PDS is “a lazy and ineffective way to handle the task.”

The CPA’s Davison believes that a trust deed should not be included in a SMSF PDS. “A trust deed is a formal legal document which, no matter how simply it has been written, will contain an element of legalese. A PDS on the other hand is designed to educate investors to enable them to make informed decisions about their investments. This can’t be done using complicated language and legal definitions.”

Davison went on to say however, that the trust deed does contain the rules of the fund and should be provided to all fund members as a matter of course so they can properly carry out their role as trustees.

These differing views and debates within the professional community are all well and good.  But how is a lay trustee meant to know what should be done when there are so many conflicting messages?

PDS

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