On 13 June 2018, the Federal Government released the first tranche of the revised Corporate Collective Investments Vehicle (CCIV) Bill for public consultation. This follows consultation on an exposure draft of the bill released on 25 August 2017.
The introduction of the new CCIV regime is part of a push by the Federal Government to align Australia's fund structures with those found in the rest of the world and is also timed to coincide with the introduction of the new Asia Region Funds Passport, a multilateral framework which allows eligible funds (including CCIVs) to be marketed across member countries, with limited additional regulatory requirements.
CCIVs are modelled on the United Kingdom's open-ended investment companies, which were in turn designed to fall within the UCITS directive, making CCIVs a structure that will hopefully be recognisable to foreign investors and fund managers and increase the marketability of the Australian funds industry.
Key features of CCIVs
CCIV and sub-funds:
A CCIV is a company limited by shares with at least one 'sub-fund'. A sub-fund is designed to be an insolvency-remote cell of the company which does not have separate legal personality, but has its assets and liabilities segregated from those of any other sub-funds of the CCIV. The external administration process for CCIVs and sub-funds is still under development and will be included in the next exposure draft of the bill.
A CCIV must have a single, corporate director, being a public company that holds an Australian financial services licence that authorises it to operate the business and conduct the affairs of the CCIV.
A CCIV will be a 'wholesale CCIV' if it is not a 'retail CCIV'. A 'retail CCIV' is defined by reference to whether a person was required to be given a Product Disclosure Statement for the issue of a security in the CCIV. Despite issuing shares, a CCIV will be subject to the PDS regime and not the prospectus regime.
The wholesale/retail distinction is on an 'all in' basis, meaning that a retail CCIV cannot have wholesale sub-funds and vice versa.
Retail CCIVs will be subject to a comprehensive regulatory framework modelled on the framework for registered managed investment schemes, which include the requirements for:
- the corporate director and its officers and employees to owe additional statutory duties to the members of the CCIV;
- the constitution of a retail CCIV to make adequate provision for the establishment of sub-funds and the method by which member complaints are to be dealt with, and also specify the corporate director's rights to any fees and indemnities and any limits on the exercise of the CCIV's borrowing powers;
- a retail CCIV to have a compliance plan; and
- at least half the directors of the corporate director of a retail CCIV to be 'external directors' (similar to the circumstances in which a registered scheme can avoid the need to establish a compliance committee).
Wholesale CCIVs will be subject to more regulation than wholesale, unregistered managed investment schemes. This might deter managers of wholesale funds from using the CCIV structure. For example, unlike a trustee of an unregistered scheme, the corporate director of a CCIV:
- must be a public company with greater financial disclosure requirements than a proprietary company and subject to the related party provisions of the Corporations Act; and
- will be subject to a statutory right of investors to call a meeting and vote on its removal.
A retail CCIV will be required to have a depositary while, for a wholesale CCIV, this will be optional. The basic features of a depositary are that it must:
- be a public company or a registered foreign company that holds an AFSL and be independent of the corporate director (the independence requirement is still under development);
- hold the CCIV's assets in a segregated manner and execute lawful instructions in relation to the assets of a CCIV; and
- take reasonable care to verify that certain aspects of the operation of the CCIV comply with the CCIV's constitution and the Corporations Act.The requirement to 'verify' (rather than 'ensure' in the previous draft of the bill) suggests that the supervisory role will be on a backward-looking rather than an ongoing, real-time basis.
The depositary concept is a significant difference from the responsible entity concept under the managed investment scheme regime (under which custodians appointed by REs are agents of and service providers to the RE, rather than having their own supervisory responsibilities) and harks back to the dual manager / trustee model under the former prescribed interests regime, the weaknesses of which were exposed when a scheme became the subject of a legal dispute and determining the apportionment of liability between the manager and the trustee was a cumbersome and complex process. That said, we see the depositary concept as an opportunity for overseas service providers with experience as depositaries under the OIEC and UCITS regimes to enter the Australian market.
The rights attaching to each share issued by a CCIV must be referable to one (and only one) sub-fund of the CCIV.
A CCIV can issue 'redeemable shares', thereby enabling CCIVs to be open-ended investment vehicles like unit trusts. A redeemable share is a share (other than a preference share) that is liable to redeemed at the option of one or more of the CCIV and the member. The redemption option will not make such securities preference shares, hence a CCIV can issue ordinary shares that are redeemable.
A CCIV can only redeem redeemable shares on the terms on which they are on issue, if they are fully paid-up and if the relevant sub-fund is solvent immediately before the redemption and will not be insolvent immediately after the redemption.
For retail CCIVs, there are additional redemption requirements. In particular, if a sub-fund is 'liquid', the redemption price of the share must be based on the net asset value of the sub-fund, where liquidity is determined under rules based on the corresponding provisions for registered managed investment schemes.
CCIVs may pay dividends, redeem redeemable preference shares and reduce their share capital in a similar way to other companies. Some modifications have been made to these rules to apply them at the sub-fund level.
The yet to be released second tranche of the bill will contain draft provisions relating to external administration, takeovers, compulsory buy-outs and acquisitions, disclosure, financial services and licensing and the penalty framework for CCIVs.
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