Corporations and Markets Advisory Committee
The establishment and operation of managed investment schemes
© Corporations and Markets Advisory Committee 2014
ISBN 978-0-9871539-5-1 (on-line)
This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process without attribution.
Disclaimer. This document summarises information and makes general statements about the law. However, it has not been prepared for the purpose of providing legal advice. In all cases, you should rely on your own legal advice to determine how the law may apply in particular circumstances.
This document is available electronically only at:
CAMAC’s contact details are:
email: [email protected]
phone: (02) 9911 2950
mail: Corporations and Markets Advisory Committee
GPO Box 3967
Sydney NSW 2001
Making a submission
Matters for inclusion in submissions
CAMAC invites submissions on any aspect of this paper on which you would like to comment. Many of the issues raised and questions posed are quite technical and specialised. You should feel free to be selective about the parts on which you would like to respond.
It would be helpful if your submission could indicate the scale of any problems entailed in the issues on which you comment (for instance, the number of schemes and the number of investors affected) and include estimates of the financial and/or other impact on schemes of implementing any recommendations you put forward to deal with those issues.
Templates for submissions
To complement this discussion paper, CAMAC has also published templates for each of Chapters 3 to 16. These templates can be found on its website www.camac.gov.au under What’s New and Publications/Current Discussion Papers. Each template contains space for you to insert your details and your response to the questions for the relevant chapter. Respondents are requested to complete the details segment in the template for each chapter on which they are making a submission. At the end of each template, there is provision for respondents to provide any other views on the matters covered in the relevant chapter.
Sending your submission
Please email your submission, using the templates provided, to:
with a cc to [email protected]
Form of submission
In preparing your submission, please retain the Word format of the templates provided, to allow CAMAC to collate the responses on each question.
All submissions, unless clearly marked confidential, will be published at
www.camac.gov.au. Submissions will be published in pdf format. If you have any queries, you can call (02) 9911 2950.
Date for submissions
Please forward your submission by Friday 6 June 2014.
Making a submission ………………………………………………………………………………………….. iii
1 Introduction ………………………………………………………………………………………………. 1
1.1 Overview ………………………………………………………………………………………………….. 1
1.2 Basic concepts …………………………………………………………………………………………… 5
1.3 Terminology ……………………………………………………………………………………………… 6
1.4 The review process …………………………………………………………………………………….. 9
1.5 CAMAC……………………………………………………………………………………………………. 9
2 Current position ………………………………………………………………………………………. 11
2.1 Legal framework………………………………………………………………………………………. 11
2.2 The RE transacting as operator of a scheme …………………………………………………. 18
2.3 External controls ………………………………………………………………………………………. 22
2.4 Voluntary administration of a scheme …………………………………………………………. 23
2.5 Winding up a scheme ……………………………………………………………………………….. 23
3 Definitions ……………………………………………………………………………………………….. 25
3.1 Definition of ‘managed investment scheme’ ………………………………………………… 25
3.2 Definition of ‘member’ of a managed investment scheme ……………………………… 27
3.3 Definition of ‘scheme property’ …………………………………………………………………. 30
4 Scheme registration………………………………………………………………………………….. 35
4.1 Criteria for determining whether a scheme should be registered …………………….. 35
4.2 ASIC’s role in scheme registration ……………………………………………………………… 39
5 Governance framework for schemes …………………………………………………………. 47
5.1 Overview of the chapter…………………………………………………………………………….. 47
5.2 Overview of the governance framework for schemes ……………………………………. 47
5.3 Compliance ……………………………………………………………………………………………… 56
5.4 Risk management …………………………………………………………………………………….. 63
5.5 Assessment of the current scheme governance framework …………………………….. 68
5.6 Reform options ………………………………………………………………………………………… 71
5.7 Investment guidelines ……………………………………………………………………………….. 79
6 Scheme constitution …………………………………………………………………………………. 83
6.1 Rights and powers requiring inclusion in the constitution if they are to exist………………………………………………………………………………………………………… 83
6.2 Enforceability of the scheme constitution ……………………………………………………. 84
6.3 Procedure for changing the scheme constitution …………………………………………… 85
vi The establishment and operation of managed investment schemes
7.1 e responsible entity and others involved in the operation of a scheme ……. 89
Duty to treat members equally ……………………………………………………………………. 89
7.2 RE’s entitlement to fees and indemnities……………………………………………………… 90
7.3 Attribution to the responsible entity of acts or omissions of persons
engaged to perform the responsible entity’s functions …………………………………… 93
7.4 Disclosure of interests of directors of the responsible entity …………………………… 96
7.5 Related party transactions …………………………………………………………………………..97
7.6 Change of responsible entity…………………………………………………………………….. 101
7.7 Scheme custodians ………………………………………………………………………………….. 102
8 Meetings of scheme members …………………………………………………………………. 109
8.1 Requisitioning scheme meetings……………………………………………………………….. 109
8.2 Meeting quorum requirements in scheme constitutions ………………………………..111
8.3 The chair of a scheme meeting …………………………………………………………………. 112
8.4 Voting restrictions on resolutions at members’ meetings ……………………………… 115
8.5 Proxy voting…………………………………………………………………………………………… 118
8.6 Procedures relating to adjournment of meetings………………………………………….. 119
8.7 Other alignment issues …………………………………………………………………………….. 121
10 Disclosure………………………………………………………………………………………………. 141
10.1 Overview of the chapter…………………………………………………………………………… 141
10.2 Role of disclosure …………………………………………………………………………………… 141
10.3 Types of disclosure …………………………………………………………………………………. 142
10.4 Initial disclosure……………………………………………………………………………………… 142
10.5 Continuous disclosure and significant event reporting …………………………………. 167
10.6 Periodic disclosure ………………………………………………………………………………….. 168
10.7 Means of disclosure ………………………………………………………………………………… 169
11 Takeovers and reorganizations of schemes ……………………………………………… 175
11.1 Scheme takeovers …………………………………………………………………………………… 175
11.2 Reorganization of schemes ……………………………………………………………………….179
12 External administration …………………………………………………………………………. 183
12.1 Remuneration and expenses in the winding up of a scheme………………………….. 183
12.2 External supervision of a scheme winding up …………………………………………….. 187
12.3 Disclaimer of leases ………………………………………………………………………………… 189
12.4 Duties and obligations of officers of an RE in financial difficulties ………………. 190
12.5 Notification of appointment of receiver …………………………………………………….. 196
13 Regulatory powers and enforcement……………………………………………………….. 199
13.1 Modification and exemption powers …………………………………………………………. 199
13.2 Supervisory and enforcement powers………………………………………………………… 201
13.3 Consequences of contraventions for transactions ………………………………………… 203
14 International aspects ………………………………………………………………………………. 205
14.1 Recognised New Zealand schemes……………………………………………………………. 205
14.2 Implementation of IOSCO principles ………………………………………………………… 208
14.3 UCITS-type regulatory structure for Australian funds …………………………………. 210
15 Othe r matters ………………………………………………………………………………………… 213
15.1 Valuation of scheme assets and liabilities ………………………………………………….. 213
15.2 Definition of ‘financial market’ ………………………………………………………………… 228
15.3 Exception to the insider trading prohibition ……………………………………………….. 230
15.4 Alignment of corporate and scheme law ……………………………………………………. 232
16.1 r matters………………………………………………………………………………………… 235
Definition of ‘class of interests’ in a managed investment scheme ………………… 235
16.2 Exception from the definition of ‘managed investment scheme’ for
intra-group schemes………………………………………………………………………………… 237
16.3 Application of the definition of ‘securities’ to interests in schemes……………….. 238
16.4 Definition of ‘client’ ……………………………………………………………………………….. 239
16.5 Definition of ‘rights issue’……………………………………………………………………….. 240
16.6 Application of the disclosing entity provisions to managed investment schemes…………………………………………………………………………………………………. 243
16.7 Failure to fulfil minimum subscription conditions ………………………………………. 244
16.8 Right of investors to avoid subscription contracts ……………………………………….. 245
16.9 Certificates of interests ……………………………………………………………………………. 247
16.10 Obligations to assist those having supervisory responsibilities ……………………… 247
16.11 Reporting breaches to ASIC …………………………………………………………………….. 249
Appendix 1 Criteria for determining whether a scheme should be registered …… 251
Appendix 2 Definitions of ‘securities’ and their application to interests in schemes……………………………………………………………………………………….. 259
This chapter provides an outline of CAMAC’s review of managed investment schemes.
CAMAC’s review of managed investment schemes has proceeded in two stages.
Stage 1, which culminated in the report Managed Investment Schemes in July 2012 (the
2012 CAMAC report), principally dealt with schemes or responsible entities (which manage schemes) in financial stress.
Stage 2, which forms the subject matter of this paper, deals primarily with the establishment and ongoing operation of schemes. It was foreshadowed in the 2012
CAMAC report and commenced after the completion of that report. CAMAC has undertaken this wider examination of schemes for a number of reasons, including its perception that a general review of this nature is timely, as the current managed investment scheme provisions were introduced in the late 1990s.
CAMAC sees both stages of this review as contributing to the Government’s goal of promoting productivity, including by a reduction in the regulatory burden on industry. CAMAC’s work in this area may also provide a useful adjunct to the work of the Government’s Financial System Inquiry.
1.1.1 Stage 1: the 2012 CAMAC report
The 2012 CAMAC report considered matters relating to schemes for responsible entities (REs) in financial stress in the context of significant developments that have occurred with the use of schemes, in particular:
• the increasing use of contract-based ‘common enterprise’ entrepreneurial schemes
(such as horticultural or forestry schemes) alongside more traditional trust-based
‘pooled’ investment schemes (such as cash management trusts or property funds)1
• the growing trend for REs to operate a number of schemes or to have other business operations of their own (multi-function REs), in contrast with REs whose only function is to operate one scheme (sole-function REs).2
These developments have raised complex issues concerning the adequacy of the current legal framework, both for the regulation of ongoing schemes and for the regulation of schemes or their REs that experience financial stress.
The 2012 CAMAC report made a number of recommendations relevant to schemes generally:
• a prohibition on the creation of new common enterprise schemes
1 The distinction between common enterprise and pooled schemes is discussed in Section 1.2.1 of this paper.
2 Sole-function and multi-function REs are discussed in Section 1.2.1 of this paper.
• a new regulatory structure for the operation of schemes, described as the Separate
Legal Entity Proposal (SLE Proposal)
• a requirement that new schemes be operated only by sole-function REs (unnecessary if the SLE Proposal is introduced)
• a requirement that each scheme have a definitive register of scheme agreements and a definitive register of scheme property.
The SLE Proposal
The SLE Proposal was a key deregulatory recommendation in the Stage 1 report. It would simplify the procedures for making claims against scheme property, replacing the RE of a scheme and putting a scheme into external administration.
The SLE Proposal involved a registered MIS, which would be given the status of a separate legal entity, distinct from the RE or the scheme’s members, for the purposes of:
• holding the legal title to all scheme property
• being the principal in all agreements entered into by the RE as agent of the MIS and operator of the scheme
• suing or being sued.3
This contrasts with the current position whereby the RE is the principal in all contracts involving the scheme and holds scheme property on trust for the scheme members.
An MIS would not have any directors, officers, members or employees, but would act exclusively through the RE, as its disclosed agent.4
The SLE Proposal is relevant to the following Stage 2 matters raised in this discussion paper:5
• the definition of scheme property6
• the provision specifying who is bound by the scheme constitution7
• the possible content of the disclosure requirements8
• the duties of officers of the RE9
• various notification requirements on the appointment of a receiver10
• the right of investors to avoid subscription contracts.11
3 2012 CAMAC report Sections 1.6.2, 3.2.
4 2012 CAMAC report Section 3.2.
5 The SLE Proposal is also discussed in Section 7.5 of this paper, which deals with the related party transaction provisions, but does not change the analysis in that section.
6 Section 3.3.
7 Section 6.1.
8 Section 10.4.6.
9 Section 12.4.
10 Section 12.5.
11 Section 16.8.
CAMAC has considered each of these matters from two perspectives, namely if the SLE Proposal were implemented and if it were not.
The SLE Proposal does not have consequences for other matters discussed in this paper.
The 2012 CAMAC report also made recommendations, relevant to schemes or REs in financial stress, that would decrease costs in these circumstances by providing simpler procedures:
• various ways to overcome the disincentives for an entity to act as a temporary responsible entity (TRE)12
• the adoption of a statutory concept of insolvency for schemes, similar to that applicable to corporations13
• facilitative provisions to permit a financially stressed scheme to be placed in voluntary administration14
• a winding up procedure for an insolvent scheme, comparable to that for winding up an insolvent company15
• giving scheme members statutory limited liability, similar to shareholders, and regardless of any contrary provision in a scheme constitution.16
1.1.2 Stage 2: this discussion paper
This paper reviews a wide range of issues relating to the establishment and operation of managed investment schemes. These issues include matters raised by respondents to Stage 1 of CAMAC’s review of schemes,17 as well as other matters that have come to CAMAC’s attention. The issues raised in this paper cover the following areas:
• definitional matters18
• scheme registration19
• the governance framework for schemes, including the scheme constitution, the RE, and the compliance and risk management framework20
• matters relating to scheme members, including meetings21
12 Chapter 5.
13 Section 6.3.2.
14 Chapter 6.
15 Chapter 7.
16 Section 8.4.3.
17 The respondents who raised other matters were ASIC, Freehills (now Herbert Smith Freehills), McCullough Robertson, the Insolvency Practitioners Association (now the Australian Restructuring Insolvency & Turnaround Association or ARITA), Ashurst Australia, Chartered Secretaries Australia (now the Governance Institute of Australia), Australasian Compliance Institute, Financial Services Council, Clarendon Lawyers and Messrs Bigmore, Hopper and Kennedy of the Victorian Bar.
18 Chapter 3, Sections 15.2, 16.1-16.5.
19 Chapter 4.
20 Chapters 5-7.
• takeovers and reorganizations23
• external administration of schemes24
• regulatory powers and enforcement25
• international issues26
• other matters.27
Many of these issues involve areas where the law lacks clarity, which may result in uncertainty in the marketplace and undue administrative and legal costs in compliance. The paper discusses various options for reform that may help reduce compliance burdens.
Alignment of corporate and scheme law
A key principle that underlies CAMAC’s views on many of the issues considered in this paper is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently, given that these two types of commercial enterprise often operate in the same markets and perform similar functions.
One reason for treating schemes differently in certain instances is that the governance framework for schemes differs from that for companies. Companies are under the direction and control of a board of directors. By contrast, a scheme is controlled by an RE, which must itself be a public company having its own directors.
Unjustified differences in applicable regulation open the way to unnecessary complexity. They also impose undue compliance burdens on those industry participants who operate schemes and companies (including through stapled entities). Alignment, where appropriate, achieves an overall deregulatory benefit of having similar legislative regimes for schemes and companies.
Professional indemnity insurance
A matter raised at Stage 1 of the CAMAC review concerned the minimum amount of professional indemnity insurance cover that should be held by the RE of a managed investment scheme. The report Compensation arrangements for consumers of financial services: Report by Richard St. John (April 2012) contains recommendations dealing with the adequacy of professional indemnity insurance cover for providers of financial services to retail consumers.28 In consequence, this paper does not deal with professional indemnity insurance.
21 Chapters 8-9.
22 Chapter 10, Section 16.6.
23 Chapter 11.
24 Chapter 12.
25 Chapter 13, Sections 16.10 and 16.11.
26 Chapter 14.
27 Sections 15.1 (valuation of scheme assets and liabilities), 15.3 (exception to the insider trading prohibition),
16.7 (failure to fulfil minimum subscription conditions), 16.8 (right of investors to avoid subscription contracts),
16.9 (certificates of interests).
28 Recommendations 2.1, 2,2, 2.3. See also paras 4.10, 4.24, 4.32, 4.34-4.42, 7.51.
1.2 Basic concepts
The 2012 CAMAC report and this paper draw two distinctions that are central to an understanding of how schemes operate and to the consideration of issues relating to managed investment schemes:
• the distinction between pooled schemes and common enterprise schemes
• the distinction between sole-function REs and multi-function REs.
1.2.1 Pooled schemes and common enterprise schemes
The statutory definition of ‘managed investment scheme’ refers to contributions from investors being ‘pooled or used in a common enterprise’.29
Pooled schemes involve contributions by scheme members being pooled and becoming scheme property, for use in scheme investments or otherwise to operate the scheme. Schemes of this type are typically established as trust-based investment arrangements, with scheme members playing no active role in the affairs of the scheme.
Common enterprise schemes involve the use of member contributions in a common enterprise that constitutes the scheme, without those contributions being pooled. In these forms of entrepreneurial arrangements, a distinction must be drawn between scheme property and property owned by individual scheme members that is used in the operation of the scheme. Schemes of this type are typically established as contract-based arrangements, with scheme members playing an active entrepreneurial role to some degree, at least in theory.
1.2.2 Sole‐function and multi‐function REs
A sole-function RE is an entity whose only role is to operate one particular scheme.
A multi-function RE is an entity that is the operator of more than one scheme or is the operator of at least one scheme and has other dealings in its own right, such as conducting its own business. The legislation contemplates schemes being operated by multi-function REs.30
29 Paragraph (a)(ii) of the s 9 definition of ‘managed investment scheme’.
30 Subparagraph 601FC(1)(i)(ii) refers to an RE holding scheme property ‘separately from property of the responsible entity and property of any other scheme’.
For ease of reference, the following shorthand references are used in this discussion paper:
2012 CAMAC report CAMAC report Managed Investment Schemes (July 2012) AFSL Australian financial services licence
AFS licensee the holder of an AFSL
ALRC/CASAC report joint Australian Law Reform Commission (ALRC)/Companies and Securities Advisory Committee (CASAC)31 report Collective Investments: Other People’s Money (1993)
APRA Australian Prudential Regulation Authority
ASIC Australian Securities and Investments Commission
ASIC Report 291 ASIC Report 291 Custodial and depository services in Australia
ASIC Report 298 ASIC Report 298 Adequacy of risk management systems of responsible entities (September 2012)
ASX Australian Securities Exchange
AUSTRAC Australian Transaction Reports and Analysis Centre
common enterprise scheme
a scheme where contributions by members are to be ‘used in a common enterprise’ (para (a)(ii) of the definition of ‘managed investment scheme’ in s 9) (rather than those contributions being placed in a common pool) and where members typically enter into a series of agreements with the RE and/or other parties related to the ongoing operation of the scheme. In practice, this type of scheme may also be referred to as a contract-based scheme or an enterprise scheme
EU European Union
FSC Financial Services Council
FSC Standard No. 9 Financial Services Council Standard No. 9 Valuation of Scheme Assets and Liabilities (2006)
FSG Financial Services Guide
FSRA Financial Services Reform Act 2001
insolvent scheme a scheme where the scheme property is insufficient to meet all the claims that can be made against that property as and when those claims become due and payable
IOSCO International Organization of Securities Commissions
31 In 2002, the name was changed to the Corporations and Markets Advisory Committee (CAMAC).
limited recourse rights rights of recovery of a counterparty against an RE, under an agreement with that RE as operator of a scheme, that are limited to the scheme property available to the RE through the exercise of the RE’s
indemnity rights and exclude rights of recovery against the personal assets of the RE
MIS the proposed separate legal entity under the SLE Proposal (summarised in Section 1.1.1 of this paper) that would hold all the scheme property and, through its RE as agent, would be the principal to all agreements involving scheme property
multi-function RE an entity that is the operator of more than one scheme or is the operator of at least one scheme and has other dealings in its own right, such as conducting its own business
NAV net asset value
NTA net tangible assets
PDS Product Disclosure Statement
personal assets of the RE all assets of the RE, including assets acquired by the RE through dealings unrelated to its operation of any scheme and any funds that
the RE has received through exercise of its indemnity rights against the property of any scheme that it operates. The term excludes scheme property and any other property held on trust by the RE. The term also excludes any unexercised indemnity rights of the RE against scheme property. While as a matter of law these unexercised indemnity rights form part of the personal assets of the RE, they are, for the purposes of this paper, not included in this definition, but are separately defined below
PJC Parliamentary Joint Committee on Corporations and Financial Services
PJC Trio report PJC report Inquiry into the collapse of Trio Capital (May 2012)
pooled scheme a scheme where contributions by members ‘are to be pooled’
(para (a)(ii) of the definition of ‘managed investment scheme’ in s 9), typically in a trust-based investment arrangement, and where members typically do not enter into further agreements with the RE or any other party related to the ongoing operation of the scheme. In practice, this type of scheme may also be referred to as a passive or trust-based scheme
PPSR Personal Property Securities Register, established under the Personal
Property Securities Act 2009
RE the responsible entity of a scheme, as defined in s 9
RG 94 ASIC/APRA, Unit pricing: Guide to good practice (2008) (ASIC Regulatory Guide 94)
RG 101 ASIC Regulatory Guide 101 On-market buy-backs by ASX-listed schemes
RG 104 ASIC Regulatory Guide 104 Licensing: Meeting the general obligations (2007)
RG 107 Regulatory Guide 107 Fundraising: Facilitating electronic offers of securities (March 2014)
RG 132 ASIC Regulatory Guide 132 Managed investments: Compliance plans
RG 133 Regulatory Guide 133 Managed investments and custodial or depository services: Holding assets
RG 134 ASIC Regulatory Guide 134 Managed investments: Constitutions
RG 168 ASIC Regulatory Guide 168 Disclosure: Product Disclosure
Statements (and other disclosure obligations)
RG 198 Regulatory Guide 198 Unlisted disclosing entities: Continuous disclosure obligations)
scheme a managed investment scheme, as defined in s 9
scheme creditors all persons who have claims as creditors by virtue of having entered into agreements with the RE as operator of the scheme, except where the RE is acting as agent for scheme members. The rights of particular scheme creditors may differ, depending upon whether they have agreed to having only limited recourse rights (see above)
scheme members/members of a scheme
those persons who, pursuant to the definition of managed investment scheme in s 9, have contributed money or money’s worth as consideration to acquire rights to benefits produced by the scheme
scheme property/property of a scheme
all property coming within the definition of ‘scheme property’ in s 9
SLE Proposal the proposal in the 2012 CAMAC report under which each scheme would involve a separate entity, distinct from the RE or the scheme’s members, for certain limited purposes (see Section 1.1.1 of this paper for additional detail about that proposal)
sole-function RE an RE whose only function is to operate one scheme
subrogation remedy the process by which counterparties to agreements with the RE as operator of a scheme can indirectly gain access to the property of that scheme through the indemnity rights of the RE regarding that property, as a means of satisfying their claims under those agreements
TRE a temporary responsible entity appointed by the court to operate a scheme on an interim basis
Turnbull Report Review of the Managed Investments Act 1998 (2001) (the review was conducted by Mr Malcolm Turnbull)
UCITS Undertakings for Collective Investment in Transferable Securities
unexercised indemnity rights of an RE
rights of an RE, not yet exercised, to be indemnified out of the property of a scheme in consequence of operating that scheme
VA voluntary administration. A corporate VA is regulated under Part 5.3A
of the Corporations Act.
1.4 The review process
CAMAC formed a subcommittee for this review, comprising Robert Seidler AM (chair), Michael Murray and Geoffrey Nicoll of CAMAC, James Marshall (Partner, Ashurst Australia, Sydney), David Proudman (Partner, Johnson Winter & Slattery, Adelaide) and Michelle Reid and Wen Leung of ASIC, in conjunction with the CAMAC Executive.
The subcommittee was adjusted in the final stages of settlement of this paper to include
Joanne Rees, David Gomez, Teresa Handicott and Denise McComish of CAMAC.
CAMAC acknowledges the research by Milan Cakic of Allygroup on shorter Product Disclosure Statements for simple managed investment schemes and the shorter disclosure regimes for securities (Section 10.4), the work of ASIC officers in preparing the section on a UCITS-type regulatory structure for Australian funds (Section 14.3) and the work of Shaun Steenkamp of the Australian Accounting Standards Board in identifying accounting standards that are relevant to the valuation of scheme property (Section 15.1). CAMAC thanks them for their contribution to this discussion paper.
CAMAC is constituted under the Australian Securities and Investments Commission Act 2001. Its functions include, on its own initiative or when requested by the Minister, to provide advice to the Minister about corporations and financial services law and practice.
The members of CAMAC are selected by the Minister, following consultation with the States and Territories, in their personal capacity on the basis of their knowledge of, or experience in, business, the administration of companies, financial markets, financial products and financial services, law, economics or accounting.
The members of CAMAC are:
• Joanne Rees (Convenor)—Chief Executive Officer, Allygroup, Sydney
• David Gomez—Chief Financial Officer, Land Development Corporation, Darwin
• Teresa Handicott (Brisbane)—Partner, Corrs Chambers Westgarth
• Alice McCleary—Company Director, Adelaide
• Denise McComish—Partner, KPMG, Perth
• Michael Murray—Legal Director, Australian Restructuring Insolvency & Turnaround
Association (ARITA) (formerly the Insolvency Practitioners Association), Sydney
• Geoffrey Nicoll—Co-Director, National Centre for Corporate Law and Policy
Research, University of Canberra
• John Price—Commissioner, Australian Securities and Investments Commission
(nominee of the ASIC Chairman)
• Ian Ramsay—Professor of Law, University of Melbourne
• Brian Salter—General Counsel, AMP, Sydney
• Greg Vickery AO—Special Counsel, Norton Rose Australia, Brisbane.
The chair of the CAMAC subcommittee on managed investment schemes, Robert Seidler AM (Chairman, Hunter Phillip Japan Ltd, Sydney), was also a member of CAMAC until April 2013. CAMAC thanks Mr Seidler for agreeing to continue as chair of the subcommittee after the end of his term as a member of CAMAC and the substantial work that he has contributed to this project.
The Executive comprises:
• John Kluver—Executive Director
• Vincent Jewell—Deputy Director
• Thaumani Parrino—Office Manager.
2 Current position
This chapter summarises the way that schemes are established and regulated under the Corporations Act, as well as general law principles that apply to the operation of schemes. It indicates where these matters are dealt with in the 2012 CAMAC report and this paper.
2.1 Legal framework
The current legal framework for schemes, primarily set out in Chapter 5C of the Corporations Act, was introduced by the Managed Investments Act 1998.32 The design of that legislation took into account the ALRC/CASAC report.
2.1.1 Legal structure of a scheme
While there is no prescribed structure for a scheme, the various types of trust, contractual, limited partnership33 and other entities have key common features, including:
• the contributions34 of members of the scheme are either ‘pooled’ (typically in a trust-based arrangement) or are ‘used in a common enterprise’ (typically in a contract-based arrangement).35 Most schemes are either pooled schemes or common enterprise schemes,36 though some schemes can combine both types of arrangement.37
Scheme members receive contractual or property ‘interests’ in the scheme,38 which are
‘financial products’ regulated by Chapter 7 of the Corporations Act
• members do not have day-to-day control over the operation of the scheme (though under the terms of a scheme’s constitution they may have the right to be consulted or to give directions in some instances)39
• the scheme is operated by a responsible entity (RE),40 given that a scheme is not a separate legal entity and therefore cannot enter into legal agreements in its own right. In operating the scheme, the RE acts as the principal to agreements with external parties, except where (as in some common enterprise schemes) the scheme members themselves transact as the principals, which may involve using the RE as their agent.
32 Collective investment vehicles were previously regulated as ‘prescribed interests’, which involved an approved deed, with responsibilities for the scheme divided between a management company and a trustee.
33 See, for instance, Re Willmott Forests Ltd (No 2)  VSC 125 at -.
34 Contributions can be in money or money’s worth: subparagraph (a)(i) of the definition of ‘managed investment scheme’ in s 9.
35 Subparagraph (a)(ii) of the definition of ‘managed investment scheme’ in s 9.
36 This distinction between trust-based and contract-based structures was drawn by the Companies and Securities
Law Review Committee (CSLRC) in 1987, using the terms fiduciary [trust] and non-fiduciary [contract]
prescribed interests: CSLRC Discussion Paper No 6—Prescribed Interests (1987), Ch 4.
37 For instance, in Commonwealth Bank of Australia v Fernandez  FCA 1487 at , the Federal Court referred to members in a common enterprise scheme having ‘an interest in scheme assets that are acquired with pooled money’.
38 Subparagraph (a)(i) of the definition of ‘managed investment scheme’ in s 9.
39 Subparagraph (a)(iii) of the definition of ‘managed investment scheme’ in s 9.
40 s 601FB(1). One of the key initiatives recommended in the ALRC/CASAC report, and implemented in Chapter 5C, was the introduction of a single licensed RE to operate the scheme and hold scheme property on trust for scheme members. The RE replaced the previous two-tiered trustee and management company structure for the operation of these schemes.
As discussed in Section 1.1.1 of this paper, the 2012 CAMAC report recommended that this position be changed by the introduction of a separate legal entity, being a registered MIS, that would be distinct from the RE or members of the scheme.41
Some arrangements are specifically excluded from the definition of a scheme.42
The definition of ‘managed investment scheme’ is discussed in Sections 3.1 and 16.2 of this paper. Other definitions that are relevant to the managed investment scheme provisions are discussed in Sections 3.2, 3.3, 16.1 and 16.3-16.5.
The concept of ‘scheme property’ covers:
• contributions of money or money’s worth to the scheme. If what a member contributes to a scheme is rights over property, the rights in the property that the member retains do not form part of the scheme property43
• money borrowed or raised by the RE for the purposes of the scheme
• property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to above
• income and property derived, directly or indirectly, from contributions, money or property referred to above.44
Despite this apparently wide definition, whether property used in connection with a scheme is ‘scheme property’ as defined may depend on whether the scheme is one in which members pool their funds or is one in which members use their funds in a common enterprise. Common enterprise schemes are more likely than pooled schemes to have property of the members used in the enterprise.
The definition of ‘scheme property’ is discussed in Section 3.3 of this paper.
Pooled schemes and common enterprise schemes
Schemes that hold real estate or other assets for investment purposes are generally structured as trust-based pooled schemes, largely for tax reasons. In the listed property and infrastructure sectors, interests in these pooled schemes are often stapled to shares in an operating company, with the trust part of the structure owning the real estate or infrastructure. Scheme members hold shares in the corporate part of the structure and have a beneficial interest in the whole of the property of the trust.
41 Section 1.6.2, Chapter 3 of the 2012 CAMAC report.
42 The definition of ‘managed investment scheme’ in s 9 of the Corporations Act sets out a number of specific exclusions. ASIC has pointed out that, in general, only investments that are ‘collective’ are schemes. Some examples given by ASIC of investments that are not schemes include:
• regulated superannuation funds
• approved deposit funds
• debentures issued by a body corporate
• barter schemes
• direct purchases of shares or other equities
• schemes operated by an Australian bank in the ordinary course of banking business (eg term deposit).
43 Note 1 to the definition of ‘scheme property of a registered scheme’ in s 9.
44 Definition of ‘scheme property’ in s 9.
By contrast, common enterprise schemes are often structured as a series of bilateral or multilateral executory agreements between the member, the RE and various external parties. The ‘scheme’ in that case is not a pool of assets under management, but rather the common enterprise carried out over time in accordance with those agreements. For instance, for taxation or other reasons, various agribusiness common enterprise schemes were structured so that scheme members (‘growers’) operated their agribusiness investment in their own right, entering into agreements with the RE or external parties to perform the cultivation and management activities associated with the member’s enterprise. Scheme members would hold various forms of proprietary or contractual interests in allocated parcels of land, which may be owned by an external party.45 In that type of common enterprise scheme, complex problems can arise in determining the nature of the rights of scheme members, and clearly distinguishing during the operation of the scheme between the property of the scheme and the property of scheme members used in the enterprise.46
45 In BOSI Security Services Limited v Australia and New Zealand Banking Group Limited & Ors  VSC
255, at - and -, the Court described the structure of one agribusiness involving a common enterprise as follows:
The Timbercorp group of companies went into administration on 23 April 2009. On 29 June 2009, the creditors voted at their second meeting for the companies to be wound up and the companies, which included the second defendant (“AL”), were placed into liquidation. …
Before liquidation, the Timbercorp group had established, managed and operated several horticultural managed investment schemes. These schemes had included managed investment schemes for the cultivation and harvesting of almonds for commercial gain. Five of the schemes (collectively “the Almond Projects”)
had used commercial almond orchards established by AL on its land, which AL made available for the purposes of the projects. Investors in these projects (“growers”) subscribed for interests in “Almondlots”, which carried rights to use and occupy AL’s orchards for the terms of the projects of which they were members (“the growers’ rights”).
All of the Almond Projects had many years left to run when the Timbercorp group went into external administration but the insolvency of the Timbercorp group had the consequence that the Timbercorp companies could not continue their involvement in the projects. The liquidators brought the projects to an
end when they extinguished the growers’ rights on 2 December 2009 so that they could sell AL’s land, almond trees and water licences (“the Almond Assets”) free of any encumbrance on title. …
… At the time that the Timbercorp group was placed under administration, the group had thirty three
managed investment schemes registered with the Australian Securities and Investments Commission (“ASIC”) under Part 5C of the Corporations Act 2001 (Cth) (“the Act”). Timbercorp Securities Ltd (“TSL”), a wholly owned subsidiary of TL and the holder of an Australian financial services licence, was the responsible entity (“RE”) of these schemes. …
The registered projects and the 2002 private offer project were conducted on AL’s land and used AL’s almond orchards and infrastructure, including its water licences and irrigation equipment. Although the
legal structures differed, it was a key feature of each project that the Almond Assets remained AL’s property. The project documents only gave growers rights to use and occupy AL’s property for the terms of their projects for the purpose of cultivating and harvesting almonds.
Growers participated in the projects by subscribing for Almondlots and paying a fee per Almondlot. Subscription was by application and the completion of a power of attorney. By signing the application the grower agreed to be bound by the constituent legal documents governing the project. By completing the
power of attorney the grower appointed the attorney to enter into the applicable agreements underpinning the projects on the grower’s behalf.
46 For instance, in BOSI Security Services Limited v Australia and New Zealand Banking Group Limited & Ors
 VSC 255, the Court held, on the facts, that the members of the common enterprise scheme had only a contractual, not a proprietary, interest in certain land used in the operation of that scheme. Those contractual rights were insufficient to establish their entitlement to share in the proceeds of the sale of that land. In Re Willmott Forests Ltd (No 2)  VSC 125 at  ff, the Court gave consideration to whether certain freehold and leases should be taken to have been ‘contributed’ to the schemes and therefore would constitute scheme property.
Trust and non-trust elements
There are some key trust elements that are applicable to all schemes, whether pooled or common enterprise schemes, in particular:
• the RE holds scheme property on trust for scheme members.47 It has been held that, in consequence, an RE is a ‘trustee’ for the purposes of the court’s jurisdiction to provide judicial advice and direction to an RE under relevant state trustee legislation48
• the RE’s rights to recover from scheme property for its remuneration and expenses in operating the scheme are derived from the constitution of the scheme49 and based on trust law indemnity principles.
On the other hand, there are areas where the legislative structure for schemes differs from the general law of trusts. For instance, the Corporations Act sets out a regime for the transfer of rights, obligations and liabilities where the RE of a scheme changes,50 independently of any trust law principles applicable when there is a change of trustee.51
The 2012 CAMAC report recommended modifications to this regime in the event that the SLE Proposal is not adopted.52 If the SLE Proposal is adopted, these transfer procedures would be redundant.
Also, under general trust law, there is no such thing as the formal winding up of a trust. The trust simply comes to an end in certain circumstances and the property is distributed among the beneficiaries.53 By contrast, the legislation regulating schemes contains various provisions for their winding up.54
The winding up procedures are discussed in Section 2.5 of this paper and in Chapter 7 of the 2012 CAMAC report.
2.1.2 Registration of a scheme
All schemes must be registered except for ‘private’ schemes and ‘wholesale’ schemes55
(the discussion in this paper will deal with registered schemes except where otherwise
47 s 601FC(2). There may be a difference of view whether this section only applies to scheme property in fact held by the RE (in which case that property is held on trust) or extends to any scheme property, whether or not in fact held by the RE (in which case all scheme property is deemed to be held by the RE and held on trust).
48 Mirvac and Mirvac Funds  NSWSC 457 at :
[S]ection 601FC(2) states that the responsible entity holds scheme property (in this case the property of the respective trusts) on trust for scheme members (in this case the respective unitholders). There are therefore express trusts here and each responsible entity clearly falls within the definition of the ‘trustee’ for the purposes of section 63 [of the Trustee Act 1925 (NSW)]. I see nothing in Chapter 5C of the Corporations Law to suggest that it is intended to exclude the Court’s jurisdiction to provide judicial advice to a responsible entity under general trustee legislation.
See also In the matter of Centro Retail Limited and Centro MCS Manager Limited in its capacity as Responsible Entity of Centro Retail Trust  NSWSC 1175 at , Re Elders Forestry Management Ltd  VSC 287 at -, Sydney Airport Holdings Limited as responsible entity of Sydney Airport Trust 2  NSWSC
1665 at .
49 s 601GA(2).
50 ss 601FS, 601FT.
51 Some of the legal issues that arise at general law when there is a change of trustee are discussed in V Stathakis
& S Harrison, ‘Practical consequences of a change of trustee on receivers and secured creditors’ (2011) 11(8)
Insolvency Law Bulletin 155.
52 Section 5.8.3.
53 See, for instance, Westfield QLD No. 1 Pty Limited v Lend Lease Real Estate Investments Limited  NSWSC 516.
54 Part 5C.9.
55 s 601ED. The process of registration with ASIC is set out in Part 5C.1.
indicated). There is provision for the winding up of schemes that should have been, but have not been, registered.56
Issues relating to scheme registration are discussed in Chapter 4 of this paper.
2.1.3 Governance framework for schemes
A registered scheme must have an RE, which operates the scheme and must be a public company that holds an Australian financial services licence permitting it to operate the scheme.57 This licensing system imposes certain obligations on REs, including that they have available adequate financial resources to provide the financial services covered by their licence58 and adequate risk management systems.59 A scheme may be deregistered by ASIC if it does not have an RE that meets these requirements.60
The RE’s role as operator of the scheme is discussed in Section 2.2 of this paper. Section 5.2.1 discusses in more detail the governance requirements that apply to the RE and its officers and employees, including the licensing regime for REs. Section 5.4 provides additional details about the risk management requirements for REs.
Replacement of the RE is discussed in Section 2.1.5 of this paper.
Chapter 7 of this paper discusses issues relating to the RE and others involved in the operation of a scheme.
Constitution and compliance framework
A registered scheme must have a scheme constitution,61 a compliance plan62 and, in certain circumstances, a compliance committee.63
The scheme constitution as part of the governance framework is discussed in Sections 5.2.2 and 6.1 of this paper, while its enforceability and the procedure for changing it are discussed in Sections 6.2 and 6.3, respectively.
The compliance plan and the compliance committee are discussed in Section 5.3.
2.1.4 Investing in a scheme
The process of offering interests in a scheme is regulated by various disclosure requirements, including that potential retail investors must be given a product disclosure statement, and other related documents, in advance of any investment.64 ASIC has also
56 s 601EE.
57 ss 601FA, 601FB. The general obligations of licensees are set out in s 912A.
58 s 912A(1)(d). See ASIC Regulatory Guide 166 Licensing: Financial requirements (November 2013), Pro Forma 209 Australian financial services licence conditions (PF 209) and CO 13/760 Financial requirements for responsible entities and operators of investor directed portfolio services. The aim is to ensure that REs have
adequate resources to meet operating costs and there is an appropriate alignment with the interests of scheme
59 s 912A(1)(h).
60 s 601PB(1)(a).
61 Part 5C.3.
62 Part 5C.4.
63 Part 5C.5.
64 An interest in a scheme is a ‘financial product’ for the purposes of Chapter 7 of the Corporations Act (Part 7.1
Div 3). The disclosure requirements for financial products are set out in Part 7.9. They contain detailed requirements for disclosure to a ‘retail client’ (as defined in ss 761G, 761GA).
provided disclosure guidance for various types of schemes, including mortgage schemes, property schemes, infrastructure funds, hedge funds and agribusiness schemes.65
The disclosure requirements for interests in schemes are discussed in Chapter 10 of this paper. Section 5.7 discusses disclosure of a scheme’s investment guidelines.
2.1.5 Replacement of the RE
There are procedures for replacing an RE, including the appointment of a temporary responsible entity (TRE) as an interim measure while a new RE is sought.66 A common goal of these procedures is to avoid a scheme being without an RE for any period of time, given that the role of the RE is to operate the scheme.67
Where an RE is replaced, the rights, obligations and liabilities of the outgoing RE under agreements into which it has entered (or that it has inherited from any prior RE) as operator of the scheme are transferred to the incoming RE (including any TRE) through a statutory novation process.68 The ostensible purpose of this transfer is to ensure that the rights of counterparties are not affected where the RE of a scheme changes. Except when an RE is acting as agent for scheme members (who then become the principals), the RE transacts as the principal in operating a scheme. As principal, the RE personally takes on the rights, obligations and liabilities under each agreement into which it enters as operator of the scheme, unless the counterparty agrees otherwise. These personal rights, obligations and liabilities of an RE are transferred to a TRE or new RE through the novation process.
Replacement of the RE was discussed in Chapter 5 of the 2012 CAMAC report. Section 7.6 of this paper discusses an additional issue relating to replacement of the RE.
2.1.6 Position of scheme members
A member of a managed investment scheme is a person who holds an interest in the scheme.69 The definition of ‘member’ is discussed in Section 3.2 of this paper, while the test for determining when a person ceases to be a scheme member is discussed in Section 9.5.
Members of a scheme have no day-to-day control over the operation of the scheme.70
However, meetings of scheme members may be called for various purposes, including to replace the RE,71 to alter the scheme constitution,72 to approve various related party
65 Regulatory Guide 45 Mortgage schemes: Improving disclosure for retail investors, Regulatory Guide 46
Unlisted property schemes: Improving disclosure for retail investors, Regulatory Guide 231 Infrastructure entities: Improving disclosure for retail investors, Regulatory Guide 232 Agribusiness managed investment schemes: Improving disclosure for retail investors, Regulatory Guide 240 Mortgage Hedge funds: Improving disclosure.
66 Part 5C.2 Div 2.
67 s 601FB(1).
68 ss 601FS, 601FT. What is involved in the concept of rights, obligations and liabilities, and what agreements might be covered under this provision, are discussed in Investa Properties Ltd  NSWSC 1089 at , Syncap Management (Rural) Australia Ltd v Lyford  FCA 1352 at -, Australian Olive Holdings Pty Ltd v Huntley Management Ltd  FCA 1479 at -, Huntley Management Ltd v Timbercorp Securities Ltd  FCA 576 at -, - and Primary RE Limited v Great Southern Property Holdings Limited (recs & mgrs apptd) (in liq) & Ors  VSC 242 at -, -.
69 Paragraph (a) of the definition of ‘member’ in s 9.
70 Subparagraph (a)(iii) of the definition of ‘managed investment scheme’ in s 9.
71 s 601FM.
72 s 601GC(1)(a).
financial benefits73 or to direct that the scheme be wound up.74 There are statutory procedures for calling and holding meetings, as well as voting on resolutions and gaining access to the minutes of members’ meetings.75
Issues relating to meetings of scheme members are discussed in Chapter 8 of this paper. Members may inspect the register of scheme members without charge.76 Issues relating to
the access of scheme members to the register are discussed in Section 9.1 of this paper.
Scheme members do not have an automatic right to inspect scheme accounts or other documents, unless this right is provided for in the scheme constitution or some other scheme document. However, the court may order that a scheme member have access to books of the scheme if the court is satisfied that the applicant is acting in good faith and that the inspection will be made for a proper purpose.77 The court may also make ancillary orders, including restricting the use that a person who inspects the books may make of the information obtained.78
There are statutory provisions governing the right of members to withdraw from a scheme.79 The procedures governing any withdrawal rights differ depending on whether the scheme is liquid or non-liquid. The withdrawal procedures and the possibility of a statutory buy-back procedure for schemes are discussed in Sections 9.2-9.4.
There are also provisions dealing with the consequences for members of certain contraventions by promoters or the RE.80
2.1.7 Takeover s and reorganizations
The takeover and compulsory acquisition provisions in Chapters 6, 6A and 6B of the Corporations Act apply to the acquisition of interests in listed schemes.81 Attempts to entrench an RE of a listed trust may amount to ‘unacceptable circumstances’ for the purposes of Chapter 6.82
A reorganization or change of control of a company may be achieved through a scheme of arrangement under Part 5.1 of the Corporations Act. These provisions do not apply to schemes. Instead, changes of control or other reorganizations of schemes have tended to proceed through ‘trust scheme’ arrangements. There is no equivalent in these arrangements of the judicial and other procedural protections applicable to corporate schemes of arrangement under Part 5.1, though the proponents of a trust scheme may choose to seek judicial direction or advice on its implementation.
73 The related party transaction provisions in Chapter 2E of the Corporations Act are applied, with modifications, to schemes by s 601LA. See Part 5C.7. Those provisions are discussed in Section 7.5 of this paper.
74 s 601NB.
75 Part 2G.4. In general, the RE and its associates are not entitled to vote their interests on a resolution if they have an interest in the resolution or matter other than as a scheme member: s 253E. This provision is discussed in
Section 8.4 of this paper.
76 s 173(2).
77 s 247A.
78 s 247B.
79 Part 5C.6.
80 Part 5C.8.
81 s 604. See also ASIC Regulatory Guide 74 Acquisitions approved by members and Takeovers Panel Guidance
Note 15: Trust Scheme Mergers.
82 Re AMP Shopping Centre Trust (No 1) (2003) 45 ACSR 496 at .
The CAMAC report Members’ schemes of arrangement (2009) recommended the extension of the Part 5.1 scheme of arrangement provisions to listed and unlisted schemes.83
Takeovers and reorganizations of schemes are discussed in Chapter 11 of this paper.
2.2 The RE transacting as operator of a scheme
A scheme is not a separate legal entity and therefore cannot enter into agreements in its own right. In a pooled scheme, the RE acts as principal in operating the scheme and is personally liable under each agreement into which it enters in that capacity, except where the counterparty agrees otherwise. Scheme members are not parties to those agreements. Likewise, in common enterprise schemes, the RE transacts as principal in operating the scheme (and is personally liable, unless the counterparty agrees otherwise), except where the members themselves enter into agreements as principals, using the RE as their agent for this purpose. To assist the RE in acting as agent for scheme members, it has been the practice with some common enterprise schemes for the application form signed by any person seeking to become a scheme member to contain a grant of a power of attorney to the RE.84
A counterparty to an agreement where the RE acts as principal may agree to limit its rights of recovery against the RE to the amount for which the RE can be indemnified from the property of the scheme (limited recourse rights), thereby excluding rights of recovery against the personal assets of the RE. It is common for limited recourse rights clauses to be incorporated in agreements drawn up by an RE as operator of a scheme.85 Limited recourse rights are discussed in the context of notification of the appointment of a receiver in Section 12.5 of this paper.
As discussed in Section 1.1.1 of this paper, the 2012 CAMAC report recommended the introduction of a separate legal entity, being a registered MIS, that would be distinct from the RE or members of the scheme.86
2.2.2 Indemnity rights of the RE
An RE, as operator of a scheme, and as the principal to agreements into which it enters in that capacity, has rights to be indemnified out of the property of that scheme, by application of trust law principles, for:
• its remuneration and expenses in operating the scheme
• the obligations or liabilities that it personally incurs under those agreements.87
It has long been recognised that a trustee can resort to the property of the trust to discharge a liability that it has properly incurred as trustee of that trust.88 A trustee can:
83 Sections 7.2 and 7.6.2.
84 See, for instance, Re Elders Forestry Management Ltd  VSC 287 at .
85 In some schemes, the RE may contract out its management role to another party, with agreements involving outside parties also containing limited recourse rights to protect the manager against personal liability.
86 Section 1.6.2, Chapter 3 of the 2012 CAMAC report.
87 The applicable trust law principles are summarised in JA Pty Ltd v Jonco Holdings Pty Ltd  NSWSC 147 at .
• apply the trust property directly in discharging the liability,89 or
• itself discharge the liability and then exercise a right to be reimbursed from the property of the trust for the costs it has incurred.90
These trust law principles are summarised in one case as follows:
The trustee is entitled to be indemnified out of the trust assets in respect of liabilities which it incurs in the course of administering the trust, but is personally liable to creditors in respect of such liabilities unless it has contracted with a creditor to limit the creditor’s recourse against it. If the trustee has discharged the liability out of his individual property, he is entitled to reimbursement from the trust fund. If he has not discharged it, he is entitled to be exonerated from the trust fund for the liabilities properly incurred in the administration of the trust. He cannot be compelled to surrender the trust property to the beneficiaries until his claim has been satisfied.91
These indemnification rights of a trustee are available to an RE of a scheme only if:
• they are specified in the constitution of the scheme, and
• the RE has properly performed its duties.92
The RE will not have an indemnity claim against the property of the scheme where the RE has acted beyond power (including outside the terms of the scheme constitution) or otherwise improperly.93 This statutory limitation on an RE’s right of indemnity is reinforced by the general trust law limitation whereby a trustee’s right of indemnity is subject to, and diminished by, any lawful claim by beneficiaries against the trustee in connection with breaches by the trustee, for instance misappropriation, or neglect, of scheme property.94
Any attempt in a scheme constitution or otherwise to deny a lawful indemnity right of the RE, otherwise given in the constitution, because the RE has gone into external administration, is void.95
The question of what constitutes proper performance of an RE’s duties is discussed in
Section 7.2 of this paper.
88 Worrall v Harford (1802) 8 Ves Jun 4.
89 In trust law this is described as the ‘right of exoneration’.
90 In trust law this is known as the ‘right of recoupment’ or the ‘right of reimbursement’.
91 Stacks Managed Investments Ltd  NSWSC 753 at . See also CPT Custodian Pty Ltd v Commissioner of State Revenue  HCA 53, which held that the trust fund available to the beneficiaries of a trust could not be identified and quantified until the trustee’s superior indemnity rights concerning those funds had been quantified and satisfied.
92 s 601GA(2).
93 s 601GA(2). This is based on trust law principles. See, for instance, General Credits Ltd v Tawilla Pty Ltd
 1 Qd R 388 at 389-390, RWG Management Ltd v Commissioner for Corporate Affairs  VR 385. See also RI Barrett, ‘Insolvency of registered managed investment schemes’, Paper delivered at the Conference of the Banking and Financial Services Law Association, Queenstown, July 2008, pp 5-7.
94 This ‘clear accounts’ rule and its consequences are discussed by N D’Angelo, ‘The unsecured creditor’s perilous path to a trust’s assets: Is a safer, more direct US-style route available?’ (2010) 84 Australian Law Journal 833 at 841-848.
95 s 601FH. This adopts a recommendation of the ALRC/CASAC report (vol 1, para 8.8), endorsing a recommendation of the ALRC’s General Insolvency Inquiry (ALRC 45) (the Harmer Report) vol 1, para 251; vol 2, s T3 (see also vol 1, para 271 of the Harmer Report for the application of this provision to the administrator and deed administrator).
2.2.3 Rights of counterparties
A scheme is not a legal entity96 and therefore cannot enter into agreements in its own right. Instead, the RE, as scheme operator, transacts as principal to all agreements into which it enters in that capacity, except where it specifically acts as agent for another party.97
As discussed in Section 1.1.1 of this paper, the 2012 CAMAC report recommended the introduction of a separate legal entity, being a registered MIS, that would be distinct from the RE or members of the scheme.98
Where RE provides security
A counterparty can enforce any security lawfully99 granted to it by an RE100 when acting, as principal or agent, in any capacity. For instance, the RE may provide particular scheme property as security for an external financier that is funding the scheme under a limited recourse rights arrangement.
Where RE acts as agent
Where an RE has entered into agreements solely as the agent for members of a scheme (as in some common enterprise schemes), counterparties will have remedies against those members only, provided that the RE has acted within its agency powers. These agreements may include provisions that terminate or otherwise affect rights on the happening of certain events, such as the scheme being wound up.101 If an RE has acted ostensibly as an agent for scheme members, but beyond its agency powers, counterparties may have remedies against the RE only (applying relevant agency law principles).
Under the SLE Proposal, the RE would always be acting in the capacity of agent, regardless of the type of scheme. If common enterprise schemes continue to be permitted, the RE would continue to be an agent of scheme members in those common enterprise schemes that so provide. In other cases, it would be an agent of the MIS.
Where RE acts as principal
Where the RE enters into an agreement as principal in operating a particular scheme, then, by application of general law principles, and subject to the counterparty having agreed to limited recourse rights only, the counterparty will have:
• a direct right against the personal assets of the RE (which include funds already received by the RE through the earlier exercise of its indemnity rights against the property of that scheme, or any other scheme that it operates), and
• an indirect subrogation remedy in relation to any unexercised indemnity rights of the
RE against the property of that scheme.102 Counterparties cannot make a direct claim
96 Capelli v Shepard  VSCA 2 at .
97 Where an RE enters into an agreement, consideration may need to be given to the terms of the agreement and other surrounding circumstances to determine whether the RE has acted as operator of a particular scheme. This
is based on trust law principles, as set out in Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78.
98 Section 1.6.2, Chapter 3 of the 2012 CAMAC report.
99 For a security to be properly given over scheme property, the RE must have express power to give the security and must give the security in the due administration of the trust: CCH Managed Investments Law and Practice (looseleaf) at ¶81-100.
100 Where assets of a scheme are held by a custodian acting as agent for the RE, it may be necessary for the security to be executed by the custodian: CCH Managed Investments Law and Practice (looseleaf) at ¶81-200.
101 See, for instance, Re Elders Forestry Management Ltd  VSC 287 at .
102 This is based on trust law principles, as summarised by the High Court in Octavo Investments Pty Ltd v Knight
 HCA 61 at -, .
on the property of that scheme, which is held in trust by the RE for scheme members.103
A counterparty with limited recourse rights has no rights against the personal assets of the RE. Limited recourse rights are similar to the indirect subrogation remedy in that both are limited to the lawful indemnity claims that the RE can make against available scheme property.
As previously indicated (Section 2.2.2), an RE may lose its right of indemnity in various circumstances. In consequence, the improper conduct of the RE may affect the capacity of counterparties with limited recourse rights to obtain recovery from scheme property, or for other counterparties to exercise their subrogation remedies in relation to scheme property.
One judge, speaking extra-judicially, has summed up the position in the context of trusts:
The trustee’s [indemnity] rights … are fragile things. And their fragility may rebound upon creditors. The beneficiaries’ interest in trust property will not be postponed to a beneficial interest of the trustee unless the trustee’s interest exists. If the trustee’s interest does not exist, the trust property is shielded from the claims of the trustee’s creditors.104
Counterparties may also be disentitled from claiming against scheme property under the subrogation remedy by their own behaviour. One commentator105 has summed up the position as follows:
Some in commerce, including lawyers, refer to a ‘right’ of subrogation. In fact, it is not a right at all, or even a cause of action, but rather an equitable remedy acting on the conscience of the trustee.106 Being a creature of equity, it is discretionary and subject to all the usual rules for engaging equitable remedies. This means that an enforcing unsecured trust creditor may be denied subrogation by application of disentitling equitable defences such as unconscionability, laches, acquiescence, waiver, estoppel, clean hands, or who comes to equity must do equity. Potentially, parties with something to gain (for example, the beneficiaries or even competing trust creditors) could manoeuvre to deny an unsecured trust creditor its claim to subrogation and, therefore access to the trust assets, by seeking to demonstrate disentitling behaviour on the part of the creditor, leaving it to its rights against the trustee personally and a share out of the trustee’s personal assets (if any) in liquidation.
Where an RE goes into external administration, uncertainty remains about who can claim against any property recovered by its external administrator through exercise of any previously unexercised indemnity rights of the RE. One line of trust law authority is that, in the insolvency of a trustee, funds recovered under the trustee’s right of indemnity out of property of any trust should be available for all creditors of that trustee.107 Another line of
103 s 601FC(2). In Octavo Investments Pty Ltd v Knight  HCA 61 at , the High Court indicated that trust property itself cannot be taken in execution by the creditors of the trustee.
104 RI Barrett (now a judge of the NSW Court of Appeal), ‘Insolvency of registered managed investment schemes’, Paper delivered at the Conference of the Banking and Financial Services Law Association, Queenstown, July 2008, p 5.
105 N D’Angelo, ‘The unsecured creditor’s perilous path to a trust’s assets: Is a safer, more direct US-style route available?’ (2010) 84 Australian Law Journal 833 at 843.
106 Lerinda Pty Ltd v Laertes Investments Pty Ltd (2009)  QSC 251; see also Bofinger v Kingsway Group Ltd
 HCA 44 at .
107 Re Enhill Pty Ltd  1 VR 561.
authority is that, in the first instance, those funds should be available only for those creditors who have dealt with the trustee as trustee of that particular trust.108
Under the SLE Proposal, the RE would not act as principal in relation to scheme matters. Counterparties would have no right against the personal assets of the RE (unless the counterparties and the RE so agreed or the RE was acting beyond its agency powers and the indoor management rule109 did not apply). Counterparties would have direct rights against scheme property held by the MIS and would not need to rely on a right of subrogation.
2.2.4 Position of scheme members
Scheme constitutions usually exempt scheme members from any obligation to indemnify the RE for expenses and liabilities that it has incurred in operating the scheme. If not, the RE may have a right of indemnity against those members for those amounts.110
The 2012 CAMAC report recommended that there be statutory limited liability for scheme members.111
2.3 External controls
The RE of a listed scheme is under a continuing obligation to notify the market of any material price-sensitive information concerning the scheme that is known to the RE but is not generally available.112
Disclosure issues are discussed in Chapter 10 of this paper (see also Section 5.7 in relation to disclosure of investment guidelines).
ASIC has a range of powers under Chapter 5C, including to make various exemption and modification orders,113 to undertake surveillance checks of REs,114 to require modification of a compliance plan,115 and to apply to the court to have a TRE appointed116 or to have a scheme wound up.117
108 Re Suco Gold Pty Ltd (1983) 33 SASR 99. The Harmer Report (vol 1, para 262) summarised the position reflected in Re Suco Gold as follows:
Equitable principles require that a [trustee] company’s own property and trust property, or property of two or more trusts, and the respective sets of creditors be kept separate and that each group of creditors be
entitled to a distribution of the funds derived from the property in which they could claim an interest.
See also Re ADM Franchise Pty Ltd (1983) 7 ACLR 987, which is consistent with the Suco Gold approach. Various commentators also support the Suco Gold approach: R Baxt, ‘Trusts and Creditors Rights’ (1982) 11
ATR 3, 9; BH McPherson, ‘The Insolvent Trading Trust’ in PD Finn (ed), Essays in Equity (Law Book Co, Sydney, 1985), 142; and HAJ Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1.
109 Under the SLE Proposal, there would be an indoor management rule similar to that for companies (ss 128-129) (see Section 3.3 of the 2012 CAMAC report). Under this rule, a counterparty would be entitled to assume that an RE that discloses that it is acting as agent for a particular MIS is acting within its agency powers and is otherwise complying with the requirements of the scheme, unless the counterparty knew or suspected otherwise
(cf s 128(4)).
110 Fitzwood Pty Ltd v Unique Goal Pty Ltd  FCAFC 285 at -. See further the CASAC report Liability of Members of Managed Investment Schemes (March 2000), available under ‘Publications’ on the CAMAC website www.camac.gov.au
111 Section 8.4.3. The report recommended that this limited liability should not be subject to any contrary provision in a scheme constitution.
112 Chapter 6CA Continuous disclosure. Specific reference to the obligation of the RE is found in s 674(3).
113 Part 5C.11.
114 s 601FF.
115 s 601HE(2).
ASIC has a range of investigative and other powers, including those pursuant to the licensing regime for the RE118 and its general information-gathering powers under the ASIC Act.119 ASIC also has powers to:
• commence proceedings120
• apply for a declaration of contravention, a pecuniary penalty or a compensation order for breach of a civil penalty provision121
• seek preservative orders, injunctions, and orders affecting contracts or requiring the payment of damages.122
ASIC provides regulatory guidance on various aspects of the operation of schemes.123
Issues relating to ASIC’s regulatory powers are discussed in Chapter 13 of this paper.
2.4 Voluntary administration of a scheme
The ALRC/CASAC report recommended that a voluntary administration (VA) framework for schemes be introduced, similar to that for companies under Part 5.3A.124 A scheme VA procedure may provide an opportunity to restructure a financially stressed, but potentially viable, scheme, or otherwise provide a better return for scheme creditors than if the scheme was immediately wound up.
Those recommendations were not adopted. Neither the second reading speech for the Managed Investments Bill 1997 (Cth), which provided for the introduction of Chapter 5C into the Corporations Act, nor the Explanatory Memorandum to that Bill, explained this omission.
Chapter 6 of the 2012 CAMAC report recommended a VA procedure for schemes. It provided details of how such a procedure might be implemented if the SLE Proposal is, and if it is not, adopted. It also discussed various implementation issues that would arise in either case.
2.5 Winding up a scheme
The procedures for the winding up of a scheme that were introduced in 1998 primarily envisage the winding up of solvent schemes, with the RE conducting the winding up, though the court has a power to order a winding up on the ‘just and equitable’ ground and to ‘appoint a person to take responsibility’ for the liquidation of a scheme if the court
‘thinks it necessary to do so’.125
116 s 601FN.
117 s 601ND. See also s 601NF.
118 See, for instance, ss 912C-912E.
119 Part 3 of the ASIC Act.
120 s 1315(1)(a).
121 s 1317J(1).
122 ss 1323, 1324 and 1325.
123 See, for instance, ASIC Regulatory Guides 132-136 and the best practice unit pricing guide (RG 94).
124 vol 1 at para 8.13 and vol 2 Pt 5.3B.
125 Part 5C.9.
Historically, little consideration was given to the winding up procedures for insolvent schemes, particularly when they were more in the nature of pooled schemes involving securities or other investment portfolios, with no significant creditor involvement. Pooled schemes of this nature were more likely to lose value and be wound up for that reason, rather than be unable to meet the claims of creditors as they became due and payable.
However, the approach in Australia over more recent years, driven in part by taxation considerations and the growth of superannuation funds under management, has been to expand the role of schemes, with some of them becoming significant commercial enterprises in their own right, with external financing or other creditors. There is no detailed procedure in the current law for the winding up of these types of schemes if they become insolvent.
Chapter 7 of the 2012 CAMAC report contained comprehensive recommendations for the winding up of insolvent schemes, as well as some recommendations for the winding up of solvent schemes.
Chapter 12 of this paper discusses some additional issues relating to the winding up of schemes.
This chapter discusses whether there is any need for modifications to the Corporations Act definitions of ‘managed investment scheme’, ‘member’ and ‘scheme property’.
3.1 Definition of ‘managed investment scheme’
The definition of managed investment scheme may leave unregulated some arrangements that should be regulated as schemes.
The core elements of a ‘managed investment scheme’ are set out in paragraph (a) of the definition in s 9, which covers schemes having the following features:
(i) people contribute money or money’s worth as consideration to acquire rights to benefits produced by the scheme
(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
(iii) the members do not have day-to-day control over the operation of the scheme.126
This definition was considered in In Re Lawloan Mortgages Pty Ltd.127 In that case, there was a mortgage lending scheme that had various subsets of members. The contributions of the members in each subset were pooled in a trust account for disbursement as loans to borrowers, but there was no broader pooling of funds as between the various loans and the contributions were not capable of producing, and were not intended to produce, any benefit for the larger set of investors in the mortgage lending scheme. It was held that the words ‘for the people (the members) who hold interests in the scheme’ in the definition of
‘managed investment scheme’ require that ‘the benefits produced by the pooling of funds in a given scheme must be capable of flowing to all, not a sub-set, of the members in the scheme’. On this basis, the Court held that the loan scheme, in which subsets of investors contributed to separate loans, did not come within the definition of ‘managed investment
126 Paragraph (a) of the definition. There is a series of specified arrangements that do not fall within the definition of ‘managed investment scheme’: paras (c)-(ma) of the definition. Paragraph (n) provides for the regulations to declare other kinds of scheme not to be a managed investment scheme. There are no relevant regulations.
127  QSC 302 at .
scheme’ (though each of the individual loans did come within that definition). The courts in earlier cases dealing with similar facts reached a different conclusion.128
Analysis and discussion
The managed investment provisions were introduced in response to a ‘need to ensure that there is a proper legal framework’ that ‘provides an appropriate level of regulation that adequately and effectively protects the interest of investors’.129 The ALRC/CASAC report observed that:
While many investors are keenly aware of what they are doing, others do not have the experience or expertise to appreciate fully the risks associated with investing. Many investors in these schemes choose them because they enable investors to pass responsibility for the day-to-day management of their savings to someone else. These investors rely on the law, not their own expertise and ability, to provide their savings with appropriate protection. The ability of collective investment schemes to continue to accumulate the savings of Australians and channel them into investment will depend heavily on investor confidence in the regulatory regime for these schemes.130
Given this investor protection goal, it would be consistent with the policy objective if the definition of ‘managed investment scheme’ could ensure that it covers any arrangements where ordinary (especially retail) investors contribute money to collective investment enterprises in the expectation of receiving a benefit.
This goal may not be achieved under the current definition of ‘managed investment scheme’. As interpreted in the Lawloan decision, that definition only applies where all members benefit from the pooling or common enterprise under the scheme. It will not cover artificial structures that contain a small number of members (even as few as one) who receive no benefit from the scheme. There is therefore the potential for significant numbers of retail investors to become involved in these types of schemes and be left without the protections of the managed investment provisions.
A possible response may be to make clear that, where all the other elements of the definition are satisfied, the definition will include arrangements that provide benefits to at least some members of the scheme. If this approach were to be adopted, ASIC could use its exemption power131 in circumstances where only very few members would receive a benefit and ASIC is otherwise satisfied that the arrangement does not need to be regulated as a managed investment scheme.
Question 3.1.1. Should arrangements where not all the members of the scheme receive a benefit under the scheme come within the definition of ‘managed investment scheme’ and, if so, how might the definition best be amended to extend to these arrangements?
128 ASIC v Chase Capital Management Pty Ltd  WASC 27 at -, ASIC v Knightsbridge Managed Funds Ltd  WASC 339 at -]54]. It should be noted, however, that the Court in the Lawloan case (at ) drew attention to points of distinction between the circumstances in that case and those in earlier two cases. In the Chase Capital case, ‘the issue was not whether the individual investments should be characterised as schemes, as opposed to the overall arrangement, but rather whether the arrangements amounted to managed investment schemes at all’. In the Knightsbridge case, the money to be advanced under all the loans was placed into a single cash management account that attracted interest on the total funds, which was subsequently shared pro rata among investors.
129 Joint Australian Law Reform Commission (ALRC)/Companies and Securities Advisory Committee (CASAC)
report Collective Investments: Other People’s Money (1993) at p xv (the terms of reference).
130 para 1.4.
131 s 601QA.
Question 3.1.2. Are there any reasons why the definition should not be amended in this way?
3.2 Definition of ‘member’ of a managed investment scheme
The range of persons who may be covered by the definition of ‘member’ of a managed investment scheme may not be sufficiently certain. In particular, it may be beneficial to clarify the position of option holders.
A ‘member’ in relation to a managed investment scheme is defined as ‘a person who holds an interest in the scheme’.132 In turn, s 9 defines ‘interest in a managed investment scheme’ very broadly to mean:
a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not).
It has been held that the definition of an ‘interest’ in a managed investment scheme covers a binding contract for an RE to issue units in a scheme.133
In addition, there is authority that interests in a scheme include options enforceable against the RE of a scheme or a person acting on its behalf to take up units in the scheme.134 Also, the Explanatory Memorandum to the Bill for the Managed Investments Act 1998 stated:
An option to subscribe for an interest in a managed investment scheme will be an interest in a managed investment scheme because it is a contingent right to the benefits of the scheme.135
There is a regulation that ensures that the holders of these options need only be included on the register of option holders, not also on the register of members.136
Analysis and discussion
The Corporations Act should give clear guidance about the circumstances in which a person holds an ‘interest’ in, and therefore is a ‘member’ of, a scheme, given that the Corporations Act imposes regulatory requirements in relation to ‘interests’ and confers rights on ‘members’.
132 Paragraph (a) of the definition of ‘member’ in s 9.
133 Basis Capital Funds Management Ltd v BT Portfolio Services Ltd  NSWSC 766 (see particularly at
134 Seabrook, in the matter of the Takeovers Panel & the Corporations Act 2001 (Cth)  FCA 1219.
135 para 19.8. See also para 6.79 of the Revised Explanatory Memorandum to the Bill for the Financial Services
Reform Act 2001.
136 Corp Reg 5C.11.03, which provides that:
The register of members of a registered scheme need not contain information about a member whose only interest in the scheme is as the holder of an option.
The requirement for a register of members is in ss 168(1)(a), 169. The separate requirement for a register of option holders is in ss 168(1)(b), 170.
The Court in Seabrook, in the matter of the Takeovers Panel & the Corporations Act 2001 (Cth)  FCA
1219 noted Corp Reg 5C.11.03 (at ) and the separate provisions requiring a register of members and a register of option holders (at ).
If something constitutes an ‘interest’ in a scheme, the scheme constitution must make
‘adequate provision for the consideration that is to be paid to acquire’ that interest.137 This may be difficult to do where the interest is a prospective or contingent interest that may
not be enforceable, rather than an actual interest.
Corporations Act provisions that relate to ‘members’ of a scheme include:
• a scheme must maintain a register of members138
• the scheme constitution must specify any right members have to withdraw from the scheme139
• the scheme constitution must be legally enforceable as between members and the
• members have a vote on a special resolution to modify, repeal or replace the scheme constitution141
• members have the right to recover from the RE the amount of any loss or damage caused to them in their capacity as members by the RE.142
One commentary has noted that the breadth of the definition of ‘member’:
may create problems for the responsible entity in discharging its administrative functions, such as maintaining the register of members and providing annual reports to members … It may also expand the categories of persons who are “members” for the purposes of calculating voting thresholds, determining entitlement to remedies under s 601MA, and so on. To the extent that the responsible entity cannot know the identity of all those who may have a prospective or contingent interest, whether enforceable or not, in benefits produced by the scheme, it may be difficult as a practical matter to determine the extent and identity of the membership.143
CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.
In contrast with the wide and indeterminate range of persons who may be members of a scheme, a person is only a member of a company if the person agrees to become a member and the person’s name is entered on the register of members.144 Also, a holder of options over unissued shares in a company is not a member of that company.145
137 s 601GA(1)(a). See Seabrook, in the matter of the Takeovers Panel & the Corporations Act 2001 (Cth)  FCA 1219 at -.
138 s 168(1).
139 s 601GA(4).
140 s 601GB. The question of enforceability of the scheme constitution is further discussed in Section 6.1 of this paper.
141 s 601GC.
142 s 601MA.
143 CCH Managed Investments Law and Practice (looseleaf) at ¶65-200.
144 s 231. The Court in Seabrook, in the matter of the Takeovers Panel & the Corporations Act 2001 (Cth)  FCA 1219 noted (at ) that ‘[T]raditionally in the area of corporate governance, the notion of “holder” in the context of the definition of a shareholder has carried the meaning of “registered holder”’ (citing Dalgety Downs Pastoral Co Pty Ltd v Federal Commissioner of Taxation (1952) 86 CLR 335 at 341 and Santos Ltd v Pettingell (1979) 4 ACLR 110 at 119.
145 HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [17.320].
Adoption of the same approach for schemes would provide greater certainty about who is a member of a scheme. It would also remove the overlap between the categories of members of a scheme and holders of options in a scheme. Furthermore, a definitive register of scheme members would be consistent with the recommendations in the 2012
CAMAC report for definitive registers of agreements relating to a scheme146 and of the
property of a scheme.147
There are various situations in which scheme members may be disadvantaged if their scheme membership depended on their inclusion on the register. For instance, a person may not be on the register due to:
• an oversight or system failure in the registry systems
• delay by the RE in registering the acquisition of an interest
• failure by the RE to amend the register for dishonest reasons.
These areas are equally relevant to members of companies. Rectification of the relevant register may provide an adequate solution for members of schemes as well as companies.148
However, in other circumstances, removal from the register may cause difficulties for scheme members that would not arise for members of companies.
For instance, ASIC requires that scheme constitutions ‘not include provisions that treat withdrawing members as having ceased to be a member before the time for which the scheme property is valued for determining the withdrawal price’, as ‘until that time the member can share in any increase in the value of scheme property and so retains an interest in the scheme’.149
Also, one of the tests for determining whether a scheme should be registered relates to how many members it has (see the discussion of the numerical test in Section 4.1 and Appendix 1 of this paper). If a scheme’s members were only those persons on the scheme’s register, the requirement to register the scheme could be avoided by failing to complete the register. However, this potential concern could be dealt with by an amendment to the relevant test for registration (if retained), for instance by basing it on
‘members or persons who are entitled to be registered as members’.
Consideration might be given to whether there are any rights of scheme members that should be preserved for option holders if the category of scheme members were limited to those on the register of members, for instance, access to a method for dealing with complaints.150
Question 3.2.1. Have any problems arisen from the breadth of the definition of ‘member’ of a managed investment scheme? If so, please give details, including how many schemes and investors may have been affected.
146 Section 4.3.4.
147 Section 4.4.3.
148 HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [21.060].
149 Regulatory Guide 134 Managed investments: Constitutions (February 2014) at RG 134.167.
150 s 601GA(1)(c).
Question 3.2.2. Should the definition of ‘member’ of a scheme be made more specific, for instance, by providing that a person is a member of a registered scheme only if the person appears on the register of members?
Question 3.2.3. Alternatively, if the current broad definition of ‘member’ remains, are any amendments required to other Corporations Act provisions to deal with the administrative consequences for the RE of having this wide definition?
Question 3.2.4. Are there any reasons why the current broad definition of ‘member’ in the Corporations Act should remain as it is or, alternatively, why it should not be changed in a particular manner?
Question 3.2.5. What, if any, specific rights should be preserved for holders of options over unissued interests in a scheme if it is made clear that those option holders are not members of the scheme?
3.3 Definition of ‘scheme property’
The definition of ‘scheme property’ in the Corporations Act lists specific items that are scheme property. However, the definition may not cover all categories of property that might reasonably be included in this concept.
A separate but related issue is that it is not always clear when property ceases to be scheme property.
Section 9 contains a definition of scheme property, being:
(a) contributions of money or money’s worth to the scheme; and
(b) money that forms part of the scheme property under provisions of this Act151
or the ASIC Act; and
(c) money borrowed or raised by the responsible entity for the purposes of the scheme; and
(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and
(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d).
The definition does not indicate when property ceases to be scheme property.
Analysis and discussion
It is important for an RE to know what property is ‘scheme property’ for the purposes of:
• the duty to ensure that scheme property is clearly identified as such and held separately from the RE’s property and that of any other scheme152
151 See, for instance, s 601FB(4).
• the duty to ensure that the scheme property is valued at regular intervals appropriate to the nature of the property153
• the duty to ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution and the Corporations Act.154
Other matters that depend on the accurate identification of scheme property include:
• the valuation of scheme property for the purpose of determining whether a scheme is liquid155
• whether the provisions governing the giving of financial benefits out of scheme property to related parties apply.156
Furthermore, the 2012 CAMAC report recommended that scheme constitutions include an obligation for the RE to maintain a register of scheme property, reinforced by the licensing obligations and legislative sanctions for any breach.157
The current definition of scheme property focuses on three categories of property:
• contributions by members to the scheme
• money that the Corporations Act or the ASIC Act stipulates is scheme property
• money that the RE borrows or raises for the purposes of the scheme.
Property or income arising directly or indirectly from these categories of money is also scheme property.
Certain property that might reasonably be considered to be scheme property may arguably not come within any of these existing categories, for instance:
• amounts that an RE decides to pay into the assets of the scheme to compensate for losses due to breaches by the RE (even though not required to do so by a court order158)
• contributions for the payment of rent in relation to land on which the scheme is operated, where those payments have been retained by the RE pending later payment to the lessor when they fall due. These may not be contributions ‘to the scheme’ as required by paragraph (a) of the definition, as they are held for payment to an outside party, the lessor of land
• money that has been paid to acquire a new interest in a scheme and is required to be held in a separate account pending the transfer of the interests to the acquirer.159 This
152 s 601FC(1)(i). The scheme’s compliance plan must deal with this matter: s 601HA(1)(a).
153 s 601FC(1)(j). The scheme’s compliance plan must deal with this matter: s 601HA(1)(c).
154 s 601FC(1)(k).
155 s 601KA(4). The test for determining whether a scheme is liquid is discussed in this paper at Section 9.3.
156 ss 601LB, 601LC.
157 Section 4.4.3.
158 The legislation already provides that compensation paid into a registered scheme by the RE pursuant to a court order is transferred to scheme property: s 1317H(4).
money may not constitute contributions ‘to the scheme’ as required by paragraph (a) of the definition, as it is held in a separate account for persons who are not yet scheme members
• application fees from prospective borrowers from a mortgage scheme. These payments do not fall readily within any of the existing categories of scheme property.
One approach would be to make specific amendments to the definition of ‘scheme property’ in section 9 to ensure that it covers these categories of property. This approach would require further amendments to the definition each time there was a doubt about whether a particular further category of property fell within the definition of ‘scheme property’. Any need for ongoing amendments may be more readily met if the definition of
‘scheme property’ allowed for additional categories to be prescribed in the regulations.
An alternative approach would be to provide a more general definition, to the effect that scheme property is property that is held by the RE or its agents or employees (or, under the SLE Proposal, by the MIS160) in relation to the scheme. This approach would avoid the need for piecemeal amendment of the definition to cover additional categories of property.
A general definition along these lines would also respond to a concern identified by the Turnbull Report, which recommended that the definition of scheme property be amended to clarify when property ceases to be scheme property.161 That report referred to a suggestion by ASIC that property should cease to be scheme property:
• when it is paid to scheme members
• when it is paid to the RE as a fee or indemnity162
• where it is no longer held by the RE or its agents or appointees, unless a constructive trust arises.163
Consideration may need to be given to whether any general definition should also include property that, while it is not held by the RE, nevertheless relates to the scheme and is held on a constructive trust for the RE. A possible way of achieving this result might be to provide that scheme property is property that is held by or on behalf of the RE or its agents or employees (or, under the SLE Proposal, by or on behalf of the MIS) in relation to the scheme.
Consideration may also need to be given to whether a general definition of scheme property should exclude property held by the RE in relation to the scheme, but nevertheless properly regarded as its personal property rather than scheme property (for instance, capital that it must hold pursuant to ASIC’s licensing requirements164). It has
159 s 1017E. Clarification that this money is scheme property would make it clearer that the operation of the account is part of the operation of the registered scheme and should therefore be dealt with in the compliance plan. An alternative way of ensuring this result would be an explicit requirement that the compliance plan deal with compliance with s 1017E and that the operation of the s 1017E account in relation to a particular registered scheme is part of the operation of that scheme.
160 The SLE Proposal is summarised in Section 1.1.1 of this paper.
161 Section 5.2.4 and rec 17.
162 The RE’s rights to be paid fees out of scheme property, or to be indemnified out of scheme property, must be specified in the scheme’s constitution (s 601GA(2)).
163 Section 5.2.4. The Turnbull Report said that situations in which a constructive trust is taken to arise may require some specification.
164 RG 166 Licensing: Financial requirements (November 2013).
been held that this type of property does not fall within the current definition of scheme property.165
Question 3.3.1. Have any problems arisen from the current definition of ‘scheme property’? If so, please give details, including how many schemes may be affected.
Question 3.3.2. Should the legislation be amended to provide a more comprehensive definition of ‘scheme property’ and, if so, should specific categories of property be added to the current definition or should that definition be replaced with a more general definition?
Question 3.3.3. If specific categories are added to the definition, what should those additional categories be?
Question 3.3.4. If a more general definition is preferred, what should that definition be?
Question 3.3.5. If a more general definition is preferred:
• does it need to deal with the situation where property in relation to the scheme is held on constructive trust for the RE
• should it exclude property relating to the scheme that is property of the RE in its own right?
Question 3.3.6. If specific categories are added to the definition, should the Corporations Act clarify the circumstances in which property ceases to be scheme property and, if so, how?
Question 3.3.7. If a general definition is adopted, would that definition make it sufficiently clear when property ceases to be scheme property?
Question 3.3.8. Are there any reasons why there should not be a broader definition of scheme property or, alternatively, why further specific categories of scheme property should not be added to the current definition?
165 In Re Gunns Plantations Limited (No 4)  VSC 595, the RE took out a bank guarantee (the RE Guarantee) to ensure that it would be able to pay all its debts as and when they become due and payable. The Court held that the RE Guarantee did not fall within the definition of ‘scheme property’. In support of that conclusion, it said (at ):
The RE Guarantee made no reference to the schemes, nor was it a requirement under any of the scheme constitutions or other scheme documents for [the RE] to obtain the RE guarantee. The RE Guarantee was not an essential element of the schemes. Rather, it was a mechanism by which [the RE] could satisfy the regulatory requirement placed upon it by its AFSL to remain solvent. That of itself cannot be categorised as a contribution to the schemes. Nor is it money raised by [the RE] for the schemes.
4 Scheme registration
This chapter discusses the circumstances in which a managed investment scheme must be registered and ASIC’s role in the registration process.
4.1 Criteria for determining whether a scheme should be registered
Should all managed investment schemes be registered? If not, what types of scheme should not be registered?
A managed investment scheme must be registered if:
• it (by itself or together with other closely related schemes as determined by ASIC)
involves more than 20 investors (the numerical test),166 and/or
• it was promoted by a person, or an associate of a person, who was in the business of promoting managed investment schemes at the time the scheme was promoted (the professional promoter test).167
A scheme that satisfies either or both of these tests is nevertheless exempt from the requirement to be registered if none of the issues of interests in the scheme would have activated the Product Disclosure Statement (PDS) requirements in Division 2 of Part 7.9 of the Corporations Act168 (the disclosure test).
Appendix 1 to this paper provides more detailed information about:
• the professional promoter test and the disclosure test
• various matters raised in the Analysis and discussion part of this section.
Analysis and discussion
Purpose of registration
CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.
In the case of registration, there is a key difference between companies and schemes.
Those involved in the formation of a company choose to incorporate, usually to obtain the benefit of limited liability. Registration of a company by ASIC under the Corporations
166 s 601ED(1)(a), (c), (3).
167 s 601ED(1)(b).
168 s 601ED(2), Corp Reg 5C.11.05A.
Act169 brings the company into existence170 and that Act provides the company with the legal capacity and powers of an individual and all the powers of a body corporate.171
Registration as a company, in turn, brings the company within the regulatory requirements of the Corporations Act.
By contrast, schemes exist by virtue of contractual arrangements between private parties, without the need for any statutory authorisation. The sole purpose of the registration requirement for schemes is to bring them within the purview of the regulatory requirements of the Corporations Act. The ALRC/CASAC report said that schemes should
‘be clearly identifiable for regulatory and general information purposes’.172 One
commentary has observed that:
the legislation is concerned only with those offerings of investment opportunities which are so similar to offerings of shares and debentures that regulation about them calls for regulatory techniques that developed in relation to offerings of shares and debentures.173
Regulatory requirements of the Corporations Act to which registered schemes are subject include:
• the requirements in the schemes provisions of Chapter 5C of the Corporations Act, for instance:
– the requirement to have a responsible entity (discussed in Section 5.2.1 of this paper).174 The RE must hold an Australian financial services licence and is therefore subject to various licensee obligations, including the requirement to have adequate risk management systems (discussed in Section 5.4 of this paper)
– the compliance framework (discussed in Section 5.3 of this paper)
• requirements applicable to companies as well as registered schemes, such as the financial reporting and record-keeping requirements (see Section 5.2.5 of this paper).
Given that schemes, unlike companies, do not need registration for their existence, it may be appropriate to allow some schemes to remain unregistered where regulation under the Corporations Act may not be necessary, as discussed below under the heading Numerical test. As a broad proposition, however, CAMAC considers that schemes should generally be subject to the regulatory requirements of the Corporations Act. CAMAC therefore favours abolition of the disclosure test for exemption, for the reasons discussed below.
169 Chapter 2A.
170 s 119. Company registrations that were in force under the Corporations Law of the States and Territories immediately before the commencement of the Corporations Act continue as if they were registrations under the Corporations Act (s 1378, definition of ‘old Corporations Law’ in s 1371).
171 s 124.
172 ALRC/CASAC report para 4.9. Also, the Court in Australian Securities and Investments Commission v Koala
Quality Produce Ltd (2002) 41 ACSR 628 at 629 at  observed:
… registration and the protections it involves are deemed by the law to be necessary in the interests of investors. Without registration and the regime it entails, necessary controls are lacking, with the result that investors are exposed to a situation in which their funds are not protected in the way the legislation intends them to be protected.
See also ASIC v Young  QSC 29 at , ASIC v Chase Capital Management Pty Ltd  WASC 27 at
173 HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.470.3]. As noted in that commentary, this passage was approved by Sundberg and Dowsett JJ in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd  FCAFC 147 at .
174 s 601EB(1)(d).
The definition of ‘managed investment scheme’175 is very broad, catching a wide range of arrangements, potentially including private arrangements between small groups of friends and family members. There may be no policy rationale for subjecting these arrangements to the various regulatory requirements that apply to registered schemes.
The numerical test for registration provides a means of excluding these arrangements from regulation under the Corporations Act.
Professional promoter test
A numerical threshold requires a complementary test, such as the professional promoter test, to guard against the possibility of a person setting up a series of schemes, all falling below the stipulated threshold, to avoid the need to register them. However, there are some difficulties in applying the professional promoter test, for instance in determining:
• who is the ‘promoter’ of a scheme (where an organization initiates a scheme, is the promoter the organization or the RE, or are they both promoters?)
• when a person is in ‘the business of promoting managed investment schemes’.
Possible ways to clarify what constitutes the business of promoting managed investment schemes include:
• the inclusion of a specific test (for instance, the person has promoted schemes that have in total at least a certain number of members at the time the offer for the relevant scheme occurs or have raised a minimum amount)
• the application of a more generic test (for instance, the person is forming the scheme with a view to profit other than as a member of the scheme176).
Abolition of the test
In CAMAC’s view, the disclosure test should be abolished: the criteria for deciding whether a scheme should be registered should not be linked to those for deciding whether an issue of interests in a scheme requires disclosure. The policy reasons for the current disclosure test have not been clearly articulated. Exemptions from the disclosure requirements for scheme interests should be dealt with separately from the criteria for registration.
One category of schemes that would be exempt from registration under the disclosure test is schemes that involve only wholesale investors.177 One commentary nominates the exemption of wholesale schemes as the purpose of the disclosure test.178
175 Definition of ‘managed investment scheme’ in s 9. An issue arising from this definition is discussed in
Section 3.1 of this paper.
176 cf ASIC v Chase Capital Management Pty Ltd  WASC 27 at  and ASIC v Young  QSC 29 at
177 The PDS requirements for issues only apply in relation to issues, or issue offers, that involve retail clients:
178 CCH Managed Investments Law and Practice (looseleaf) at ¶1-500 (see also at ¶10-340).
CAMAC questions whether wholesale schemes should be exempt from registration. The policy rationale for such an exemption may have been that wholesale investors do not need the same investor protection as retail investors. However, CAMAC can see no reason why wholesale schemes should not be subject to the regulatory provisions of the Corporations Act in the same manner as companies that may only have wholesale investors.
Also, in many instances, significant amounts of funds invested by retail investors are channelled into wholesale-only schemes through institutional investors. Furthermore, increased wholesale regulation may better reflect international regulatory standards.179
If some Corporations Act requirements were thought to be over-regulatory for wholesale-only schemes, consideration might be given to exempting those schemes from particular requirements on a case-by-case basis or creating a separate class of wholesale-only schemes, subject to more limited requirements than schemes generally.
Even if it were accepted that there should be no requirement to register wholesale-only schemes, the current disclosure test may exempt from registration some schemes that directly involve retail investors, given that the test refers only to ‘issues’ of interests, and does not cover ‘sales’ of interests, in a scheme. Appendix 1 to this paper explains in more detail why this is the case.
Application to small schemes
The interaction of the disclosure test with the numerical test and the professional promoter test leaves doubt about the preferred policy approach to small schemes. If a scheme satisfies the professional promoter test, it must be registered (unless an exception applies), even if the scheme has 20 or fewer members and would therefore not require registration under the numerical test if that test applied by itself. However, the disclosure test, by applying the small-scale offerings disclosure exemption,180 exempts schemes with 20 or fewer members from registration, even if the scheme satisfies the professional promoter test.181
Increase in the scope of the disclosure test
While the exceptions from the disclosure requirements principally covered wholesale and private schemes when the managed investment provisions were first introduced, they now include other matters that are not appropriate criteria for deciding whether to register a scheme. There is no evidence that the consequences for the scheme registration criteria
179 For instance, in relation to financial reporting, Principle 28 of the IOSCO Objectives and Principles of
Securities Regulation (2010) states:
Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.
IOSCO, in its Methodology For Assessing Implementation of the IOSCO Objectives and Principles of Securities
Regulation (2011), states (at 173 in the Explanatory Notes to Principle 28) that:
Assessors should consider whether the standards for internal organization and operational conduct to be observed on an on-going basis by the hedge fund manager/advisers (in view of the risks posed) take into account at least … independent audit on an annual basis of the financial statements of the fund manager/adviser and/or each of the funds managed.
The IOSCO Methodology also states (at 174) that:
hedge fund managers/advisers or the hedge fund should provide proper disclosure to investors …
including audited financial statements of the hedge fund manager/adviser and/or the fund managed. These standards relate to hedge funds generally, not just those offered to retail investors.
180 s 1012E.
181 The numerical test requires registration if the scheme ‘has more than 20 members’ (s 601ED(1)(a)). The small-scale offering exception applies, inter alia, when no more than 20 persons purchase interests in any
12 month period (s 1012E(2)(b), (6), (7)).
were taken into account when the disclosure requirements were being amended. Appendix 1 to this paper discusses these matters in more detail.
Question 4.1.1. Should all schemes require registration? If not, what should be the criteria for exemption from registration (for instance, should the numerical test be retained in its current form or with a higher or lower numerical threshold)?
Question 4.1.2. If an exemption from registration along the lines of the professional promoter test is retained, does the test require amendment? If so, how should it be amended?
Question 4.1.3. Does special provision need to be made for wholesale-only schemes and, if so, what? For instance, should there be a separate class of registered scheme for wholesale-only schemes or, alternatively, should wholesale-only schemes be exempt from regulatory requirements and, if so, what requirements and why?
4.2 ASIC’s role in scheme registration
Should ASIC’s role in scheme registration be more closely aligned with its role in company registration?
Application to ASIC
The company registration procedure and the scheme registration procedure both commence with the lodgement of an application with ASIC.182
Contents of the application
Details about key participants
The application must set out details of the key participants in the company or scheme. In the case of a company, the required details are:
• the names and addresses of its members
• the present and any former names, the address and the date and place of birth of each person who has consented in writing to become a director or company secretary
• for a company limited by shares and an unlimited company, details about each member’s shareholding and for a company limited by guarantee the proposed amount of the guarantee to which each member agrees.183
In the case of a scheme, the required details are:
• the name, and the address of the registered office, of the RE
182 ss 117(1) (companies), 601EA(1) (schemes).
• the name and address of a person who has consented to be the auditor of the compliance plan.184
Given that the RE must be a public company,185 details of its directors and company secretary will have been provided to ASIC in the RE’s application for registration as a company or in subsequent notifications to ASIC if there is a later change.
The application for registration as a scheme does not need to include details of the persons who propose to be members of the scheme. This may reflect the notion of a scheme as a passive investment vehicle, as opposed to the view of a limited liability corporate structure as a vehicle for entrepreneurial risk-taking.186
Applicants to register a company or a scheme must have relevant consents and agreements when the application is lodged. After registration, the consents and agreements must be kept by the company or RE.187
Details about the entity
The application must set out key details about the company or scheme. These details differ between schemes and companies, given the structural and regulatory differences.
In the case of a company, the required details are:
• the type of company to be registered
• the company’s proposed name (unless the ACN is to be used in its name)
• the address of the company’s registered office and, if different, the address of its principal place of business
• for a company limited by shares and an unlimited company, details about shares issued for non-cash consideration
• details of any holding company structure
• the State or Territory in which the company is to be taken to be registered.188
If the company is to be a public company and is to have a constitution on registration, a copy of the constitution must be lodged with the application.189
In the case of schemes, the application must state the name of the scheme190 and the following key documents must be lodged with the application:
• a copy of the scheme’s constitution
• a copy of the scheme’s compliance plan
184 s 601EA(2).
185 s 601FA.
186 A company must have at least one member (s 114). Single member proprietary companies were introduced by the First Corporate Law Simplification Act 1995.
187 ss 117(5) (companies), 601EA(3) (schemes).
188 s 117(2)(a), (b), (g), (j), (l), (ma)-(n), ASIC Form 208. The application must also state the proposed opening hours of the company’s registered office if they are not the standard opening hours (s 117(2)(h), definition of
‘standard opening hours’ in s 9).
189 s 117(3).
190 Corp Reg 5C.1.01.
• a statement signed by the directors of the proposed RE that the scheme’s constitution and the scheme’s compliance plan comply with the relevant regulatory requirements.191
ASIC’s role in the registration process
Discretion or obligation
ASIC’s role in registering a scheme differs from its role in registering a company.
ASIC has a discretion to grant or refuse an application for company registration.192 The
Explanatory Memorandum to the Bill for the Company Law Review Act 1998 stated:
If a proposed company would, when registered, be in breach of another provision of the Law (for example, by having a disqualified director), [ASIC] may exercise its discretion to refuse registration. However, it is not envisaged that [ASIC] will ordinarily attempt to verify the information contained in applications or otherwise investigate whether the Law is being complied with before registering a company.193
In practice, therefore, a company will generally be registered as a matter of course unless there is an obvious defect in the application for registration.
By contrast, ASIC must register a scheme within 14 days of lodgement of the application for registration, unless it appears to ASIC that the application or the proposed scheme is deficient in one or more of the following respects:
• the application does not supply the required details and documents194
• the proposed RE is not a public company that holds an Australian financial services licence195
• the scheme’s constitution does not meet the statutory requirements196
• the scheme’s compliance plan does not meet the statutory requirements197
• the copy of the compliance plan lodged with the application is not signed by all directors of the proposed RE198
• there are no arrangements that will satisfy the requirements for an annual audit of the compliance plan.199
191 s 601EA(4). The constitution must comply with ss 601GA and 601GB. The compliance plan must comply with s 601HA. Section 601HC requires that the copy of the compliance plan lodged with the application be signed by the directors of the RE.
192 s 118. See Austin & Black’s Annotations to the Corporations Act at [2A.118].
193 para 7.17.
194 ss 601EB(1)(c), 601EA.
195 ss 601EB(1)(d), 601FA.
196 ss 601EB(1)(e), 601GA, 601GB. ASIC Regulatory Guide 134 gives guidance on the requirements in ss 601GA
197 ss 601EB(1)(f), 601HA.
It is unclear whether this requirement:
• requires ASIC to give active consideration to each of the elements entitling it to refuse to register a scheme before deciding whether to grant an application (this is ASIC’s view of the requirement200)
• requires ASIC to register the scheme unless it happens to be aware of one of the specified factors that would justify the rejection of a registration application, but without requiring ASIC to give specific consideration to each of those factors.201
The statutory language also leaves unclear whether ASIC has an obligation not to register a scheme if it is aware that one of the specified elements exists.
Furthermore, this legislative framework for scheme registration, unlike the framework for company registration, appears to leave ASIC with no discretion to refuse to register a scheme that satisfies the specified criteria but nevertheless would involve a breach of the law (for instance, where a director of the RE is disqualified from acting as a director).
Whatever view of the law is taken on these matters, ASIC is not required to assess the commercial merits of a scheme.
Name of the company or scheme
In addition to the above grounds for refusing to register a scheme, ASIC must not register a scheme if its proposed name is the ‘same’ as that of an existing scheme or a scheme that has already applied for registration.202
In a similar vein, a name is available to a company unless the name is ‘identical’ to a name reserved or registered for another body.203
However, the ground for refusing to register a scheme on the basis of its name is narrower than the equivalent ground for refusing to register a company in the following respects:
• for schemes, the name must be exactly the same to justify a refusal to register whereas, for companies, two names can be considered identical, notwithstanding that they may differ in certain minor respects204
• ASIC can refuse registration of a company name on the basis that it is ‘unacceptable’ on various grounds, including that it is likely to be offensive or that it falsely implies certain governmental or other connections.205
200 See, for instance, ASIC Regulatory Guide 132 Managed investments: Compliance plans at RG132.14. See also Auditing and Assurance Board Guidance Statement GS 013 Special Considerations in the Audit of Compliance Plans of Managed Investment Schemes, para 6.
201 This view may be supported by HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.501.9], which states that ASIC has a statutory duty to register a scheme, but that there is no statutory duty where it appears that one of the identified factors exists.
202 Corp Regs 5C.1.01(3), 5C.11.04. This regulation provides that the name of a scheme that is applying for
registration must not be the same as the name of an existing scheme or a scheme that has already applied for registration. By necessary implication, this requires ASIC to refuse registration if a proposed scheme name and an existing scheme name are identical.
203 s 147.
204 s 147(1)(a), (b), Corp Reg 2B.6.01(1), Item 6101 of Schedule 6 to the Corporations Regulations. The differences to be disregarded include minor grammatical and orthographic variations and situations involving the use by one company of an abbreviated form of the name of another company (for instance, ‘Co’ for
205 s 147(1)(c), Corp Reg 2B.6.01(2), Part 2 of Schedule 6 to the Corporations Regulations.
ASIC cannot refuse to register a scheme name on the basis that the name may mislead investors. If ASIC sees a need to take action where a scheme has a misleading name, it may need to rely on the provisions prohibiting false or misleading statements in relation to financial products206 and misleading or deceptive conduct in relation to a financial product or financial services.207
Consequences of an ASIC refusal to register a scheme
A person who operates a scheme that is required to be registered, but that ASIC has refused registration, would contravene the Corporations Act208 and the scheme could be wound up by the court.209
Analysis and discussion
Alignment with companies
The key practical difference between the company registration process and the scheme registration process is that the legislative registration requirement for schemes has led to ASIC giving more active consideration to the scheme registration criteria than it does to the company registration criteria. Even technical non-compliance with the scheme registration criteria requires changes to documentation or arrangements before a scheme can be registered.
This difference reflects the investor protection elements of the scheme structure, being the scheme constitution and the compliance plan. Registration helps to ensure that a scheme has these features.210
CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently. It may be possible to bring the scheme registration procedure more closely into line with the corporate procedure (thereby giving ASIC more administrative flexibility), while retaining the investor protection purpose of scheme registration, by:
• permitting registration of a scheme upon lodgement of an application for registration, without the need for detailed consideration of the registration criteria
• ensuring that ASIC has the power to make a stop order, on an interim as well as on a final basis, to prevent any issue of interests in a materially non-compliant scheme.211
This procedure would remove the need for ASIC to give active consideration in every case to whether the relevant registration criteria212 have been satisfied. This approach would be in line with ASIC’s role in relation to amendments to the scheme constitution213 and
206 s 1041E.
207 s 1041H. This provision imposes civil liability only.
208 s 601ED(5).
209 s 601EE.
210 Australian Securities and Investments Commission v Koala Quality Produce Ltd (2002) 41 ACSR 628 at 629 at
211 This power would be along the lines of ASIC’s stop order power in s 1020E.
amendments to the compliance plan:214 copies of the relevant amendments are lodged with
ASIC, but ASIC has no obligation to reach a view on each amendment lodged with it.
In relation to ASIC’s power to refuse registration on the basis of a proposed name, there is no apparent reason why ASIC’s power to refuse to register a scheme on this ground should be any narrower than its equivalent power to refuse to register a company.
Possible additional grounds to refuse to register a scheme
Consideration might be given to whether certain features of schemes might justify providing additional statutory grounds on which ASIC could refuse to register a scheme. For instance, schemes frequently involve limitations on the types of investment that the relevant RE can make and on the powers of the RE.215 By contrast, the Corporations Act provides companies with the legal capacity and powers of an individual and all the powers of a body corporate.216
Possible additional grounds on the basis of which ASIC might refuse to register a scheme and that may assist it in performing its investor protection role in relation to schemes include:
• the proposed scheme’s name may mislead investors (for instance, where the name gives the impression that the RE’s investment powers relate to a more limited class of products than is in fact the case)
• circumstances exist in relation to the scheme that create an inappropriate risk that the scheme will not be operated efficiently, honestly and fairly.
One example of the potential for a scheme name to mislead investors relates to a subcategory of money market funds called ‘enhanced’ money market funds.
Most money market funds invest in a diversified portfolio of high-quality, short-term money market instruments.217 By contrast, ‘enhanced’ money market funds have longer maturity, less liquidity and higher interest rate, credit and liquidity risks than other money market funds.218 Despite this, an ASIC survey revealed that:
214 s 601HE(3).
215 The investment powers of the RE must be adequately provided for in the scheme constitution (s 601GA(1)(b)).
Those powers are often very wide. However, REs are generally limited in the types of investment they can make by conditions imposed on their licence by ASIC pursuant to s 914A.
216 s 124.
217 ASIC Report 324 Money market funds (December 2012) para 2. An ASIC survey revealed that ‘on average,
72% of the assets of money market funds were invested in cash instruments, with the remainder in assets such as mortgages and fixed incomes’ (id at para 60).
The ASIC Report (at para 26) reported that the money market industry globally represented approximately US$4.7 trillion in assets under management in the first quarter of 2012, and around one fifth of the assets of collective investment schemes worldwide. In relation to the Australian industry, it said (at para 52):
According to the Australian Bureau of Statistics, in June 2012 the managed funds industry had $1,886 billion funds under management (FUM) and money market funds had, on an unconsolidated basis, a total of
$24.4 billion FUM. By these figures, money market funds account for 1.3% of the total managed funds industry in Australia. In March 2012, the global money market fund industry was estimated to be $4.7 trillion. On that basis, Australian money market funds are estimated to account for less than 1% of the global money market fund industry.
218 ASIC Report 324 Money market funds at paras 61, 69, 71. On average, 48% of their assets are in cash and often more than 50% of their funds under management are in fixed income instruments and mortgages (id at para 61). The lower liquidity of enhanced money market funds is also noted at paras 74, 110.
The product branding and PDSs of enhanced money market funds often contain the words ‘cash’ or ‘money market fund’. These funds could be confused with other money market funds by retail investors.219
ASIC has said that it is looking to encourage better differentiation between enhanced money market funds and other money market funds.220
Any ASIC power to refuse to register a scheme where it believes that the scheme’s name is misleading could be complemented by:
• a power for ASIC to refuse to amend the register in case of a notification of change of name221 where it believes that the proposed name may be misleading
• a power for ASIC to issue a direction to change the name of a scheme if it considers it to be misleading.
Action to deal with misleading scheme names would be consistent with the approach recommended by the International Organization of Securities Commissions (IOSCO) in relation to money market funds.222
Moreover, ASIC could be given an express power to require schemes that fall within a particular class to have particular terms in their name. For instance, this power would enable ASIC to require that hedge funds be named as such.
A wider power for ASIC to refuse a scheme registration if circumstances exist in relation to the scheme that create an inappropriate risk that the scheme would not be operated
‘efficiently, honestly and fairly’ would permit ASIC to assess the prospects for the efficient, honest and fair conduct of a scheme in two different contexts. ASIC, in effect, considers whether a prospective RE would carry out its obligations ‘efficiently, honestly and fairly’ when deciding its application for an Australian financial services licence.223 If an ‘efficiently, honestly and fairly’ criterion were added to the scheme registration criteria, ASIC would again take these factors into account when considering each application for registration of a scheme to be conducted by the RE.
Question 4.2.1. Should ASIC’s role in relation to scheme registration be brought more closely into line with its role in relation to company registration by:
• permitting it to register schemes without requiring active consideration of the registration criteria in each case, but giving it stop order powers to prevent the operation of non-compliant schemes
• giving it the same powers to refuse registration on the basis of name or a potential breach of the law as it has in relation to companies?
219 id at para 70. That report also noted (at para 58) the ‘distinct differences between money market funds and fixed income funds in terms of targeted return, risk profile and investment timeframe’, as well as the use of ‘cash’ or
‘money market fund’ in the product branding of money market funds.
220 id at paras 64, 70, 104, 135–136.
221 Corp Reg 5C.01.02.
222 In its Policy Recommendations for Money Market Funds Final Report (October 2012), IOSCO recommends that regulators ‘should closely monitor the development and use of other vehicles similar to money market funds (collective investment schemes or other types of securities)’ (rec 3) and says, in its commentary on this recommendation, ‘when describing [collective investment] schemes as money market funds would be misleading, the reference in product documentation to terminology similar to “money markets” or “cash” should be avoided’.
223 s 913B(1)(b), in combination with s 912A(1)(a).
Question 4.2.2. Should ASIC have the power to refuse to register a scheme if it considers that the scheme’s name may mislead investors? If so, should ASIC also have:
• a power to refuse to amend the register in the case of a notification of change of name where it believes that the proposed name may be misleading
• a power to issue a direction to change the name of a scheme if it considers it to be misleading?
Question 4.2.3. Should ASIC have a power to refuse to register a scheme if circumstances exist in relation to the scheme that create a potential risk that the affairs of the scheme would not be conducted ‘efficiently, honestly and fairly’?
Question 4.2.4. Should ASIC have a power to require schemes that fall within a particular class to have specific terms in their name?
Question 4.2.5. Are there any other grounds on which ASIC should be permitted to refuse to register a scheme?
Governance framework for schemes
5 Governance framework for schemes
This chapter discusses possible ways to improve the governance framework for schemes, including by the introduction of a risk management requirement specifically for schemes. It also examines the role of investment guidelines in the governance framework.
5.1 Overview of the chapter
This chapter considers whether the governance framework for schemes is satisfactory from the point of view of investor protection.
Section 5.2 gives an overview of the current framework, while Sections 5.3 and 5.4 give greater detail about its main structural elements, the compliance regime224 and the obligation for an RE to have a risk management system for its business (which includes the scheme or schemes that it operates).225
Section 5.5 assesses the current framework, including how it compares with the governance framework for companies. Section 5.6 explores options for dealing with possible deficiencies in the framework for schemes, including by giving greater weight to risk management in scheme governance.
Section 5.7 discusses the role that investment guidelines might play in any enhanced risk management system.
5.2 Overview of the governance framework for schemes
5.2.1 The responsible entity
A managed investment scheme must have an RE, which operates the scheme.226
The RE, its officers and its employees have various duties under Chapter 5C, as well as under other parts of the Corporations Act and at general law. In addition, the RE is subject to the financial services licensing regime, given that it must be a public company that holds an Australian financial services licence (AFSL) permitting it to operate the scheme.227
224 Parts 5C.4 and 5C.5.
225 A registered scheme must have a risk management system, given that the RE must hold an Australian financial services licence (s 601FA) and a licensee must have adequate risk management systems: s 912A(1)(h).
226 s 601FB(1). One of the key initiatives recommended in the ALRC/CASAC report, and implemented in Chapter 5C, was the introduction of a single licensed RE to operate the scheme and hold scheme property on trust for scheme members. The RE replaced the previous two-tiered trustee and management company structure for the operation of these schemes.
227 s 601FA. See also the definitions of ‘financial service’ and ‘financial services business’ in s 761A, ss 766A(1)(d), 911A.
Governance framework for schemes
Duties under Chapter 5C
The RE and its officers and employees have a variety of duties under Chapter 5C, as set out below.228
The RE and its officers have duties in relation to a scheme that are analogous to those of the officers of a company, namely:
• to act honestly229
• to exercise the degree of care and diligence that a reasonable person would exercise in the RE’s or officer’s position.230
The RE, its officers and its employees also have a duty, analogous to that for the officers and employees of a company, not to make use of information acquired through being the RE, or an officer or employee of the RE, in order to gain an improper advantage for the RE, one of its officers or employees or any other person or to cause detriment to the members of the scheme.231 There is a similar duty, again analogous to a duty of the officers and employees of a company, for officers and employees of an RE not to make improper use of their positions as officers or employees of the RE.232
There are also duties that have no direct equivalent for companies.
The RE and its officers have a duty to act in the best interests of the scheme members and, if there is a conflict between the members’ interests and the RE’s interests, to give priority to the members’ interests.233 This duty encompasses a ‘fundamental duty of undivided loyalty’ to scheme members.234 In addition to the requirement to prefer members’ interests if there is a conflict between those interests and the interests of the RE, this duty of undivided loyalty can involve duties for the RE and its officers:
228 The duties in Chapter 5C reflect the recommendations in the ALRC/CASAC report in relation to the RE (referred to in that report as the ‘scheme operator’) and its officers (see the discussion at paras 10.3-10.22 of that report).
229 ss 601FC(1)(a) (the RE), 601FD(1)(a) (the RE’s officers). See ALRC/CASAC report paras 10.7, 10.18. The equivalent duty for directors and other officers of companies in s 181(1) is to act ‘in good faith in the best interests of the corporation and for a proper purpose’: the wording of the managed investment scheme provisions reflects the duty applicable to companies when Chapter 5C was introduced (former s 232(2)). For the problems that led to the change in the wording of the provision applicable to companies, see HAJ Ford,
RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at
230 ss 601FC(1)(b) (the RE), 601FD(1)(b) (the RE’s officers): cf s 180 for companies. See ALRC/CASAC report para 10.19 (that report only proposed this duty for the officers of the RE, not the RE itself). The s 601FD(1)(b) duty for the RE’s officers is discussed in Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 at -.
231 ss 601FC(1)(e) (the RE), 601FD(1)(d) (the RE’s officers), 601FE(1)(a) (the RE’s employees): cf s 183 for companies. See ALRC/CASAC report paras 10.13, 10.21.
232 ss 601FD(1)(e) (the RE’s officers), 601FE(1)(a) (the RE’s employees): cf s 182 for companies. See
ALRC/CASAC report paras 10.13, 10.21. Para 10.13 recommended that this duty not to make improper use of position be applied to the RE. However, the Corporations Act only applies this duty to the RE’s officers and employees, not to the RE itself. The s 601FD(1)(e) duty for the RE’s officers is discussed in Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 at -.
Members of a compliance committee also have duties to act honestly, to exercise reasonable care and diligence and not to make improper use of information or their position (s 601JD).
233 ss 601FC(1)(c) (the RE), 601FD(1)(c) (the RE’s officers). See ALRC/CASAC report paras 10.8, 10.20.
234 Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited
(Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 at .
Governance framework for schemes
• to use their best efforts to pursue solely the members’ interests
• to act honestly and to exercise care, competence and prudence in doing so
• to adhere to the terms of the scheme constitution.235
The RE and its officers also have duties relating to the scheme’s constitution (see
Section 5.2.2, below) and compliance plan (see Section 5.2.3, below).
The purpose of imposing duties on officers of the RE as well as on the RE itself was to enable investors to take action to enforce their rights against those officers directly, without first proceeding against the RE itself.236 Unlike the duties of officers in the corporate context, which are owed to the company itself rather than to its shareholders, the duties of the RE’s officers in Chapter 5C are owed to the scheme members, rather than to the RE.237 Also, the scheme duties may be seen as more demanding than the company duties, as they are owed to members as beneficiaries of a trust.238 This situation will change if the SLE Proposal is adopted, as the duties of the RE and its officers would be owed to the MIS, not to the scheme members.
In addition to the above duties, the RE has duties:
• to treat the members who hold interests of the same class equally and members who hold interests of different classes fairly239
• to ensure that scheme property is clearly identified as scheme property and held separately from property of the RE and property of any other scheme240
• to ensure that the scheme property is valued at regular intervals appropriate to the nature of the property241
• to ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution and the Corporations Act242
• to report to ASIC any breach of this Act that relates to the scheme and has had, or is likely to have, a materially adverse effect on the interests of members as soon as practicable after it becomes aware of the breach.243
235 Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 at -, -.
236 ALRC/CASAC report para 10.16.
237 Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 at . The members are expressly referred to in the duties contained in s 601FD(1)(c), (d) and (e).
238 Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited
(Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 at -, . The RE holds scheme property on trust for scheme members (s 601FC(2)), even if the scheme itself is not structured as a trust.
239 s 601FC(1)(d). See ALRC/CASAC report para 10.12. This duty is discussed in Section 7.1 of this paper.
240 s 601FC(1)(i). See ALRC/CASAC report para 10.11. The compliance plan of a scheme must set out the arrangements for ensuring that the requirement for separation of assets is complied with (s 601HA(1)(a)). The definition of ‘scheme property’ is discussed in Section 3.3 of this paper.
241 s 601FC(1)(j). Valuation of scheme assets and liabilities is discussed at Section 15.1 of this paper.
242 s 601FC(1)(k).
243 s 601FC(1)(l).
Governance framework for schemes
Duties under other parts of the Corporations Act and at general law
The RE may have duties at general law (such as fiduciary duties and a common law duty of care).244
As an RE is a public company, its directors have the same duties as the directors of any other company.245 However, the duties imposed by the managed investment provisions in Chapter 5C (being for the benefit of scheme members) override any conflicting duty that an officer or employee has under the general corporate provisions relating to duties of officers and employees (being for the benefit of the RE, as a corporation, and, indirectly, of the RE’s shareholders).246
The directors of the RE also have a duty to prevent the RE from trading while insolvent.247
In addition, directors of the RE may be personally liable in some stipulated instances in operating the scheme.248
As the holder of an AFSL, the RE must have adequate risk management systems for its business of operating managed investment schemes, unless the licensee is regulated by APRA,249 which also imposes risk management requirements.250 The RE’s risk management system necessarily takes into account the risks of each of the schemes that it operates, though particular risks may not necessarily affect the RE in the same way that they affect an individual scheme. For instance, under the current law, an RE whose creditors in relation to a scheme have agreed to limited recourse rights does not have the same financial risk as the scheme. The RE’s only financial risk is that the scheme may not have sufficient assets to pay the RE’s remuneration and expenses. The scheme’s financial risks may, however, be relevant to the reputational risk of the RE as an operator of schemes. If the SLE Proposal is adopted, the RE’s financial risk will only include the financial risks of schemes under its control if scheme creditors have obtained a guarantee from the RE.
Risk management is discussed in more detail in Section 5.4.
244 The ALRC/CASAC report envisaged that the duties it recommended would be in addition to general law duties: para 10.6. Some of the statutory duties in Chapter 5C affirm the general law duties: HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.502.3].
245 The general duties are set out in Part 2D.1, in particular ss 180–184.
246 ss 601FD(2), 601FE(2). See ALRC/CASAC report para 10.17, Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 at .
247 s 588G. Directors who fail to prevent the RE from incurring debts while insolvent are personally liable for any loss or damage suffered by creditors (s 588J), with criminal liability where this failure was dishonest
248 s 197.
249 s 912A(1)(h). From July 2015, APRA-regulated registrable superannuation entity licensees (RSEs) that manage non-superannuation registered managed investment schemes (dual-regulated entities) will be subject to the risk management requirements of the Corporations Act licensing provisions for their non-superannuation activities: amended s 912A(1)(h) and new s 912A(5), introduced by the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Act 2013 Schedule 1 Items 5 and 6.
250 See APRA Prudential Practice Guide SPG 200 Risk Management (August 2010). Listed schemes are also subject to risk management requirements under the ASX Corporate Governance Principles and Recommendations with 2010 Amendments (2nd edition) (see Section 5.2.7 of this paper).
Governance framework for schemes
An RE is also subject to the following licensing obligations:251
• to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly252
• to have adequate arrangements for the management of conflicts of interest253
• to comply with the licence conditions254
• to comply with the financial services laws and take reasonable steps to ensure that its representatives comply255
• unless the licensee is regulated by APRA – to have available adequate resources (including financial, technological and human resources) to provide the relevant financial services and to carry out supervisory arrangements256
• to maintain the competence to provide those financial services257
• to ensure that its representatives are adequately trained, and are competent, to provide the financial services258
• to have an internal and external dispute resolution system for retail clients259
• to have compensation arrangements for retail clients260
• to report to ASIC significant breaches of the above obligations261
• to assist ASIC in the performance of its functions.262
ASIC has various powers under the licensing provisions. Significantly for investors in managed investment schemes, the ASIC powers include a power to suspend or cancel the