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On 15 September 2017, the Department of Treasury and the Australian Securities and Investments Commission (ASIC) finalised initial consultations on the draft Corporate Collective Investment Vehicle (CCIV) Bill. Written submissions could be made until 25 September 2017.
To be effective the CCIV regime must facilitate the establishment of a vehicle capable of competing in participating Asian jurisdictions, whilst maintaining our standards of investor protection without undue operator burdens.
There are considerable issues and technical drafting changes to refine before the CCIV legislation can be finalised. Given the number and type of issues discussed in consultation sessions, further consultation appears necessary before the legislation is finalised. We are not there yet, but the target is within sight.
The draft CCIV Bill and the Asia Region Funds Passport (Passport) Bill were released on 25 August 2017. The Bills contain drafts of two new chapters that would be inserted into the Corporations Act 2001 (Cth of Australia) (Act) to establish regulatory frameworks for the Passport and CCIV regimes.
The CCIV and Passport are intended to address two recommendations1 that aim to increase Australia’s cross-border financial services trade and improve financial sector competitiveness and efficiency.2
The Passport may facilitate cross-border trade with participating Asian countries but questions remain as to whether it will result in growth of the Australian funds management industry. Whilst the Passport may make it easier for Australian fund managers to access investors in other participating Asian markets, it also makes it easier for foreign managers with an Asian presence to access the Australian market without establishing a footprint here. If Hong Kong or Singapore were to join the Passport regime, foreign fund managers (including those from the US and the UK) with existing Australian operations may decide to rationalise their Austral-Asian operations to their other centres (typically Hong Kong or Singapore) and simply passport into the Australian market.
The success of the CCIV regime will, to a large extent, depend on the relative cost-benefit effectiveness, a recurring issue voiced during the consultations.
Currently, managed investment scheme (MIS) trust-based structures are the most common type of investment vehicles used in Australia. A main objective of the CCIV regime is to introduce a corporate based investment vehicle alternative that is similar to European-style corporate funds (under the European Undertakings for Collective Investment in Transferable Securities (UCITS) Directive), which are already popular in parts of Asia.
CCIVs will be companies limited by shares with most of the powers, rights, duties and characteristics of a public company. Retail CCIVs will have features and protections akin to registered MISs and their predecessors, approved deed prescribed interests.
Like cell/segregated portfolio companies in other jurisdictions, a CCIV can have discrete sub-funds, each of which is referenced by one or more different classes of shares. Although more than one class of shares can reference the same sub-fund (i.e. both class A and class B reference sub-fund 1), a particular class of shares can reference only one sub-fund, not multiple sub-funds (i.e. class A cannot reference sub-fund 1 and sub-fund 2). A sub-fund does not have separate legal personality, and so cannot, sue, be sued or contract. Each sub-fund is segregated from the others, and the assets and liabilities of one sub-fund cannot be sold to or met from/used for other sub-funds.
While the asset protection within a sub-fund is welcome, several concerns were raised during the consultation process about the rigidity of the contracting restrictions and prohibition of asset allocation across different sub-funds.
A CCIV is a wholesale CCIV if it is not a retail CCIV, and retail CCIVs are subject to greater regulation than wholesale CCIVs. As a result, concerns were raised about the breadth of the definition of “retail CCIV” and, in particular, its breadth when compared to the tests that apply to determine whether MISs must be registered, meaning they will be subject to similar regulation as retail CCIVs.
A retail CCIV includes a CCIV that has a single shareholder that is a retail client. The equivalent test to determine whether an MIS must be registered permits an MIS to have 20 or fewer members (taking into account other schemes that ASIC decided were closely related) before it needs to be registered.
While the tests are similar, though not exactly the same in relation to the promoters and their associates of CCIVs and MISs, unlike the test to determine whether an MIS must be registered, there is no carve out from being a retail CCIV where all of the shareholders of the CCIV did not need a product disclosure statement in order to invest in the CCIV.
The breadth of the definition of “retail CCIV” means that many more CCIVs will be classified as retail CCIVs than under the similar tests that apply to determine whether an MIS must be registered and meet additional regulatory requirements. From a cost/benefit perspective, it is unclear why equivalent regulatory tests to those applicable to MISs should not be adopted for CCIVs.
A CCIV must have a sole corporate director which, like a registered MIS RE, is a public company holding an Australian financial services licence (AFSL) authorising it to act as a corporate director. For retail CCIVs, a majority of the corporate director’s board must be “external” but, unlike a registered MIS, there is no alternative of instead having a compliance committee.3 The tests for determining whether a director is “external” mirror the tests for an external member of a registered MIS RE’s board or compliance committee.
A corporate director may appoint agents to do anything that the corporate director is authorised to do in connection with the CCIV, but the CCIV’s “depositary” (see below) may not be an appointed agent. Like a registered MIS’s RE, the corporate director remains liable for the acts and omissions of its agents (and their sub-agents), regardless of whether those acts and omissions are within the scope of their appointment.
Like a registered MIS RE, the corporate director must have a compliance plan for the retail CCIV that sets out adequate measures that the corporate director is to apply in operating the CCIV to ensure compliance with the Act and the CCIV’s constitution. The compliance plan must be audited annually by an auditor that satisfies certain independence criteria. The auditor must opine on the corporate director(s)’ compliance with the compliance plan and whether the compliance plan continues to meet the requirements of the Act.
A retail CCIV must have a constitution that “makes adequate provision” for a list of matters that are effectively the same as those for a registered MIS constitution other than provisions dealing with complaints; but a corporate director will already be subject to requirements for dealing with complaints under the AFSL regime.
A retail CCIV must engage a public company (or a foreign company registered under the Act) that satisfies requisite independence criteria, to act as a “depositary”. The depositary is to hold the retail CCIV’s assets on trust for the CCIV and supervise the corporate director. The depositary can engage agents to perform any of its obligations, except its corporate director supervision obligation.
Much of the discussion during the consultations focused on the depositary, in particular, its independence and the relationship between the corporate director and the depositary. Depositaries will, at the same time, be taking instructions from the corporate director and supervising them (a recurring tension under the prescribed interest regime).
The current legislation also imposes significant obligations on a depositary, and high fee levels will, no doubt, be required before a company may be willing to assume the role. For example, the draft legislation provides that a depositary may deal with assets it holds only on instructions from the corporate director that are lawful and comply with the CCIV’s constitution.4 Many potential depositaries (mainly represented from the current custodians) understandably raised queries about the nature of this requirement; in particular, in the context of global assets and the need to form an opinion and obtain legal advice about instructions.
It was suggested during the consultations that a corporate director have the power to remove a depositary without member approval. This proposal seemed to be based on the premise that the requirements for changing a depositary under the Bill were the same as for changing a registered MIS RE, namely members passing an extraordinary resolution. This is not, however, the case. While an extraordinary resolution is required to change a corporate director and an unlisted registered MIS RE, only a special resolution is proposed to be required to change a depositary. A special resolution is generally easier to pass. Although the higher threshold approval of 75 percent must be obtained, it is only 75 percent of those present at the meeting, not 50 percent of all members, whether present or not (which applies for an extraordinary resolution).
Carte blanche for a supervised entity to remove their supervisor appears unwise, but, admittedly, the benefit associated with passing a special resolution may be outweighed by the cost. A more efficient method for effecting change may be one that is similar to the ASIC relief granted to changing the RE of a registered MIS; that is, one that permits the corporate director to initiate the change of depositary by notifying ASIC and the members. The notices could set out the corporate director’s reason for wanting to change the depositary and the depositary’s response. Members holding 5 percent of the shares in a sub-fund could also have the right to requisition a members’ meeting to consider changing the depositary (and possibly also the corporate director).
The following diagram illustrates the structure of the retail CCIV.
There are marked differences between the MIS regime and the proposed CCIV regime. In particular, the requirement for a depositary to hold the assets on trust for the CCIV and to supervise the corporate director herald back to the days of the pre-MIS two party trustee and manager approved deed prescribed interest system.
Foreign managers that do not hold an AFSL and currently engage a responsible entity for hire, may find it more attractive to continue using the MIS regime, rather than engaging two local entities to service the CCIV: an Australian public company corporate director holding an AFSL and a depositary. Alternatively, foreign managers may decide to establish their funds in another Asian jurisdiction and simply passport into Australia, to the extent the passport is required.
Despite the differences to the MIS regime, there are also many similarities (some of which we have already mentioned). Indeed, the regime for retail CCIVs borrows heavily from the regulatory requirements of the MIS regime. The similarities include:
There is some merit in the CCIV regime copying the regulatory requirements of the MIS regime. It will reduce the possibility of “gaming” the two regulatory regimes. It may also make it easier for funds established under the MIS regime to transition to the CCIV regime.
However, imposition of the same MIS regulatory requirements on the CCIV regime may not give rise to the same regulatory outcome for investors given the differences in the legal form of investment vehicles and the divergence in legal principles applicable to companies and trusts. Questions will almost certainly arise as to the difference in application of the same legislation to trusts and companies. The test that applies to amending the constitution of an MIS is a case in point. The test for amending a registered MIS constitution is proposed to apply to amending the constitution of a CCIV. Yet, different interpretations are likely to apply, as is evident from the divergence in the principles for amendment applied in the Gambotto5 and Cachia6 cases.
Further, the power to amend a registered MIS constitution has, in recent years, been the subject of a divergence in judicial interpretations: one more liberal than the other, depending on whether members have a right to have a scheme administered in accordance with the terms of the MIS constitution. The policy rationale advocating the more liberal interpretation was supported by jurisprudence incorporated from jurisprudence involving companies, not trusts. Proponents of the second interpretation refused to apply company law principles in the context of trusts. With the corporate based CCIV, it is difficult to predict whether Courts will more readily apply the company law principles to the amendment power.
1 November 2009 Australian Financial Centre Forum: Australia as a Financial Centre: Building on our Strengths report (Johnson Report). The Johnson Report also recommended that an Investment Manager Regime (IMR) be introduced to improve Australia’s competitiveness as a financial centre. The IMR has been introduced and generally applies from the 2016 year of income. The IMR legislation clarifies that investments by non-residents in foreign assets will, generally, be exempt from tax in Australia. The IMR is currently being reviewed by the ATO in consultation with the funds management industry to ensure that it achieves this outcome in all appropriate cases. Any necessary amendments to the existing legislation are to clarify matters in favour of the taxpayer and will likely apply from 1 July 2015.
2 The Explanatory Memorandum to the Passport Bill states that:
“The Passport will provide a multilateral framework which allows eligible funds to be marketed across member countries, with limited extra regulatory requirements. The Passport is intended to support the development of an Asia-wide managed funds industry through improved market access and regulatory harmonisation.”
3 Wholesale CCIVs do not need a corporate director with a majority of external directors on the board.
4 This role is more like that of a trustee under the prescribed interests regime.
5 Gambotto v WCP Ltd (1995) 182 CLR 432.
6 Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65.
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