New parliamentary inquiry into the wholesale investor and wholesale client tests

By Emma Donaghue and Tristan Page

The Parliamentary Joint Committee on Corporations and Financial Services (Committee) has commenced an inquiry into the wholesale investor test for offers of securities (Section 708 of Chapter 6D of the Corporations Act 2001) and the wholesale client test for financial products and services (Sections 761G and 761GA of Chapter 7 of the Act).

Managed investment scheme review

This inquiry follows on from the review initiated by Treasury in August 2023 about the regulatory framework for managed investment schemes. One part of that review focused on the tests used to determine if an investor is a ‘wholesale client’, specifically looking at the financial thresholds and individual wealth test. Learn more in this article.

The fact they have now launched a specific enquiry into the tests signifies there is a real possibility changes will be made.

What does the inquiry cover?

The key terms of reference for the inquiry include:

• examining the current test, its relevant contexts, consequences of an investor meeting the test, and how the tests are applied in practice;
• comparison with comparable overseas jurisdictions;
• consideration of any proposals to change the test; and
• the process for making changes to the test, including any additional government consultation.

What does this mean for you?

Based on submissions made to Treasury in response to its review, there are proposals for the net asset portion of the test to be increased to $5 million. This would significantly reduce the number of investors that meet the test.

For a fund manager, if an investor does not meet the wholesale client test, then they can only invest in a registered managed investment scheme. The costs of operating a registered managed investment scheme are significantly higher than the costs of operating a wholesale managed investment scheme.

What happens next?

The Committee has called for written submissions by 15 May 2024, with the intention to report to Parliament by the end of 2024.

Hall & Wilcox is making a submission, and we welcome any feedback from you about the tests. Get in touch with the HW Funds team to discuss what the inquiry might mean for you.