Responsible Entities and Managed Investment Schemes

What is a managed investment scheme?

A managed investment scheme is a scheme that enables a group of investors to contribute money that is pooled for investment to produce a financial benefit. Section 9 of the Corporations Act 2001 (Cth) contains the definition of a managed investment scheme, which must have three particular features:

  • Investors contribute money or money’s worth as consideration to acquire rights (interests) to benefits that are produced by the scheme;
  • All contributions from investors are pooled or used for a common purpose to further produce benefits. Benefits may be financial or consist of rights or interests in property; and
  • The members of the scheme (investors) are not active in controlling the scheme’s day-to-day operations.

The concept of managed investment schemes was introduced in July 1998, by the Managed Investments Act (Cth), which replaced the old “prescribed interests” regime. Its most significant change was the replacement of the roles of trustee and manager with the single  role. It also introduced new measures to ensure adequate investor protection, including:

  • The licensing and surveillance of scheme operators by a regulator;
  • The scheme operator’s liability to investors;
  • Registration requirements for certain schemes; and
  • The separation of scheme assets from those of the scheme operator.

The provisions of the Managed Investments Act are incorporated in Chapter 5C of the Corporations Act 2001.

Managed investment schemes are a popular investment arrangement as they provide investors with access to assets and asset classes that may be otherwise inaccessible for them, and portfolio diversification within an asset class.

These trust-based investment schemes, which can also be referred to as managed funds and collective investments, are typically structured as unit trusts. Investors hold units in the trust and rely on a managing party to appropriately invest the pooled funds for a profit, which members are then entitled to on a pro-rata basis.

What is not a managed investment scheme?

Generally, only investments that are ‘collective’ are managed investment schemes. Some examples of investments that are not managed investments schemes include:

  • Regulated superannuation funds;
  • Approved deposit funds;
  • Debentures issued by a body corporate;
  • Barter schemes;
  • Franchises;
  • Direct purchases of shares or other equities; and
  • Schemes operated by an Australian bank in the ordinary course of banking business (e.g. term deposits).

What asset classes can a managed investment scheme invest in?

Managed investment schemes cover a wide variety of investments. Popular managed investment schemes include:

Does a managed investment scheme need to be registered?

A managed investment scheme can be either registered or unregistered. Regardless, all managed investment schemes must be operated by a manager with an Australian Financial Services Licence (AFS Licence), authorising it to run the scheme.

A managed investment scheme must be registered with the Australian Securities and Investments Commission (ASIC) if;

  • The scheme has 20 or more members;
  • The scheme is promoted by a person who is in the business of promoting managed investment schemes; or
  • ASIC has otherwise determined that the scheme must be registered.

Registered schemes have additional compliance and governance responsibilities. Where a scheme is required to be registered, the following must be addressed:

  • A Responsible Entity must be appointed (versus a trustee for a unregistered managed investment scheme);
    • The Responsible Entity must be an Australian public company holding an AFS Licence authorising it to act as a Responsible Entity;
    • The Responsible Entity must have minimum net tangible assets of $50,000 or 0.5% of the value of the scheme’s gross assets, up to $5 million assuming a custodian is appointed, otherwise $10 million is required;
  • Custodians must be appointed in some cases;
  • A Constitution, similar to a trust deed, that meets the Corporations Act requirements must be executed and lodged with ASIC;
  • A Compliance Plan must be created and lodged with ASIC, setting out the measures which a Responsible Entity is to undertake in operating the scheme to ensure compliance with the constitution and the Corporations Act;
  • A Compliance Committee is to be created if the board of directors of the Responsible Entity does not consist of at least half external directors.

Registered versus unregistered managed investment schemes

The following table provides a summary of the differences between registered and unregistered managed investment schemes.

Feature Registered managed investment scheme Unregistered managed investment scheme
Product Issuer Responsible entity – must be a public company with at least 3 directors Trustee – public company or a proprietary limited company
Members Retail and wholesale investors Typically wholesale only (with certain exceptions)
Offer Document Product Disclosure Statement Information Memorandum
Establishment requirements Scheme must have a constitution and compliance plan. These documents must be lodged with ASIC for review prior to registration Scheme must have a constitution or trust deed. The scheme doesn’t require a compliance plan or for documents to be lodged with ASIC
AFS Licence requirements Required to hold AFS Licence to operate a registered scheme, deal in a financial product and provide advice (with some exemptions) Required to hold AFS Licence to deal in a financial product and provide advice
Financial requirements Must meet solvency and cash needs requirement plus minimum net tangible asset requirement. Note: additional requirements are imposed if a custody service is provided Must meet base level financial requirements such as solvency and cash needs requirements
Governance Scheme must have external board of directors or compliance committee of at least 3 members, with a requirement that a majority of committee members are external Scheme does not require external board of directors of compliance committee
Reporting ·  Lodge annual audited accounts with ASIC as a minimum

·  Compliance plan audited annually

·  Annual reporting to investors

·  Periodic statements to investors and continuous disclosure obligations

·  No lodgement of accounts with ASIC

·  Fund accounts not required to be audited

·  Fund manager determines investor reporting

Custody ·  Responsible Entity can hold scheme assets if it holds sufficient financial resources ($10 million) and meets custodial standards under ASIC policy

·  Typically, an external custodian will be appointed

·  Fund manager can hold assets but may be required to hold an AFS Licence to provide custodial services

·  Custodial standards must be met but a reduced financial resource requirement ($150,000)

·  Often a licensed external custodian is appointed

·  If financial products are held, there is no licensing exemption available for custodians

One Investment Group is licenced to act as responsible entity for registered managed investment schemes, and has experience as responsible entity for a variety of fund sizes and asset classes. For more information about One Investment Group’s services, contact us on [email protected] or call (02) 8277 0000.