CAMAC's 2014 discussion paper on managed investment schemes

In brief

The Corporations and Markets Advisory Committee's discussion paper about the establishment and operation of managed investment schemes particularly examines governance, disclosure and regulatory issues. If the changes are implemented, it could profoundly affect these schemes. Partners Marc Kemp and Penny Nikoloudis and Lawyer Mark Boyagi outline the key changes suggested in the discussion paper.

Background

CAMAC has adopted a two-stage approach to its review of managed investment schemes.

The first stage, which resulted in the July 2012 publication of the report, Managed Investment Schemes, focused on the issues thrown up by financially distressed schemes.

The second stage, which is the subject matter of the recently released discussion paper, addresses the establishment and ongoing operation of schemes and raises a number of governance, disclosure and regulatory issues.

Informing and underlying this review is the principle that the regulatory regime for managed investment schemes should be aligned with that of corporations, unless there are 'compelling reasons' for treating schemes differently.

The timing of CAMAC's discussion paper is significant in light of the Federal Government's Financial System Inquiry (the Murray Inquiry), which will no doubt consider the paper and industry submissions in making its own recommendations.

An overview of CAMAC's discussion paper

In its March 2014 discussion paper, CAMAC requests submissions on a number of matters, some of which are aimed at reducing compliance burdens, while others would affect the establishment and operation of managed investment schemes on a more fundamental level.

CAMAC seeks submissions on the following matters, which, if adopted, would affect the establishment and operation of managed investment schemes on a fundamental level. CAMAC considers these matters both from the point of view of the traditional scheme structure where the scheme is (unlike a company) not an entity, and from the point of view of the 'separate legal entity' concept that it suggested in its 2012 report.

• Definitions: CAMAC suggests a number of changes to defined terms used in the Corporations Act 2001 (Cth), including broadening the definition of 'managed investment scheme' to include arrangements where benefits flow to some (but not all) members; narrowing the scope for a person to be characterised as a 'member' by, for example, excluding holder of options; and extending the definition of 'scheme property' to include assets that may currently fall outside its scope.
• Scheme registration: CAMAC suggests that the disclosure and numerical tests currently exempting certain schemes from registration should be abolished, such that all schemes would be required to register as a matter of course unless another exemption applied. These tests – particularly the disclosure test – currently serve to exempt wholesale funds from the requirement to register and, if established, would need to be replaced by a (possibly more targeted) wholesale exemption.
• Scheme constitution: Among other things, CAMAC questions the responsible entity's power to make unilateral amendments to scheme constitutions in circumstances where these changes do not adversely affect the right of members. Consistent with its aim of aligning the regulation of companies and schemes, CAMAC suggests that all amendments should require a special resolution.
• The responsible entity: CAMAC considers that an obligation on responsible entities to treat members of the same class 'fairly' may be more flexible than the current standard requiring those members to be treated 'equally'. CAMAC also wishes to clarify the test of 'proper performance' under which responsible entities are entitled to fees and indemnities and to impose criminal liability for breaches of restrictions on related party transactions.
• Meetings of scheme members: CAMAC seeks to align the various requirements for the calling and conduct of member meetings for schemes with those applying to companies, particularly in relation to requisitioning scheme meetings, quora, the election and role of the chair, proxy voting and adjournment. CAMAC also raises questions about the voting exclusion imposed on responsible entities and their associates under section 253E of the Corporations Act; in particular, whether a responsible entity may vote in a fiduciary capacity and why the law permits a responsible entity and its associates to vote on a resolution to replace the responsible entity when the scheme is listed.
• Other matters relating to scheme members: CAMAC considers options for increasing access to the member registers of schemes; a more prescriptive test for determining when a scheme is liquid to replace the current 'reasonable expectations' test; and the introduction of a statutory buy-back mechanism under which responsible entities could manage scheme capital in a similar way to companies without needing to rely on the statutory withdrawal procedure (as modified by ASIC).
• Disclosure: Without explicitly concluding that schemes should be subjected to prospectus disclosure, CAMAC questions whether the current PDS regime best facilitates the information needs of investors.
• Takeovers and reorganisations of schemes: CAMAC suggests that takeover laws applying to companies and listed schemes should be extended to large unlisted schemes, and asks if there should be a statutory procedure for reorganising schemes similar to that used for company restructures under Part 5 of the Corporations Act.
• Regulatory powers and enforcement: Although ASIC currently has powers to exempt a scheme from requirements imposed under Chapter 5C of the Corporations Act, or to modify the operation of certain provisions in the same chapter, CAMAC asks if ASIC should be given even more flexibility to reduce regulatory requirements on a case-by-case basis.
• External administration: CAMAC suggests a framework under which liquidators would have a statutory right to claim remuneration and expenses for their work in winding up a scheme. CAMAC continues to support the introduction of voluntary administration procedures for insolvent schemes.
• International aspects: Chapter 8 of the Corporations Act enables securities that comply with New Zealand securities law to be marketed in Australia without having to comply with the substantive requirements of Australia's securities, fundraising and licensing provisions. Of particular interest is CAMAC's questioning of whether the current regulatory framework for managed investment schemes should be broadened to permit registration of an alternative regulatory structure that is modelled on the regulatory requirements that apply to UCITS (or Undertaking in Collective Investments in Transferable Securities – the ubiquitous European retail fund structure). This would have far-reaching implications, potentially moving Australian managers to attract investors familiar with that popular fund structure, and exposing them to competition from overseas managers who are not, under the current regime, able to register UCITS type funds in Australia, given that they do not have the equivalent of the single responsible entity.
  Separately, in CAMAC's view, a listed New Zealand scheme should be treated as a listed disclosing entity for the purpose of Australia's continuous disclosure obligations.
• Other matters: Given that the valuation of scheme assets is the central element in pricing scheme interests, CAMAC advocates a regulatory framework promoting consistency and comparability in the valuation of schemes.

Conclusion

CAMAC's discussion paper offers a comprehensive analysis of the issues confronting managed investment schemes and could, if it leads to changes, profoundly affect the establishment and operation of schemes. The timing of the paper is significant, coinciding as it has with the Murray Inquiry.

Allens is preparing submissions in response to the matters raised by CAMAC and invites you to share your views regarding the matters raised in the discussion paper. Please contact one of the partners listed below if you would like to discuss.