ASIC calls out super fund trustees on executive conflict arrangements

The corporate regulator has identified “concerns” about conflicts arising from the personal investment switching habits of super fund directors and senior executives, after a surveillance exercise that looked into whether price-sensitive valuation information was being used for personal gain.

After being tipped off that directors and senior executives could be switching investment options based on “their knowledge of the timing and revaluation of unlinsted assets”, ASIC studied a sample of 23 trustees across both industry and retail funds during the volatile pandemic period.

As unlisted assets are only reviewed at scheduled periods, it’s possible someone with inside information about a reduction in value could swap out their allocation before the results are announced.

The results of the study, ASIC said, revealed conduct that fell below it’s expectations.

“We expected superannuation trustees to have robust conflict of interest policies that dealt adequately with investment switching, including by their directors and executives,” said ASIC commissioner Danielle Press. “What we found instead was often a clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter this risk.

“This is very concerning given the level of sophistication and governance required of trustees when managing millions of dollars in assets on behalf of fund members,” Press continued.

On top of a failure to identify executive investment switching as a risk, ASIC says some board members aren’t proactively engaged with the issue.

Inadequate oversight of investment switching and a lack of oversight of related parties were also identified as key areas of concern.

Feathering the nest

The worry, ASIC believes, is that there aren’t enough controls in place to ensure executives don’t use inside knowledge to essentially feather their own retirement nest.

The potential for this to occur is hightened when it comes to information about unlisted assets.

“Directors and executives of superannuation funds may have knowledge of their trustee’s decisions around valuations of unlisted assets or the authority to influence such decisions. Trustees must have effective conflicts management frameworks to prevent the misuse of such information,” Press said.

“Policies should cover the identification, control, management and regular monitoring of conflicts as well as the consequences for non-compliance. Such protections will help trustees manage the risk that their executives’ own interests or those of a related party results in loss of confidence in the fund or in detriment to members.”

The corporate regulator says it will continue gathering information and consider next steps, including following up with trustees on areas for improvement in their conflict management practices.