Investors in XTBs, a series of listed fixed income securities, got a surprise last Wednesday when trading in all of the XTBs on the Australian Securities Exchange was suspended.
Australian Corporate Bond Co, which manages the XTBs, has been caught up in ASIC court action against fund manager Theta Asset Management, which happens to be ACBC’s responsible entity.
ASIC announced last that it had commenced proceedings against Theta and its managing director Robert Marie, alleging that they were responsible for authorising five defective product disclosure statements for a product called Sterling Income Trust.
ASIC alleges that Theta and Marie failed to ensure that each of the product disclosure statements did not contain misleading or deceptive statements or omissions.
On the same day, ACBC requested that all Exchange Traded Bond (XTB) units listed on the ASX be put into a trading halt. It said the issue facing Theta “may impact the market for all classes of XTB.”
There are 41 XTBs listed on the ASX. They are securities that provide a beneficial interest in underlying corporate bonds issued by large Australian companies and financial institutions. They can be bought and sold on the exchange, with prices changing in response to changes in the market prices of the underlying bonds.
ACBC launched its first XTBs in May 2015. XTBs provide exposure to debt securities issued by AMP, ANZ, Bank of Queensland, Macquarie Group, NAB and Westpac.
If they are held to maturity, they will be redeemed by the issuer at face value.
They offer retail investors exposure to corporate bonds and other debt securities that would ordinarily only be available to institutional or wholesale investors. All XTBs are backed by investment grade, senior corporate debt.
Trading in all XTBs was restored on Friday.
ACBC chief executive Richard Murphy says Theta is its responsible entity – a relationship that is conducted at arm’s length.
Murphy said: “We asked for the trading halt as a prudent measure to assess the situation. If necessary, we can change our responsible entity and that would be done without any disruption to the XTBs, which are held by a custodian.”
In a statement to the ASX on Friday, ACBC said: “The trust [Australian Corporate Bond Trust] continues to be separate from the operation of any other managed investment schemes operated by Theta Asset Management. None of the assets of the trust are available for the payment of any pecuniary penalty imposed by the courts in this matter and are not available for distribution in respect of any unitholders in any other scheme where Theta Asset Management is the responsible entity.”
Under securities law, a managed investment scheme is required to have a responsible entity. The RE’s job is to ensure compliance with all regulatory obligations, as well as maintain the scheme’s constitution and fulfill all reporting requirements.
The work of an RE can be done in-house or it can be contracted to a third party, as it was in this case.