Consultation Paper 188: Managed investments: Constitutions

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ASIC has recently released Consultation Paper 188 (CP 188). CP 188 outlines proposals to update its guidance relating to the content requirements of Constitutions of registered Managed Investment Schemes.

In CP 188 ASIC has noted that RG 134 ‘Managed Investments: Constitutions’, was released in 1998 and last updated in 2000 when the managed investments regime was in its infancy.  As we are all aware the managed investments industry has seen significant evolution since this early time.

The proposals include:

Following industry feedback ASIC now proposes to improve the efficiency and user friendliness of the process to register managed investment schemes.  CP 188 is the first stage of a project that will include:

  • Changing the online application process;
  • Reviewing policy in RG 132;
  • Reviewing internal assessment processes;
  • Adopting 1 of the following 2 options in drafting the updated RG 134:

Option 1: to generally express ASIC’s views on how it believes a constitution can meet s. 601GA and 601GB that it will apply, but leave open that there may be other ways to comply;

Option 2: other than for incorporating its proposals on issue and withdrawal price, RG 134 will generally provide advice on when ASIC will object to a constitutional provision involving s. 601GA and 601GB.

Safe Harbour

It is proposed to revoke class order [CO 05/26] and create a ‘safe harbour’ process which will enable a RE to satisfy the obligation that the constitution of a scheme makes adequate provision for consideration to acquire an interest in the scheme (s. 601GA(1)(a)).  REs not wishing to rely on the ‘safe harbour’ process are encouraged to provide drafts of relevant constitutional provisions for assessment before applying to register the scheme.  ASIC has stated that non ‘safe harbour’ constitution provisions will be subject to greater scrutiny at registration.

The ‘safe harbour’ process will require the constitution to include a provision that the consideration payable to acquire an interest in an unlisted scheme (including scheme interests quoted on the AQUA market of ASX) will be based on:

  • The value of scheme assets less any liabilities permitted to be paid from scheme property; or
  • If there are different prices for different scheme interest classes, the value of the scheme assets properly attributable to a class less any liabilities properly attributable to that class.

The consideration to acquire an interest in a listed scheme will be determined by reference to market price.

The ‘safe harbour’ process will exclude schemes where members do not have a proportionate interest but contribute to a common enterprise or schemes with a fixed price consideration or schemes with limited or no pooling eg agriculture schemes.

Similarly, the calculation of consideration for placements to the RE or an associate will not be included in the ‘safe harbour’.

Likewise, a number of current restrictions on rights issues and distribution reinvestment plans aimed at equality of treatment of members are to be removed from the ‘safe harbour’ provisions as the equal treatment duty in s. 601FC(1)(d) already exists.  REs will also be able to exclude foreign members from rights issues and distribution reinvestment plans due the problems in meeting foreign jurisdictional requirements.

REs will be permitted to negotiate differential fee arrangements with wholesale clients provided it meets the requirements of Class Order 03/217.  This recognises the commercial benefits for REs in attracting wholesale clients.

The ‘safe harbour’ will allow a RE to include a constitutional provision that the withdrawal price may be based on the value of scheme assets less any liabilities that may be met from scheme property (eg transaction costs).

REs may determine the level of detail to include in the constitution about its powers to invest or deal with scheme property and any powers to borrow or raise money for scheme purposes.


Scheme constitutions will be required to make adequate provision for dealing with complaints by retail clients.  ASIC suggests REs can comply by including a constitution provision stating the RE will comply with the dispute resolution requirements approved by ASIC for s. 912A(2)(a)(i).  REs will be able to devise their own complaints handling procedures for wholesale clients and include these in the constitution.

Winding Up

Constitutions will need to make adequate provision for winding up and must address the following key aspects:

  • Enabling the identification of scheme assets;
  • The distribution of the net proceeds of realisation;
  • Addressing how those involved in winding up the scheme will be paid and in what priority;
  • Any power to require members to continue making payments during the process of winding up the scheme or any ability to accept such payments from members in order to maximise the net proceeds of realisation; and
  • How the process of winding up will occur if the RE and/or scheme is ‘insolvent’.

ASIC have not set out what constitutes ‘adequate provision’ on the above key aspects and consider it will depend on the circumstances of each scheme.

ASIC notes that Ch. 5C does not detail what constitutes winding up a managed investment scheme or what the process entails.  Section 601NE(2) provides that the RE must ensure the scheme is wound up in accordance with its constitution and any order of the court under s. 601NF(2).

Constitutions should include provision for an independent audit of the final accounts after winding up to be conducted by a registered company auditor or firm.  Contrary to the existing paragraph RG 134.24 which provides for an independent audit of the final accounts after winding up, ASIC notes that REs often give themselves a discretion to arrange either an independent audit or a review of the final accounts by a registered company auditor.  A review provides a lesser level of assurance and has substantially less scope than an audit.

ASIC will not object to constitution provisions that permit REs to postpone the realisation of a scheme on winding up for as long as the RE thinks fit, provided that the clause is subject to the Corporations Act.

Rights to be paid fees or be indemnified out of scheme property

Constitutions will not have to state the specific amount of the fee that is payable to the RE on withdrawals but can state a maximum fee and/or all the variables that affect the amount of the fee payable.  However, the REs right to a fee or indemnity out of withdrawals must be stated in the constitution and must be only paid in relation to the RE’s proper performance of its duties. ASIC will not object to constitutional provisions that calculate a variable fee relative to an index benchmark (eg. ASX 200 index) and provides for a similar index to be substituted in specified circumstances (eg. if the original index is no longer available or appropriate).

Constitutional provisions will not be allowed which permit payment of fees in advance to a RE or give a right of indemnity out of scheme property for expenses or liabilities incurred before the RE took office.  Money raised for the issue of scheme interests and held pending issue may not be withdrawn to pay fees except where the issue takes place.

Withdrawal rights

All constitutions that provide a right for members to withdraw from the scheme should include provisions which comply with s. 601GA(4).

For constitutions to have adequate provisions for making and dealing with withdrawal requests it should address:

  • The method and criteria for exercising a right to withdraw;
  • The nature of the consideration to be given to members to satisfy withdrawal requests;
  • Any restrictions on satisfying withdrawal requests; and
  • When a member ceases to be a member.

If members are to be permitted to withdraw from a scheme while it is not liquid, the right must be stated in the constitution and state that withdrawals are to be made in accordance with Pt. 5C.6 of the Corporations Act.  The statutory framework in Pt. 5C.6 applies to withdrawals from non-liquid schemes to ensure withdrawal procedures may operate effectively and members are treated equally, and not to the detriment of remaining members.

Constitutions should require that a withdrawal price is determined on the basis of reasonable and current market valuations of scheme property.

Any power of the RE to suspend or delay the withdrawal process must be stated in the constitution and set the specific circumstances when such a power may be exercised.  The constitution should provide for when a member’s interests are treated as withdrawn.  Payment of withdrawal requests should be made within a certain and reasonable timeframe.

Incorporation of extrinsic material

A constitution should not include provisions which make it subject to another document other than an Act of Parliament, regulations or instruments made under an Act.  For example provisions which make a constitution subject to the terms of a PDS would be contrary to this proposal.

Legal enforceability

The constitution of a managed investment scheme is required to be legally enforceable as between the RE and its members.  ASIC have proposed that, for a constitution to be legally enforceable, it should:

  • Be contained in a document that is in a valid form and executed by the proposed RE;
  • Be contained in a document that is binding between the RE and all members of the scheme; and
  • Only include provisions that are not inconsistent with the Corporations Act.

Impact on existing constitutions

A commencement date of 1 May 2013 has been proposed by ASIC for schemes not yet registered.

For currently registered schemes compliance is encouraged by 1 May 2013 if the Responsible Entity (RE) decides the constitution amendments can be made unilaterally (i.e. without unit holder approval) or by the date a members’ meeting is held if the RE decides unit holder approval to the amendments is required. REs will need to consider whether such amendments are in the best interests of members (including other issues such as whether the amendments could risk trust settlement).

Consultation Period

The consultation period closes on 13 November 2012.

A copy of the ASIC CP paper 188 and media release can be accessed here


Please follow this link to a copy of the submissions lodged by Henry Davis York with ASIC regarding CP 188. This document provides a good summary of issues surrounding CP 188.