The mFund Settlement Service - coming soon

In brief

The ASX has announced that it has now received regulatory clearance for its new mFund Settlement Service (previously known as AQUA II and the ASX Managed Funds Service) which it hopes will be launched before 30 June 2014. Once established, the service will allow investors to transact electronically in units in admitted unlisted registered managed investment schemes through brokers authorised to participate in the service. Partner Penny Nikoloudis and Lawyer Matthew Symmons report on the key aspects of mFund and the remaining milestones to its launch.

Background

Once established, mFund will provide investors with a facility to apply electronically for, or make electronic requests to redeem, interests in unlisted registered managed investment schemes that have been admitted to the service, through brokers authorised to participate in the service.

In doing so, mFund will allow investors to apply for, redeem and hold interests in managed funds, alongside their ASX-quoted shares, through a single CHESS holding. One of the ASX's claimed benefits is that this will provide fund managers with enhanced product distributions as it will allow them to capitalise on existing relationships between brokers, advisers and their investors (in particular, self-managed super funds) who currently use the ASX market to invest in shares, Australian Government bonds and exchange-traded funds (EFTs). In this way, mFund may represent an additional distribution channel or an alternative to the platform services currently utilised by many REs for their funds.

ASX has confirmed that it is currently working with around 60 foundation members (including fund managers, their registries, ASX brokers and administration service providers) to deliver mFund, and has published the names of these organisations on the new mFund website.

With several of the important milestones now having been achieved, including the granting of Australian Securities and Investments Commission (ASIC) Class Order [CO 13/1621] (CO 13/1621), it seems that the remaining regulatory hurdles will be cleared shortly so that mFund may be officially launched before 30 June 2014.

Key aspects and operation of mFund

Once established, mFund will allow investors to apply electronically for, or request to redeem, interests in admitted unlisted registered investment schemes through brokers authorised to participate in the service. Admitted funds will not become listed funds as mFund will not allow for the secondary trading of products – that is, interests in admitted funds will not be traded between one investor or another, and prices for transactions will not be set by the market.

Investors using mFund will be able to apply for, or redeem, interests in admitted funds through an authorised broker in two ways:

• online, by submitting through the broker's automated client order system; or
• issuing instructions in person or by telephone, fax or email to the representative of the broker, who then takes steps to execute the instructions to the broker.

After receiving such client instructions, the broker will, as appropriate, aggregate instructions from other mFund investors in relation to the same fund before sending an electronic message to the RE (or its registrar) through the CHESS system which contains the required investor information that the RE needs to issue or redeem interests in the relevant fund along with any application moneys.

The RE (or its registrar) may then process the investor's application or redemption request in accordance with the fund's constitution and unit pricing policy as it would for other investors such that that the daily prices used for accepted applications and redemptions are determined based on the fund's net asset value at the end of the day.

The ASX has confirmed that investors will not be directly charged for using mFund, but the ASX will levy fees on the brokers using the service.

Which funds will be eligible for admission to mFund?

Despite industry submissions requesting that its scope be expanded to cover all unlisted registered managed investment schemes currently available to retail investors, ASIC has confirmed that admission to mFund will initially be limited to 'simple managed investment schemes' that are required to issue shorter eight-page PDSs for the purposes of Part 7.9 Div 4.2C of the Corporations Regulations 2001 (Cth).

As such, funds including those classified as a 'hedge fund' for the purposes of ASIC Class Order [CO 12/749] (as recently modified by ASIC Class Order [CO 13/1128]) and funds with substantially illiquid assets, such as unlisted property funds will be not initially be eligible for admission to mFund. In confirming this, ASIC stated that it is important for mFund to operate effectively and for the controls that have been put in place to be tested in practice before it considers expanding mFund to financial products beyond interests in simple managed investment schemes.

For completeness, we note that the criteria for admission to listing on the ASX do not apply to funds seeking admission to mFund.

The class order relief

During consultation with prospective mFund brokers and settlement participants, the ASX found that the application form requirements of section 1016A of the Corporations Act were likely to impede materially the use of mFund by REs, and consequently sought relief from ASIC.

Currently these requirements are generally complied with by retail investors completing paper application forms and sending them by post or electronically to the RE, along with their application money and a form of identification such as a copy of their driver's licence to satisfy anti-money laundering (AML) and 'know your customer' (KYC) checks. One of the key benefits of mFund for investors will be that they will not be required to gather these accompanying identification documents each time they invest in a fund as the AML and KYC checks will have been done when they first set up an account with their broker.

On 20 December 2013, ASIC issued CO 13/1621 which exempts an RE of a registered scheme from the requirements of s1016A(2) of the Corporations Act for the issue of an interest in the scheme to a person in response to an electronic application made through mFund, provided that certain conditions are satisfied.

In particular, to ensure that mFund users have access to the correct version of a PDS when deciding whether or not to invest in a particular fund, REs will be obliged to provide the ASX with all PDSs, supplementary PDSs and other communications that they are legally required to make available to investors. CO 13/1621 imposes additional conditions and obligations on participating REs – for instance, before an RE can accept an application made via mFund:

• the application must be accompanied by an 'electronic confirmation' from the broker stating that a PDS (and specifying the date of that PDS) has been given to the applicant; and
• the RE must ensure that the PDS referred to in this confirmation is the appropriate PDS and that it was not defective at the time of application.

The class order also obliges participating REs to:

• notify the relevant mFund investor in writing, within five business days of issuing them an interest in the fund, that a PDS with the date specified should have already been given to them;
• advise the ASX if they become aware a retail investor was not given a PDS before making an application; and
• keep a copy of all mFund applications for seven years.

Timeline and other important milestones

In addition to the issue of CO 13/1621:

• a notice exempting formally the ASX from the requirement to hold an AFS licence in relation to its operation was recently issued by the Federal Government under s791C of the Corporations Act; and
• the ASX have reportedly revised both their Operating Rules and their Settlement Operating Rules to accommodate mFund operation.

While these two developments, together with the issue of CO 13/1621, represent some of the last important milestones in the launch of mFund, not all hurdles have yet been cleared.

In particular, the ASX has asked the Australian Transaction Report and Analysis Centre (AUSTRAC) to amend Chapter 21 of the Anti-Money Laundering and Counter-Terrorism Financing Rules (the AML/CTF Rules) to exempt REs from having to separately conduct AML checks on a person who applies for interests in a fund through mFund where the RE has received a confirmation from the applicant's broker that these checks have already been carried out by the broker.

With the deadline for submissions on these amendments having now closed and the ASX media statement confirming that it has received regulatory clearance to launch mFund, the timing of the formal amendment of the AML/CTF Rules appears to be imminent.

If you have any questions in relation to the impact of mFund, please feel free to contact us.