What ASIC’s new employee entitlement scheme relief instrument means for operators

The draft provided operators with relief from the managed investment scheme registration, anti-hawking and product disclosure requirements, but was silent on DDO under Part 7.8A of the Corporations Regulations 2001. The Instrument closes this gap. Section 7(2) now provides that an EES operator does not have to comply with regulation 7.8A.10 of the Corporations Regulations 2001 in relation to an interest in the scheme. 

Corresponding DDO relief is also provided during the transitional period under section 9(3). This is a welcome addition, as without it, there was a risk interests in EES would remain subject to DDO requirements, which includes the obligation to prepare target market determination, despite being exempt from the product disclosure regime.

The most significant area of change is the conditions operators must satisfy to rely on the ongoing relief in section 7. The draft imposed a relatively streamlined set of requirements focused on honesty and care, scheme property protections, equal treatment, conflict priority, website disclosures, ASIC notification, financial reporting and record-keeping. The Instrument retains all those requirements but introduces an expanded suite of conditions that more closely mirror the general obligations imposed on Australian financial services licensees under section 912A of the Corporations Act. 

In particular, the Instrument now requires operators to:

• do all things necessary to ensure that in operating the scheme, they act efficiently, honestly and fairly – expanding on the narrower ‘honestly and with care and diligence’ wording in the Draft (the care and diligence obligation is retained as a separate requirement under paragraph 8(b));
• have in place adequate arrangements for the management of conflicts of interest that may arise in relation to the operation of the scheme;
• have adequate resources, including financial, technological and human resources, to operate the scheme and carry out supervisory arrangements;
• maintain competence to operate the scheme and ensure representatives are adequately trained and competent;
• ensure their internal dispute resolution procedure covers EES complaints (ie complaints in connection with the operation of the scheme) and comply with that procedure in relation to such complaints; and
• ensure their risk management systems are adequate for the management of risks associated with operating the scheme. 

These are material additions. For example, the approach to conflicts in the draft was limited to a priority rule, requiring operators to prefer members' interests over their own where a conflict arose.  The Instrument retains that priority rule but adds a standalone obligation to have adequate conflict management arrangements in place. 

Similarly, the requirements around resources, competence and risk management are entirely new and will require operators to demonstrate, on an ongoing basis, that they have the infrastructure and capability to operate their schemes properly.

There has also been a change in wording of the definition of ‘employee entitlement scheme’ from ‘a scheme to which employers may make, or are required by legislation, an award or an agreement to make contributions…’ to ‘a scheme to which employers make contributions…’ in the Instrument. In contrast to the draft, the Instrument wording excludes closed funds (ie funds where the employers do not currently ‘make’ contributions to a scheme). 

However, we acknowledge the note at paragraph 13 of the Explanatory Statement to the Instrument, which states the relief provided by the Instrument is intended to apply to employee share schemes that currently receive contributions as well as closed or dormant schemes that no longer receive contributions. EES operators of closed schemes should consider the application of the transitional and licensing provisions of the Instrument to those schemes.

The draft did not include a bespoke definition of ‘associate’. The Instrument introduces an expanded definition that goes beyond the standard Chapter 7 meaning. Under the Instrument, an associate of an EES operator also includes a shareholder of the operator, a registered organisation under the Fair Work (Registered Organisations) Act 2009 that is a party to a relevant award or agreement, and any associate of those persons. 

This matters because the website disclosure conditions require operators to disclose any rights of the operator ‘or an associate’ to be paid fees out of scheme property, and any arrangements under which a benefit may be given out of scheme property to the operator or an associate. These references were limited to the operator alone in the draft. The practical effect is that operators will need to identify and disclose a broader range of related-party arrangements, including those involving shareholders and relevant registered organisations, and to disclose any entitlement those entities have to be paid fees or to receive other benefits from the scheme. 

This is likely to affect schemes that have ‘sponsors’ entitled to benefits from the scheme, whether under the governing rules of the scheme or under an award or other industrial instrument.

The draft defined the EES financial year simply as a period of 12 months ending on 30 June. 

The Instrument now takes a different approach, with the financial year now commencing on 1 July 2026 and the day on which the operator first relied on the relief, or an earlier day determined by the operator. 

The first financial year may last for 12 months or a period of up to 18 months as determined by the operator, with subsequent financial years being 12-month periods. This gives operators significantly more flexibility to align the scheme's reporting cycle with their own financial year or other operational requirements.

Under the draft, operators were simply required to ‘include’ website disclosures, with no express timeframe for initial publication (other than the general link to first reliance on the exemption) and no obligation to keep disclosures up to date. 

The Instrument tightens this. 

Operators must now publish their website disclosures within 14 days of first relying on the exemption and must maintain those disclosures as current thereafter. This is a practical change operators should factor into their implementation planning – website content will need to be prepared and published promptly and reviewed and updated on an ongoing basis.

The draft required operators to publish annual financial reports and auditor's reports on their website within three months after the end of the relevant financial year. The Instrument extends this deadline to four months and specifies that reports must be published in a prominent position on the operator's website.  

While this additional month is a welcome concession, the prominence requirement means operators should consider whether their current website structure adequately facilitates access to scheme financial information.

The transitional relief provisions, which apply until 1 September 2026 (or, for operators who have lodged an AFSL application by that date, until that application is determined), are broadly consistent with the draft. 

However, the Instrument introduces a new transitional financial reporting obligation. 

Operators who rely on the transitional relief on or before 30 June 2026 must publish on their website a balance sheet, profit and loss statement and cash flow statement for the scheme, together with any notes and auditor's report. The relevant period depends on when the scheme commenced operation:

• for schemes that commenced before 1 July 2025, the statements must cover a period of 12 months (or up to 18 months as determined by the operator) ending on a date between 1 July 2025 and 30 June 2026;
• for newer schemes, the statements must cover the period from commencement until 30 June 2026.  These must be published as soon as practicable after preparation and no later than 1 May 2026 (for periods ending on or before 1 January 2026) or four months after the end of the relevant period. 

The conditions for operators relying on transitional relief have also been adjusted. The draft required transitional operators to comply with the conditions in paragraphs 8(a) to (f) (other than subparagraph 8(e)(iv)). The Instrument instead requires compliance with paragraphs 8(a) to (c) and (j) to (r) – meaning transitional operators must now satisfy the efficiency, honesty and fairness obligation, the care and diligence obligation, the conflict management obligation, the equal treatment and conflict priority obligations, as well as the full suite of scheme property, disclosure, notification, financial reporting and record-keeping conditions.