ASIC Issues Two Temporary Halt Orders Against Interactive Brokers Australia Proprietary Ltd.

ASIC has granted two temporary restraining orders to halt Interactive Brokers Australia Pty Ltd (Interactive Brokers) from marketing Stock Yield Enhancement Program (SYEP) derivatives to individual buyers. Defects in the product’s target market determination (TMD) and product transparency statement led to the issuance of the directives (PDS).

A PDS for SYEP Derivatives or general guidance on SYEP Derivatives cannot be given to individual buyers by Interactive Brokers, according to the temporary directives. Unless they are canceled early, these directives are valid for 21 days.

Retail buyers are protected by temporary directives from purchasing SYEP Futures that might not be appropriate for their wants, circumstances, or financial goals. The PDS’s flaws are a worry for ASIC as well.

SYEP Derivatives are contracts that allow small-scale buyers to loan qualified equities to Interactive Brokers, who may then lease the securities to additional parties for reasons such as short selling or other uses. In return, Interactive Brokers gives the retail trader consideration (less its fees and charges) and offers cash as security to ensure that it will fulfill its promise to return the stocks. Retail investors in SYEP Derivatives are subject to risks associated with securities lending, such as the effect of short selling on the value of their securities, counterparty risk in the event that Interactive Brokers defaults, the loss of voting rights, and tax repercussions related to substituted dividend payments and corporate actions.

ASIC has issues with the TMD for SYEP Derivatives, including the inclusion of participants whose stated investment goals are the protection of capital and the production of income, or hedging, which are likely at odds with the characteristics and risks of the product. Additionally, the TMD specified an unreasonable amount of time for distributors to report complaints and other issues to Interactive Brokers, as well as insufficient and ill-defined triggers for determining whether the TMD remains appropriate. The TMD also included knowledge and experience criteria that are not described with objective, concrete parameters.

The PDS was also deemed to be flawed by ASIC for a number of reasons, including the omission of crucial details regarding the advantages, costs, and commissions of the SYEP Derivatives, the inclusion of a false claim regarding forfeiture of voting rights, and the use of ambiguous and ineffective wording and presentation.

Interactive Brokers are expected by ASIC to resolve these issues and maintain conformance. If the issues are not resolved quickly, ASIC might think about issuing a definitive ruling. Before any definitive stop-order decisions are made, Interactive Brokers will have a chance to submit any comments.