Five years on: the new CCIV regime is here

CCIVs will have the legal form of a company limited by shares with most of the powers, rights, duties and characteristics. As a type of company, a CCIV has the legal capacity and powers of an individual and a body corporate. However, the CCIV will only have a sole director (a corporate director) and must not have any other officers or employees (other than a director or a receiver, liquidator or a trustee or other person administering an arrangement between the CCIV and someone else).

In contrast to other types of companies, a CCIV is an umbrella vehicle that is comprised of one or more sub-funds. Each sub fund is comparable to an individual unit trust which is commonly used under the existing MIS regime.

The primary governing document for a CCIV is the constitution. Unlike other company types, a CCIV must have a constitution and not rely on the replaceable rules set out in the Corporations Act. Additionally, as in the MIS regime, the constitution of a retail CCIV must make adequate provision for certain matters (for example, the handling of complaints made by investors). A wholesale CCIV must have a constitution but there are no prescribed contents.

Retail CCIVs must also have a compliance plan, which meets the legislative requirements (as with the MIS regime, there are only basic prescribed requirements) and a compliance plan auditor.

Unlike the MIS regime, where wholesale schemes need not be registered with ASIC, both retail and wholesale CCIVs must be registered with ASIC.

To establish a CCIV, it must be registered with ASIC through a registration process that largely mirrors the existing process in place for other companies but requires a copy of the CCIV's constitution to be provided to ASIC and, for retail CCIVs, a copy of the compliance plan. In earlier iterations of the Bill, we have made submissions that, in the same way that the requirement to lodge a constitution does not apply to propriety companies, the requirement to lodge a constitution should be restricted to retail CCIVs. Unfortunately, this has not been adopted and may hinder adoption of the CCIV model amongst fund managers who operate wholesale MISs.

Once registered, a CCIV may not convert to another type of company nor can another type of company change to a CCIV.

The director of a CCIV must be a public company with an AFSL authorising it to operate a CCIV (see below). Additionally, the corporate director for a retail CCIV must itself have at least half of its directors as external directors which is a distinct departure from the MIS regime. Under the MIS regime, a responsible entity may have less than half its directors as external directors (and may have no external directors) provided it establishes an independent compliance committee. The policy motive for mandating external directors for directors of CCIVs is to bring a degree of detached supervision which is expected to enhance the standard of corporate governance (an area which ASIC has identified in its 2021-2025 Corporate Plan as a key focus).

The corporate director of a CCIV is generally responsible for the conduct of the CCIV. This reflects the fact that a CCIV must not have any employees and its only director is the corporate director. Accordingly, the consequences of contravening a commonwealth criminal offence or civil penalty provision by a CCIV do not apply to the CCIV. Instead, the corporate director of the CCIV at the time of the offence or contravention is taken to have committed the offence or contravened the provision and is therefore liable for any associated fine or penalty.

The duties and obligations of directors of CCIVs align more closely to those of a responsible entity than to those of a director of another company type. However, unlike the MIS regime where trustees of unregistered schemes do not have specific duties and obligations applicable to them (other than for licensing obligations), corporate directors of wholesale CCIVs will also be subject to such duties and obligations. While the CCIV regime permits some of the additional duties and obligations owed by a corporate director of a wholesale CCIV to be expressly excluded under the CCIV constitution, corporate directors of wholesale CCIVs will still be subject to some regulatory oversight.

Financial services may be provided by the corporate director or the CCIV itself (being a legal entity). As noted above, a corporate director will be required to hold an AFSL which authorises it to 'operate the business and conduct the affairs of a CCIV', irrespective of whether the corporate director will be operating a retail or wholesale CCIV. Financial services which are provided by the CCIV are covered by the corporate director's AFSL and accordingly, the CCIV is exempt from the requirement to hold an AFSL itself.

Even though a CCIV itself does not hold an AFSL, the CCIV is deemed to be a professional investor (and therefore, a wholesale client for the purposes of the Corporations Act) for so long as the corporate director holds an AFSL.

Retail CCIVs are subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors, while there is a lighter touch regulatory approach to wholesale CCIVs. Notification must be given to ASIC as to whether a CCIV is retail or wholesale.

A CCIV will be considered a retail CCIV if it satisfies one of the three following retail CCIV tests:

• at least one member of the CCIV is a 'protected retail client'. A person is a protected retail client if they acquire securities in the CCIV as a retail client, unless the person is 'associated' with the CCIV, or where the person acquires the security under the small scale personal offer exemption;
• at least one person is a 'protected client under a custodial arrangement'. A person is a protected client under a custodial arrangement if the person acquires the securities in the CCIV under a 'custodial arrangement', but would have been a retail client if there was a equivalent direct acquisition of the securities by that person, and the person is not associated with the CCIV; or
• at least one member is a 'protected member of a passport fund'. This applies where the sub-fund is an Australian passport fund and the person became a member after the sub-fund became an Australian passport fund or on the expectation that the sub-fund would become an Australian passport fund.

A CCIV that is not a retail CCIV is a wholesale CCIV.

A sub-fund of a CCIV is all or part of the business of the CCIV that is registered as a sub-fund with ASIC. The first sub-fund is registered as part of the broader registration of the CCIV itself, and subsequent sub-funds may be created by the CCIV by lodging an application to register the sub-fund with ASIC through a streamlined registration process.

Each sub-fund is not a separate legal entity but the assets of each sub-fund are strictly segregated from all other parts of the CCIV's business and can only be applied for specific purposes (eg meeting liabilities of that particular sub-fund).  

While sub-fund like structures can be established under the existing MIS (unit trust) regime by creating different classes of units, with assets and liabilities of a unit in a particular class being referable to that class, there is no legal segregation of assets and liabilities on a class by class basis. This means that all assets of the trust are potentially available to meet the liabilities of any given class, even where the assets applied to meet the class liability are not referable to that class. A key feature of the CCIV structure is that such cross-class liability risk is removed as the assets of each sub-fund can legally only be applied for purposes relating to that specific sub-fund.

A CCIV can only issue a share or debenture (securities) which is referable to a specific sub-fund. This means that the rights attaching to the security must relate to the assets of that specific sub-fund. However, a CCIV may issue multiple classes of securities for each sub-fund.

The types of shares that a CCIV may issue are the same as other companies: ordinary shares, preference shares and redeemable shares. See below re redemptions of shares.

CCIVs may have unlimited share capital (i.e. open-ended) or may have fixed or limited share capital (ie closed ended).

Shares in a retail or wholesale CCIV can be redeemed if:

• the relevant shares are redeemable shares or redeemable preference shares;
• the redemption is on the terms on which the shares are issued; and
• the sub-fund to which the shares relate is not insolvent immediately before the redemption and there are reasonable grounds for suspecting that the sub-fund would not become insolvent immediately after redemption.

Further to the above, for retail CCIVs, additional requirements also apply depending on whether the sub-fund to which the shares relate is liquid or not liquid. These additional requirements largely mirror the requirements for registered schemes, particularly regarding the additional 'withdrawal offer' type regime that applies where the sub-fund is not liquid.

The redemption regime which applies to all CCIVs has been modelled on the requirements for redemptions of redeemable preference shares in a company, but with the added flexibility such that the redemption in a CCIV does not need to be paid out of the profits or proceeds of a new share issue. While these 'base level' redemption requirements are not particularly onerous, some wholesale investors may be less attracted to the CCIV structure when compared to the existing unregistered MIS structure as redemptions from the latter are not at all regulated by the Corporations Act.

Assets of a CCIV may be held by the CCIV itself or by engaging an asset holder such as a custodian to hold the assets on behalf of the CCIV.

While the appointment of an external asset holder will create a trust relationship between the asset holder and the CCIV, the CCIV Bill is clear that there is no intention of making a CCIV or its corporate director a trustee of the assets held by a CCIV. Thankfully, the previous requirement for mandatory depositaries (independent third parties which hold the assets of a CCIV) for retail CCIVs has been scrapped, meaning there is less regulatory burden for establishing a retail CCIV.

Generally speaking, money or property acquired by a CCIV forms part of the assets of the sub-fund if the money or property was acquired using the assets of that sub-fund. However, where the money or property being acquired relates to the business of more than one sub-fund, the corporate director must determine the proportion of the money or property which is to be allocated across the relevant sub-funds. Where a single item of property forms part of the assets of two or more sub-funds and is indivisible (eg a share or a unit), that property must be converted into money or other fungible assets so that it can be allocated across the relevant sub-funds.

Similar liability allocation rules also apply to sub-funds.

A new development is that a CCIV may generally engage in cross-investment between its sub-funds, meaning a CCIV can, in respect of one sub-fund, acquire shares that are referable to another sub-fund. However, the proposed regulations prohibit 'circular' cross-investment – ie the acquiring sub-fund must not acquire shares in the other issuing sub-fund. Doing so would result in the acquiring sub-fund obtaining shares in itself. This may occur where the issuing sub-fund already holds shares in the acquiring sub-fund as an asset (either directly or through a series of interposed sub-funds).

A consequence of cross-investment is that a CCIV becomes a member of the issuing sub-fund as it is the legal entity holding the shares in the issuing sub-fund. In such circumstances, where the CCIV is entitled to vote on a resolution at a meeting of the member of the issuing sub-fund, the draft Corporations and Other Legislation Amendments (Corporate Collective Investment Vehicle Framework) Regulations 2021 (the Regulations) prescribe that the CCIV is only entitled to vote where the members of the acquiring sub-fund pass a special resolution determining how the CCIV is to vote.

The ability to cross-invest across sub-funds in a CCIV provides greater flexibility to create different investment structures in a more efficient manner and is another improvement in the CCIV regime following feedback on previous exposure drafts of the bill. The EM explains that this approach is to align the CCIV regime with other international corporate collective vehicles and ensures that a CCIV can utilise funds management structures such as a master-feeder structure (where a CCIV establishes a sub-fund that holds a certain asset class and then creates additional sub-funds with varying levels of exposure to that initial sub-fund) or a hedging structure (where one sub-fund holds core assets and additional sub-funds holds relevant hedging instruments and shares in that core sub-fund).  

The provisions regulating meetings of CCIVs (which can be a meeting of the members of the whole CCIV or a particular sub-fund of the CCIV) are substantially the same as the meeting provisions in respect of registered schemes.

An important distinction is that the meeting provisions for CCIVs apply to both retail and wholesale CCIVs. Under the MIS regime only registered schemes are required to hold meetings in accordance with the Corporations Act, whereas wholesale scheme meetings are specifically are largely ungoverned. This is another potential barrier for adopting the CCIV model by wholesale fund managers as they will be required to abide by more stringent meetings requirements compared with the MIS regime.

At this stage, only a retail CCIV with a single sub-fund or sub-fund of a retail CCIV which only has that one sub-fund may be included in the official list of a prescribed financial market in Australia. However, these restrictions do not apply in respect of quoting a share in a CCIV on a financial market such as AQUA – a share in a CCIV may be quoted, regardless of the number of sub-funds it may have, provided it satisfies the quotation requirements of the financial market.

In earlier exposure drafts, a CCIV was prohibited from being listed on a financial market and accordingly, the current position is a welcomed improvement. The EM also notes that the listing of retail CCIVs with more than one sub-fund, or the listing of multiple sub-funds of a retail CCIV, will be considered in the future once the CCIV regime is operating. It is also worth noting that on 1 February 2022, the ASX released its consultation paper seeking feedback on the changes that the ASX are proposing to the ASX Listing Rules and the ASX Operating Rules to facilitate the listing and quoting of CCIVs and sub-funds.

Retail clients who acquire a share in a CCIV must be provided with a PDS. This means that Part 7.9 rather than the disclosure requirements in Chapter 6D will apply to shares in a CCIV. The content requirements for the PDS of a CCIV are largely consistent with the requirements for PDSs of registered schemes. Further, the Regulations also introduce a concept of 'simple sub-fund products' which is intended to be analogous to interests offered in simple MISs. A simple sub-fund product is a security in a sub-fund of a retail CCIV where at least 80% of the assets of that sub-fund are liquid assets. Such sub-funds will be able to benefit from simple PDS regime, similar to that which applies to simple MISs.

If a CCIV is a disclosing entity, it must comply with the continuous disclosure requirements (similar to a MIS which is a disclosing entity).

A corporate director of a retail CCIV may lodge an application to register a sub-fund as an Australian passport fund. The Asia Region Funds Passport (ARFP) regime was another recommendation made by the Johnson Report to provide a multilateral framework allowing eligible funds to be marketed across member countries with less regulation. The introduction of a CCIV would assist in marketing Australian funds offshore, given it has a more internationally recognisable structure. However, given the limited uptake of the ARFP regime to date, it is uncertain whether using a CCIV would mean there is much increased interest in the ARFP regime.