# Brokers charge of SMSF assets = compliance issue



## jorgon (29 July 2012)

Some online stockbrokers' accounts require customers to charge or pledge the assets of the fund as security for the payment of any debt owed to the stockbroker.  

An SMSF which agrees to such a clause will be in a breach of superannuation law because SMSFs are not allowed to charge any of their assets.  

In most cases this will be an accidental contravention, and so it is likely that the ATO will give the fund a chance to correct this before issuing a notice of non-compliance or taking action against the trustee.  

I am advising all my clients to check their stockbroker's terms carefully for an offending clause of this type.  Even some extremely well known and Australian based stockbrokers include this clause in their terms.  

If you find such a clause in the terms and conditions of your SMSF's stockbroker I would suggest that you ask them to amend or delete it.  In doing so you may wish to refer to Regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994 which (subject to exceptions which do not apply) prohibits an SMSF from giving a charge over, or in relation to, an asset of the fund (charge being widely defined as including a mortgage, lien or other encumbrance).

One way to deal with the offending clause is to ask the stockbroker to add the following clause to the terms and conditions:-

"To the extent that any provision in this agreement is in breach of regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994, that provision shall not apply between the parties to this agreement."​
I am publishing and keeping up to date a table showing the current situation with various stockbrokers here: current situation table.  

As time progresses I am hoping that all stockbrokers will offer Australian SMSFs non-offending terms to avoid this problem in future.  If members of this forum would kindly keep me informed of any progress in this direction with their own broker and can update the table (contact details are just above the table if you follow the link above).


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## Stephen (29 July 2012)

Thanks for the information. What happens when you write covered calls? Don't you have to put up a charge on the shares you are writing the covered calls on? As far as I know that is legal in a SMSF as it offers income with little comparative risk other than losing income if the shares climb past your estimate of their value. I thought that was when a Derivatives Risk Statement become important as it might have covered the charge issue with SMSFs.


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## jorgon (29 July 2012)

Stephen said:


> Thanks for the information. What happens when you write covered calls? Don't you have to put up a charge on the shares you are writing the covered calls on? As far as I know that is legal in a SMSF as it offers income with little comparative risk other than losing income if the shares climb past your estimate of their value. I thought that was when a Derivatives Risk Statement become important as it might have covered the charge issue with SMSFs.




Hi Stephen.

I'm not talking about the actual type of trading that is carried out.

The problem is not with the type of trading, but with any clause which charges or pledges the assets of the SMSF (held by the broker) as security for any payment.  
It is a breach of the superannuation law to agree to such a clause.  It is a charge of the fund's assets.  

It is still a charge of the assets if, in the ordinary course of events, the security will never be enforced by the broker (which is usually the case since an SMSF is not permitted to have a margin account).


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## Stephen (30 July 2012)

jorgon said:


> Hi Stephen.
> 
> I'm not talking about the actual type of trading that is carried out.
> 
> ...




Hi Jeremy,

Please forgive me if I seem to harp on about this and I do understand what you are saying about the charge but a covered call needs to have a charge on the underlying shares. I doubt that any broker would be willing to let a person sell a covered call if the person decides to get rid of the underlying shares before the expiry date. That would basically result in a naked call. Also, I doubt that many SMSF trustees would be willing to let their broker loan their shares for a naked call. 

So if SMSF trustees can indeed sell covered calls, then there must be some legislation around the charge clause you have raised here.

Its getting to the stage where the ATO will most probably let SMSF's have margin accounts as there are plenty of ways for SMSFs to get the money to buy shares on leverage. If the people want it, sooner or later they will give in. Just how much money can you loose recklessly trading in CFDs.


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## jorgon (30 July 2012)

Well yes, Reg 13.15A allows the fund to charge the shares in relation to a derivative transaction where the charge is given to comply with the rules of an approved body.

But this is not my point at all.  The clauses I am talking about are _general_ charges and _general_ liens.  Neither Reg 13.15A nor any of the other exceptions in the regulations permit these.


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## village idiot (30 July 2012)

Stephen said:


> Hi Jeremy,
> 
> Please forgive me if I seem to harp on about this and I do understand what you are saying about the charge but a covered call needs to have a charge on the underlying shares. I doubt that any broker would be willing to let a person sell a covered call if the person decides to get rid of the underlying shares before the expiry date. That would basically result in a naked call. Also, I doubt that many SMSF trustees would be willing to let their broker loan their shares for a naked call.
> 
> ...




Stephen

The answer to your question lies in section 13.15 of the Regs, which does allow charges where (somehwat simplified) the charge is 'in relation to a derivatives contract'.  It is this exception that makes it ok for a charge to be taken over shares that are the underlying of a call option. 

However, the charge must only be taken or come into effect when the derivatives contract is open, otherwise, in the absence of a derivatives contract, the charge would breach section 13.14. Thus it is essential that the agreement covering charges over fund assets is worded that way, which they aren't all.


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## Stephen (31 July 2012)

village idiot said:


> Stephen
> 
> The answer to your question lies in section 13.15 of the Regs, which does allow charges where (somehwat simplified) the charge is 'in relation to a derivatives contract'.  It is this exception that makes it ok for a charge to be taken over shares that are the underlying of a call option.
> 
> However, the charge must only be taken or come into effect when the derivatives contract is open, otherwise, in the absence of a derivatives contract, the charge would breach section 13.14. Thus it is essential that the agreement covering charges over fund assets is worded that way, which they aren't all.




Thanks for the explanation. I feel a little embarrassed that I did not read ss 13.14, 13.15 and 13.15A before I wasted everyone's time.


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