FMA guidance on new class exemption from market index requirements

The Financial Markets Conduct (Market Index) Exemption Notice 2018 (the Exemption Notice) came into force on 17 July 2018. The Exemption Notice provides limited exemptions for MIS managers from the market index disclosure requirements in schedule 4 of the FMC Regulations in relation to funds that invest in assets for which there is no appropriate market index.

The Financial Markets Authority (FMA) has published guidance on the application of the Exemption Notice (Guidance) to clarify FMA’s expectations in relation to the market index requirement for quarterly fund updates, and when a peer group index or composite index can be used instead or when no index information is required.

A link to the Guidance and the Exemption Notice is available here and here.

Who needs to read it?

Fund managers who have struggled to find an appropriate market index to disclose in fund updates, when a fund:

  • invests in illiquid asset classes;
  • does not invest in any particular asset class or market; or
  • uses alternative investment strategies such as derivative instruments which alter the return profile of the underlying assets.

These managers were identified by FMA as having difficulty complying with the market index requirement. However, we expect all MIS managers will have an interest in the scope of the Exemption Notice and the FMA Guidance.

What does it cover?

The Exemption Notice grants a class exemption that applies to managers with funds that invest, in whole or in part, in assets that do not have an appropriate market index. The Guidance assists MIS managers to understand their obligations in respect of the market index requirement for quarterly fund updates, and when a peer group index or composite index can be used instead, subject to certain conditions.

The FMA considers that the exemption will improve the disclosure made to investors and also improve comparability across funds over time, and is consistent with the purpose of the Financial Markets Conduct Act, to promote confidence and informed participation of businesses, investors, and consumers in the financial markets and avoid unnecessary compliance costs.

The Exemption Notice allows MIS managers to take alternative approaches, as summarised in the table below:

Where a fund has…The manager may…
Relevant assets with different peer group indicesUse a composite index that reflects the different peer group indices
Both relevant assets and assets that do have an appropriate market indexUse a composite index that reflects both the peer group index (or indices) and the appropriate market index (or indices)[1]
Assets that do have an appropriate market index and no relevant assets with a peer group indexUse the appropriate market index (or indices) if it is likely to be useful to investors when assessing the performance of the fund as a whole

Our view

The Exemption Notice is a pragmatic response to the difficulty that some MIS managers have experienced complying with the existing market index requirement, and should lead to more relevant disclosures of indices that reflect the assets the fund invests in.

The terms of the Exemption Notice are, however, quite complex in themselves and the Guidance provides an important resource for MIS managers when seeking to interpret and apply the terms and conditions of the Exemption Notice

What next

If you have any questions in relation to the Exemption Notice or the Guidance, please contact one of our experts.

Footnotes

[1] Under the Financial Markets Conduct Regulations 2014, managers are able to disclose the return on a composite index composed of more than one ‘appropriate market index’.

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