CAMAC releases second discussion paper on managed investment schemes

Overview

The Corporations and Markets Advisory Committee (CAMAC) has published a second discussion paper as a result of its review of managed investment schemes.

The first, which was published in July 2012, titled ‘Managed Investment Schemes’, primarily raised issues associated with schemes which were in financial distress.

This second discussion paper undertakes a broader examination of the regulation of schemes from their establishment to their operation and governance and raises an extensive array of disclosure, regulatory and governance issues.

An overarching theme of the discussion paper is that the regulatory regime for managed investment schemes should be aligned with that of companies, unless there are compelling reasons for treating schemes differently. This approach is viewed as beneficial to reducing the complexity and regulatory burden on the industry.

Given the timing of the release of the discussion paper, the discussion paper and the submissions will no doubt provide an important perspective to the Financial System Inquiry established by the Liberal government and chaired by David Murray.

CAMAC is inviting submissions on the issues raised. Submissions will close on Friday 6 June 2014.

Summary of proposed reforms

The proposals, if implemented, will profoundly affect how managed investment schemes are established and operated.

Some of the key proposals are:

• Registration of wholesale schemes: CAMAC proposes the abolition of the disclosure exemption for the registration of schemes, which would result in the requirement to register schemes with only wholesale investors and the application of the managed investment scheme provisions to wholesale schemes. The discussion paper proposes a targeted approach for exempting wholesale-only schemes from certain aspects of the regulatory regime.
• Scheme registration: Bringing ASIC’s role in the scheme registration process in line with its role in the registration of companies. ASIC would register a scheme generally as a matter of course without the need to review the scheme constitution and compliance plan as a pre-requisite to registration.
• Scheme constitution: CAMAC raises the prospect of removing the responsible entity’s right to unilaterally amend the constitution. In accordance with the philosophy of harmonising the regulation of companies and managed investment schemes, CAMAC proposes that the scheme constitution may only be amended by a special resolution of members.
• Product disclosure statements: CAMAC queries whether there is any justification for different disclosure regimes applying to managed investments schemes and companies and whether the due diligence requirements should be the same for product disclosure statements and prospectuses.
• Meeting procedures: Proposed alignment between requirements for meeting of schemes and meetings of companies, including in respect of the threshold for requisitioning meetings, quorum requirements and the role of the chair.
• Voting exclusion: The application of the voting exclusions are proposed to be clarified, including clarification of the appropriate test for ‘associates’. CAMAC also considers whether the restriction on responsible entities’ entitlement to vote should be extended to listed schemes.
• Withdrawal rights: CAMAC discusses the development of a statutory buy-back procedure for unlisted schemes. Changes to the definition of ‘liquid’ to specify a period of 7 days for the realisation of assets and to the withdrawal procedure, including providing ASIC with the power to stop a withdrawal offer are also proposed. A review of the definition of ‘financial market’ which may have prevented responsible entities from providing a withdrawal mechanism for members is also proposed which may help facilitate withdrawals or transfers from illiquid funds.
• Takeover and reorganisation of schemes: Proposal to extend takeover provisions in Chapter 6D to large unlisted schemes. The question of whether a statutory scheme of arrangement procedure should be applicable to managed investment schemes is also raised in the discussion paper.
• Duties of the responsible entity: The discussion paper suggests that the duty of the responsible entity to treat all members ‘equally’ be modified to a duty to treat all members ‘fairly’ which would provide responsible entities with greater administrative flexibility. Proposals are also put forth which would clarify the circumstances in which the responsible entity is entitled to fees and an indemnity from the assets of the scheme for the ‘proper performance’ of their duties and to impose criminal liability on the responsible entity for breaches of related party transaction provisions.
• Disclosure of investment guidelines: The discussion paper raises the prospect of requiring schemes to disclose its investment guidelines and any departures from its investment guidelines.
• Governance and compliance framework: Review of options to introduce a more risk based regime for schemes, rather than the current compliance plan framework which may lead to a mechanical compliance process which is not tailored to the circumstances of the scheme.
• Definition changes: Proposed changes to the definition of managed investment scheme to include arrangements where not all members receive a benefit in the scheme. Proposed changes to the definition of ‘member’ and ‘scheme property’ to clarify the scope of these definitions.
• External administration: CAMAC proposes the introduction of provisions relating to the remuneration and expenses of liquidators in the winding up of a scheme in line with the provisions applicable to companies.
• Powers of ASIC: ASIC’s exemption and modification powers are examined and CAMAC queries whether ASIC should be provided with more flexibility to provide relief from regulatory requirements for managed investment schemes on an individual scheme basis.
• Consequences of contravention: The discussion paper also highlights the need for clarity regarding the consequences of contraventions of Chapter 5C in respect of the validity of transactions.

Conclusion

The discussion paper presents a timely opportunity to review and clarify the regulation of managed investment schemes. The proposals are broad ranging and may have far reaching consequences for both managers and investors. Industry and specialised technical input as to the current position and potential implications of the proposals should assist in delivering clarity and efficiencies in this regulatory sphere.

Please contact us if you have any queries or require assistance in preparing a submission in response to the discussion paper.