Do investment managers need to register with AUSTRAC?

By virtue of their role, investment managers are responsible for the management, maintenance, and administration of portfolios to ensure a fund operates within its investment strategies and objectives. Depending on the nature of this role, an investment manager may be caught by Item 33 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act), requiring an entity to register with AUSTRAC if ‘in its capacity as agent of a person, the entity acquires or disposes of securities or derivatives on behalf of the person where the acquisition or disposal is in the course of carrying on a business of acquiring or disposing of securities, derivatives in its capacity as agent’.

Many investment managers describe their services as the acquisition and disposal of assets as an agent on behalf of a fund trustee or custodian. Indeed, this is the language often used in investment management agreements. However, more often than not, investment managers are only facilitating or organising the acquisition and disposal of assets. It is more likely they only provide a recommendation to a trustee or custodian to commit to a transaction, or the investment manager has authority to direct a broker, dealer, or counterparty to facilitate a transaction.

In this way, the investment manager is an intermediary between a trustee, responsible entity, or custodian (controlling entity) and a broker, with an administrative or advisory role in the execution of acquiring or disposing of assets. The investment manager does not actually acquire or dispose of the property in that it does not hold title to the assets nor has any dealings with the other transacting party. 

The broad view

Some take the view that all individuals who direct or administer a transaction on behalf of another person, causing a security to be acquired or disposed of, will be captured by Item 33. This adopts a definition of ‘acquire’ and ‘dispose’ that includes all actions necessary to effect an acquisition or disposal of shares held in another’s name (ie administrative actions). 

However, these words should be afforded their ordinary meaning, lending to an interpretation of actual transfer of title in asset. Otherwise, this view risks an overly broad interpretation. By way of example, a parent instructing their stockbroker to acquire shares in their adult child’s name would be captured according to this interpretation of Item 33.

Based on title

If ‘acquire’ and ‘dispose’ are viewed through the lens of transfer of title, then it is likely all practical acquisition and disposal of securities and derivatives is performed by counterparties or service providers. The investment manager has a limited responsibility for ensuring the fund invests in appropriate transaction opportunities; it does not ‘acquire’ or ‘dispose’ of securities or derivatives (as agent or at all). 

If you assume an investment manager does acquire and dispose assets, then it remains that it is not their business to acquire and dispose of securities or derivatives. An investment manager’s primary role is to ensure the maintenance, administration, and management of a fund with revenue generated from the management of the portfolio irrespective of whether it buys or sells securities or derivatives. No income is generated from the act of acquiring or disposing of securities or derivatives. 

Therefore, Item 33 would not apply to investment managers based on this view of title or operation of business.

The intention of Item 33

Further, on 1 May 2007, representatives of the Attorney-General’s Department at the Investment and Financial Services Association indicated Item 33 was intended to apply to stockbrokers. Stockbrokers or brokerage businesses may generally be regarded as service providers acting on instruction to cause a principal to gain or dispose of ownership of financial assets. 

A stockbroker is often in direct communication with investors and is actively engaged in the practical acquisition and disposal of assets. The distinction between stockbrokers and investment managers lies in the facilitation of a deal. Unlike a stockbroker, an investment manager does not act for each client within a fund; rather an investment manager is a facilitator between the controlling entity of the fund and the executing broker or counterparty. 

Based on this background, it is unlikely an investment manager would be captured by Item 33.

Investment managers v custodians

It is also reasonable to view Item 33 as targeting custodial entities that trade assets and hold title on behalf of others. A custodian of a managed fund is a typical example – the custodian is an agent of the fund’s trustee, and the custodian acquires and holds legal title to the assets on behalf of the trustee. This is a common industry view of Item 33, whereby custodians are distinguishable from investment managers because a custodial entity legally acquires, holds, and sells title over assets.

This means it was not the intention of the legislation to capture investment managers in the ambit of Item 33. 

Duplication and burden

Finally, it would also be overly burdensome, impractical and ineffective to include investment managers under Item 33. By virtue of their position, controlling entities of equities funds are AFSL holders and are required to be reporting entities to AUSTRAC. They have the primary responsibility of identifying, verifying, and monitoring their investors and can ensure the ultimate beneficial owners of the profits in the fund are appropriately monitored, not investment managers. 

The broker is also ultimately responsible for conducting KYC on the relevant controlling entity, so any effort by an investment manager would be in duplicate. If the purpose of requiring an investment manager to be a reporting entity is to capture suspicious matters, controlling entities and the brokers or service providers acquiring and disposing assets are better placed to identify unusual activity.

In our view, it is not the intention of the legislation to impose AML/CTF registration and reporting requirements on investment managers under Item 33 where their services are limited to facilitating or administering the acquisition and disposal of assets as an agent. Investment managers hold no title nor operate a business of effecting acquisitions and disposals.

To require investment managers to register with AUSTRAC would be neither purposeful nor beneficial, especially considering their limited access to information and the coverage provided by other reporting entities (ie trustees, responsible entities and brokers). Practically, reports to AUSTRAC by investment managers would be limited and inconsequential.