General introduction to the regulatory framework
The Corporations Act 2001 (Cth) (Corporations Act) is the primary legislation governing asset management sector players. The Australian Securities and Investments Commission (ASIC) is the primary securities regulator, and monitors and enforces the Corporations Act and the associated Australian financial services licence (AFSL) regime.
An AFSL is required in order to cover a range of regulated activities, including:
- the provision of investment management advice;
- the offer of interests in an investment fund;
- the provision of custodial and depository services;
- prime brokerage and other brokerage;
- market-making activity;
- underwriting; and
- the operation of registered and unregistered investment funds.
Investment funds structured as managed investment schemes generally require registration (as registered managed investment schemes) with ASIC if offered to retail clients, and may register voluntarily in other cases (for example, if offered only to wholesale clients). Wholesale clients comprise certain institutional, sophisticated and professional investors meeting relevant thresholds prescribed by the Corporations Act.
A private placement memorandum, information memorandum or other offering memorandum for an investment fund in which only wholesale clients may invest does not need to be in a prescribed form or include prescribed statements or information, and does not need not be lodged with ASIC. However, various market misconduct requirements under the Corporations Act (aimed at preventing misleading or deceptive conduct in the provision of financial services) will apply to an offering memorandum regardless of whether it needs to be lodged with ASIC.
A holder of an AFSL must:
- maintain minimum regulatory capital;
- put in place adequate arrangements for the management of conflicts of interest;
- have adequate risk management systems;
- report significant breaches to ASIC; and
- ensure personnel are trained and supervised.
An AFSL holder is subject to an overarching duty to ensure that financial services are provided efficiently, honestly and fairly. Following market sentiment that executive members of financial services entities were falling below the expectations and standards of the community for ethical behaviour, the most in-depth review of corporate Australia ever undertaken commenced in December 2017, with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). On 4 February 2019, Commissioner Kenneth Hayne delivered his final report (the Hayne Report), which made recommendations aimed at improving the culture and regulation of the financial sector in Australia.
Subject to some limited exemptions, issuers of interests in, and managers of, investment funds will generally need to hold an AFSL (regardless of whether the investors in the fund are retail clients or wholesale clients).
ASIC has traditionally provided regulated firms from the US, UK, Hong Kong, Singapore and Germany with the ability to apply for access to a statutory passport-like regime covering financial services to wholesale clients in Australia. ASIC has also provided relief for foreign firms that do not carry on business in Australia from the need to hold an AFSL to provide financial services to wholesale clients in Australia. A limited 'foreign AFS licence' regime was introduced in 2020 and provides a modified pathway for access to the Australian wholesale market by foreign regulated firms.
Other regulatory bodies relevant to the asset management sector are as follows:
- the Australian Prudential Regulation Authority (APRA), which primarily focuses on the prudential regulation of banks, insurance companies, superannuation funds and, most recently, non-bank lenders;
- the Australian Securities Exchange (ASX), which prescribes rules governing the listing of investment funds on the ASX, including listed REITs and exchange traded funds, as well as rules governing the conduct of market operators and brokers;
- the Australian Transaction Reports and Analysis Centre, which administers Australia's anti-money laundering and counter-terrorism financing laws, including rules relating to identification of investors in investment funds and counterparties to derivative transactions;
- the Foreign Investment Review Board (FIRB), which screens applications for foreign investment into Australia, in particular with respect to investment into residential property, large commercial real estate investments, agricultural investments, infrastructure, or other investments above certain monetary thresholds or that raise national interest considerations. Additional screening requirements apply for investment by foreign government investors (including sovereign wealth funds) and investment funds and other entities in which any foreign government investor has a significant interest;
- the Takeovers Panel, which focuses on resolving takeover or corporate control-related disputes arising in relation to listed or other widely held entities; and
- the Australian Taxation Office, which is the federal revenue collection agency, and is also charged with regulating the self-managed superannuation fund sector.