NEW LAWS FOR MANAGED INVESTMENTS - RESPONSIBLE ENTITIES AND
RESPONSIBLE DIRECTORS By Anthony Dhar, Partner
The Managed Investments Act started on 1 July 1998, introducing a new legal framework (Law) for managed investment schemes1. In the vast majority of cases, it will mean that such schemes must become registered schemes under the Corporations Law.
A registered scheme will be operated by a single responsible entity (SRE), in place of the two party structure used for around 30 years of a separate manager and trustee2.
The Law will be supported by ancillary instruments, class orders, policy statements and practice notes that the Australian Securities and Investments Commission (ASIC) issues from time to time3. All of these will affect the way the Law is administered in practice.
What managed investment schemes will be regulated?
A managed investment scheme with all of the following features will be regulated4:
- people contribute money or its worth to acquire interests to benefits produced by the scheme;
- any of the contributions are pooled, or used in a common enterprise, to produce financial or other benefits for members of the scheme; and
- the members do not have day-to-day control over the operation of the scheme, whether or not they have a right to be consulted or to give directions.
Investment structures that will not be regulated under the
Law as managed investment schemes include: partnerships, bodies
corporate, franchises, life company statutory funds, regulated
superannuation funds, debentures or convertible notes issued by
a body corporate, schemes operated by Australian banks in the
ordinary course of their banking business, non-cash barter
schemes and many retirement village schemes.
Most often, regulated schemes will be structured as trusts, but they might also be syndicates or joint ventures. The most common examples are cash management, equities trusts and prospectus issuing master funds. Many single purpose investment structures (eg. property trusts or syndicates) will be regulated, as will all listed property trusts.
Unless all interests issued to members in a managed investments scheme are excluded issues5, the scheme must be registered if it has more than 20 members, or it was promoted by a person (or their associate) who was in the business of promoting schemes when the scheme was promoted6.
Responsible entities - duties
Only an Australian public company may be licensed as an SRE of a registered scheme7.
An SRE, in effect, contracts with members through a scheme's constitution8. The constitution must specify the SRE's investment and borrowing powers. There is no mandatory buy-back obligation (unlike a prescribed interests scheme) but the constitution must specify any right that the SRE does offer and how it may be exercised9.
An SRE has statutory duties, including that it must act honestly; exercise the degree of care and diligence that a reasonable person would exercise in its position; act in the best interests of members and give priority to member's interests if there is a conflict; ensure scheme documents meet the requirements of the Law; comply with the scheme's compliance plan; and report breaches of the Law to ASIC10.
Directors have new duties
New duties are imposed on directors of an SRE. Other duties are imposed on employees and members of a compliance committee. The SRE directors' duties prevail over normal directors' duties, and are designed to ensure the interests of scheme members have priority over interests of the SRE.
Each SRE director must act honestly; exercise the degree of care and diligence that a reasonable person would exercise in their position; act in the best interests of members and give priority to member's interests if there are any conflicts; not make use of information acquired through being an officer of the SRE; and not make improper use of their position to gain an advantage for themselves or any other person or to cause detriment to scheme members11.
Responsibility for compliance
A fundamental reform is the emphasis on scheme's having a properly documented system of compliance policy and procedures.
Every registered scheme must have a compliance plan and the SRE directors are responsible for ensuring the SRE follows the Law, dealers licence conditions and scheme documents12. All directors sign the plan and certify to ASIC that they believe the plan complies with the Law13.
The plan will be a working document, reviewed often to ensure it continues to meet the compliance objectives of a changing business. ASIC can also require changes to be made if it feels the plan lacks in any area.
The plan must be audited each year by a registered company auditor, who checks the SRE's compliance with the plan and reports any breaches to members14. The plan auditor is a different person to the financial statements auditor, but may be a member of the same firm.
Compliance committees - an added safeguard
Where fewer than half the directors of an SRE are external directors, the SRE must set up a compliance committee which has a majority of external members15. The 'external' requirement is narrower than the concept of an independent director of a public company16.
The committee acts as a watchdog of the SRE's compliance with the Law. Committee members have 'whistle-blowing' powers to tell ASIC if breaches occur17. While disagreements about compliance matters can be resolved within the SRE, ultimately a failure to rectify a breach or an unresolved concern, could lead to disputes being aired publicly or ASIC intervention.
The Law places greater responsibility on SREs and their directors to ensure investors' rights and savings are protected. Many directors need to become accustomed with these for new managed investment schemes, and those prescribed interest schemes that make the transition during 1999 to the new managed investments laws.
1 Funds under management by Australian Investment Managers Association (AIMA) members at 31 December 1997 were reported as $139.91 billion, up $39 billion from twelve months earlier. These figures exclude superannuation, life business and general insurance.
2 Division 5 of Part 7.12 of the Corporations Law which regulated prescribed interest schemes was repealed when the Managed Investments Act started, however it continues to apply for 2 years to such a scheme in existence at that time, or until the scheme becomes subject to the new law or is wound up, whichever is earlier. In limited circumstances, ASIC may agree to extend the transitional period.
3 The Law is mostly located in Chapter 5C of the Corporations Law. Transitional provisions are in the second Division 11 of Part 11.2, Corporations Law.
4 See definition of 'managed investment scheme', s.9 Corporations Law.
5 See s.66(2) Corporations Law for further details.
6 S.601ED(1), Corporations Law.
7 S.601FA, Corporations Law.
8 S.601GB. Corporations Law.
9 An SRE may choose to make withdrawal offers available to scheme members. The Law distinguishes between schemes which have liquid and non-liquid assets, s.601GA(4) and Ch 5C.06 Corporations Law.
10 See s.601FC, Corporations Law for a list of duties.
11 See s.601FD, Corporations Law for a list of duties, Part 9.4B Corporations Law for penalty provisions.
12 S.601FD(1)(f), Corporations Law.
13 S.601HC, Corporations Law.
14 S.601HG, Corporations Law.
15 Part 5C.5, Corporations Law.
16 Refer s.601JA(2) for external directors, and s.601JB(2) for external members.
17 S.601JC, Corporations Law
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The information contained in this article has been prepared by the Minter Ellison Legal Group.Professional advice should be sought before applying the information to particular circumstances.