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When does an SMSF qualify as a ‘wholesale’ investor?

Introduction by Graham Hand

If an investor has sufficient assets or income, there may be benefits in their accountant providing a certificate confirming their status as a 'wholesale' or ‘sophisticated' investor. It may give access to investments normally reserved for the institutional market, especially unlisted bonds. There are many long term annuities or inflation-linked bonds available which are useful for retirement planning.

A couple of months ago, I wanted to invest through my SMSF in a Social Benefit Bond issued by The Benevolent Society. The lead managers were Westpac and CBA. Although I have a large SMSF, after much time and exchange of emails, I received this reply from Westpac:

“There have been some on-going internal discussions with our Legal and Compliance areas around what constitutes a sophisticated investor from an SMSF perspective and I just wanted to update you on how this has played out. 

We have been advised yesterday that for the Social Benefit Bond, any Investment via a SMSF must actually meet the Professional Investor test as follows:

"a regulated superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 if the fund, trust or scheme has net assets of at least AUD 10 million"

This is a change from our previous understanding where an SMSF with more than $2.5m in net assets would satisfy the test.

Can you please advise if this change will affect your requirement to invest in your Super Fund?

If so, is there another name you could possibly look at investing in (Company or Personal) where you do obviously meet the $2.5m net asset test that your Accountant can sign off on?”

I wrote this reply to Westpac:

“I realise you are only following legal instructions, but I believe Westpac is out of market with this interpretation. Not only have I been investing and working in markets for about 35 years, and now write a financial newsletter, but I have a large SMSF with about $X million in assets. As trustee of my SMSF, I deal with many brokers based on the $2.5 million threshold, as signed by my accountant. I buy 'wholesale' bonds not intended for retail distribution. 

How many SMSFs do you think have over $10 million of assets? You are ruling out a major market. I only want to hold this investment in my SMSF so it is not relevant what my other assets are … I guess you can cancel my order.”

Westpac replied as follows:

“I fully understand your commentary and before contacting you, I had specifically put your case forward for an exception to the ruling (having researched your experience etc). However, it has been decided that there will be no exceptions in regard to this particular SMSF ruling. 

I believe the CBA at this point in time will be taking a similar stance.

Over the next few days I will monitor if there are any AFSL Holders that will be putting a "group" bid for clients in under their name and this may provide me with the ability to refer you through to a different contact to access the Bond.

Obviously I am disappointed with this outcome and that we are not able to assist you.”

I then contacted the other lead manager at CBA, and Westpac was correct. CBA would also not sell to an SMSF with less than $10 million in assets. But I could invest in my own name.

What’s happening? Other fixed interest brokers accept the SMSF of which I am a trustee as a sophisticated investor. This is a recent reminder notice from one of my brokers, which allows my SMSF to invest:

“Your Accountant Certificate classifying you as a Sophisticated Investor will expire shortly. Accountant Certificates are only valid for up to two years after they were issued. By providing an additional Accountant Certificate we can ensure that you continue to be classified as a Sophisticated Investor under 708(8) of the Corporations Act 2011, and as such are able to trade Wholesale bonds.

Updating your Sophisticated Client classification ensures that we can continue to provide you with a more comprehensive and diversified portfolio of fixed income investment services and research than what we can make available to Retail Clients.

To retain your Sophisticated Investor status for a further two years please arrange for the enclosed Accountant Certificate to be completed and certified by your Qualified Accountant.”

Why is there so much doubt about such an important issue? SMSFs are one-third of superannuation, with a million trustees holding $500 billion, yet both CBA and Westpac say they must have over $10 million to invest in the wholesale market.  

What’s going on? Andrew Bloore explains.

In accordance with section 708 (11) of the Corporations Act, the SMSF itself can be a wholesale or sophisticated investor only where its assets are greater than $10 million.

So how can a SMSF utilise the wholesale or sophisticated investor rule?

One of the benefits of the SIS Act for an SMSF is section 58. This section allows a member of an SMSF to direct the trustees on the investments it can make. Outside of the trustee not allowing the investment because it breaches another provision of the SIS Act or another Act, the trustee must make that investment.

If the individual member meets the sophisticated investor or individual wealth rule, in my opinion, that member can direct the trustee of the SMSF to make the investment.

Therefore provided that the individual’s accountant, AFSL holder or other person that is allowable under the Act who is able and familiar with the client’s full position, signs the declaration and that individual member meets the criteria, then by utilising section 58, the individual can direct the trustee to make the investments.

What are the key tests for meeting the standards?

Test 1: Product value 

Product value applies if the product being invested in or advised on has a value exceeding $500,000. This does not apply in relation to risk-based products (such as life insurance) or to the extent that investment funds are sourced from a superannuation fund.

Test 2: Individual wealth 

This test requires a person to have net assets of at least $2.5 million or gross income for each of the last two financial years of at least $250,000, as certified by an accountant. The certificate lasts for two years before requiring renewal.

In determining the net assets or gross income of a person, the net assets or gross income of any entity controlled by that person can be included. The general rule is the SMSF assets are excluded unless the assets are segregated to the member being tested.

Test 3: Professional investors 

This category includes a range of investors with one of the following specific attributes:

  • an AFSL holder
  • a body regulated by APRA, other than a trustee of a superannuation product
  • a body registered under the Financial Corporations Act 1974
  • a trustee of a superannuation product with more than $10 million in assets
  • a person having or controlling more than $10 million in gross assets (including moneys held by an associate or on trust)
  • a listed entity and its related body corporates
  • an exempt public authority
  • a person who carries on an investment business that is offered to the public or
  • a foreign entity that would meet one of these requirements had it been established in Australia.

This only applies to large superannuation funds and not the overwhelming majority of SMSFs.

Test 4: Sophisticated investor 

This category includes persons who the AFSL holder has determined to be experienced in using financial services. The test consists of five elements which can be summarised as follows:

  • the product is not general insurance, a superannuation or an RSA product
  • the product or financial service is not used in connection with a business
  • the client signs a written acknowledgement in relation to certain matters.

Make your own enquiries

Legal departments within major financial institutions are making different determinations. Some are imposing the $10 million minimum on the SMSF itself, while others are accepting the qualification of the SMSF member. While this goes on, some bond dealers are developing their unlisted bond distribution, while others wring their hands in frustration. Given the industry uncertainty, every person affected should take their own personal advice.

A footnote from Graham Hand

When my accountant gives me the certificate in respect of sophisticated/wholesale/professional status, he does it based on the assets of my super fund, and the brokers I use to access wholesale bonds accept this. It's not based on my other assets. So who knows what’s going on!

Andrew Bloore is Chief Executive Officer at SMSF adminstrator, SuperIQ.

 

6 Comments
Complianceone
May 22, 2015

I realise this is an old thread however I thought it might be worthwhile to provide an update.

ASIC has recognised the $2.5m test for SMSF trustees and published clarification of its position in August 2014 in media release 14-191MR.

Norman Taralrud-Bay
April 06, 2014

Why is there no test based on experience in financial markets and/or investment management? Someone may have 15 yrs or more of investment experience, but not have the required net assets; or an 18 year old could inherit 10 million and be considered 'sophisticated' day one. Does this protect those who need protection?!

Sulieman
December 23, 2013

A very valid point Peter.

I would have thought WBC v Lee though would apply in any case anyway whether he was retail or wholesale as the argument was a misrepresentation by the adviser and Westpac didn't bother calling up the rep to defend this (arguably adding weight to Lee's argument).

My concern over FOS/ASIC's interpretation relates to if relevant disclosure and understanding is provided and a product failure were to occur in a wholesale product.

If FOS were to interpret that QFS150 means SMSF investors should not enter into wholesale products then a unforseen product failure leaves a licensee at considerable risk.

I believe QFS150 only relates to the service provided and not the product. ie the client should be fully informed as a retail investor but they can still enter into wholesale products.

Peter Bobbin
December 22, 2013

I agree that a smsf can be a wholesale investor but don’t think that the certificate makes them sophisticated or deserving of anything less than the full disclosure financial planning model.
Last month in WBC v Lee the Court noted that “qualifications for "wholesale client" status was based on the value of .. assets and income…. Satisfaction of such criteria … did not establish that they (the clients) had expertise in understanding and using financial products like the GPS. The accountant's certificate given pursuant to s 708(8)(c) of the Corporations Act simply relieved (WBC) from the obligations imposed on financial services licensees to give disclosure in relation to certain financial services provided to "retail clients".

Being a sophisticated client is a regulatory issue, it does not help in a negligence claim.

Andrew Bloore
December 21, 2013

Section 58 is very clear, in my opinion.

If a person meets the requirements as an individual then they are a sophisticated investor as an individual in accordance with the provisions in section 708.

Section 58 allows the individual to direct the trustee to make the investment. The SIS Act specifically allows this.

This section allows this form of trust to be directed by a beneficiary, which is very different to any other form if trust.

The key issue is for the institution to satisfy itself that the individual meets the requirement, ie the correct declaration must be signed by the appropriate person and evidence of the direction by the member to the trustee, for example the direction minute.

This is a simple matter of follow the law and have the correct supporting documentation then there no concern.

The ASIC guidance does not deal with section 58. I agree with the ASIC position but it does not deal the the issue at hand.

Sulieman Ravell
December 21, 2013

Hi Andrew

I just read your article on wholesale investors. I've just been running through the same exercise and tried to get a legal opinion. It remains inconclusive.

What you're missing is ASIC's interpretation. They issued some guidance under QFS150

https://www.asic.gov.au/asic/asic.nsf/ASIC+FSR+FAQ+DisplayW?ReadForm&unid=7BDE894D55A75B3BCA256F56007AEED1

My interpretation was that this relates to the provision of financial services rather than a financial product and I have the view (after a brief chat with ASIC who stated they're trying to protect clients retirement funds) that this is about the advice piece rather than the product.

However, I believe McMahon Clarke has a different view. It's my understanding that their view is ASIC is wrong in their interpretation and this is all based around the term "relates to" (look up their submission to ASIC on wholesale investors from a couple of years back). So I think you can have a wholesale investor SMSF.

The issue then comes back to a product failure and how the Financial Ombudsman (FOS) would treat this. I think FOS would fall back to the ASIC guidance and you're now back to square one. There is no recourse against a FOS decision.

I'm interested to see if you get any further

 

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