On 13 June 2018, Treasury released a revised exposure draft of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (CCIV Bill) for the new corporate collective investment vehicles (CCIVs).
The CCIV Bill is the result of extensive consultation with the funds management industry following the introduction of the first exposure draft of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2017 for CCIVs in August last year (2017 CCIV Bill).
The CCIV Bill covers:
- Core provisions establishing how the CCIV and its sub-funds will operate, which are proposed to be set out in a new chapter 8B of the Corporations Act 2001 (Cth) (Act); and
- Additional provisions including related party provisions, meeting rules and members' rights and remedies, which are addressed by proposed amendments to Chapters 2A to 2P of the Act.
The CCIV regulatory framework is modelled on the United Kingdom's Open-Ended Investment Companies (OEIC) regime and is intended to increase the competitiveness of Australia's managed fund industry through the introduction of an internationally recognisable investment product. The CCIV utilises a conventional company limited by shares with most of the powers, rights, duties and characteristics of a company. Importantly however, certain features of Australia's existing managed investment scheme (MIS) regime, which has a trust-based structure, have been incorporated into the design of the CCIV for the purpose of maintaining regulatory parity between the MIS framework and the CCIV framework. This is intended to provide ease of transition for fund managers wishing to migrate from a MIS to a CCIV and ensure efficient operation of the Australian funds management industry.
Features of a CCIV
A CCIV is a new type of company that:
- is limited by shares;
- has a constitution; and
- appoints a corporate director, which must be a public company with an Australian financial services licence (AFSL) authorising it to operate the business and conduct the affairs of the CCIV.
All CCIVs will require registration through the Australian Securities and Investments Commission (ASIC) in a similar manner to companies (with a few additional application requirements) and upon registration, a CCIV will have separate legal status as a company.
Similar to a MIS, a CCIV may be retail or wholesale. The trigger for whether a CCIV is a retail CCIV is linked to the requirement to provide a Product Disclosure Statement under the Act. Different regulatory requirements apply to retail and wholesale CCIVs, with wholesale CCIVs subject to fewer requirements.
A CCIV will be required to conduct its activities through one or more sub-funds. Whilst sub-funds will not have a legal personality, which means they cannot enter into contracts, cannot sue or be sued in their own name, the assets and liabilities of the CCIV must be allocated to a sub-fund of the CCIV. This is to ensure that there will be segregation of assets and liabilities between sub-funds. Each sub-fund will require registration by ASIC and will be identifiable by a unique name and ARFN. It is intended that this sub-fund framework will allow fund managers to offer a variety of investment options through multiple sub-funds under a single 'umbrella' CCIV.
From an investor's perspective, the sub-fund structure will mean that an investor may hold one or more shares in the CCIV that is referable to a particular sub-fund. Shares that are referable to the same sub-fund of a CCIV may be divided into further classes of shares, such that CCIVs may have multiple classes of shares that are referable to the same sub-fund.
The role of the Corporate Director
The CCIV will be operated by a corporate director, which will be a public company with its own officers and employees. The role of the corporate director will be to:
- operate the business and conduct the affairs of the CCIV;
- perform the functions conferred on it by the constitution and the Act; and
- ensure that the CCIV complies with the constitution and the Act.
The corporate director will have the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. Akin to the existing registered MIS regime, the corporate director will be responsible for the acts of agents of the CCIV and the corporate director (and any sub-agents of those agents) where those agents are appointed to do something in connection with the CCIV.
All existing duties imposed on company officers under the Act will apply to the officers of a corporate director. Additional requirements will apply to the corporate director for retail CCIVs. At least half the directors for a retail CCIV must be external directors. Furthermore, retail CCIV corporate directors and their officers and employees will have additional duties which have been modelled off existing duties under the Act for officers and employees of responsible entities for registered MIS'.
The rules for holding meetings of members of a CCIV and its sub-funds are based on the rules for registered MIS', rather than the rules for companies.
The rules around related party transactions in the Act generally apply to CCIVs in the same way that they apply to public companies. The exception is, to the extent the rules require a CCIV to obtain the approval of its members to give a related party a financial benefit, a CCIV must separately obtain approval of the members of each sub-fund that is affected by the giving of the financial benefit (and not the CCIV as a whole).
Custody of Assets
A retail CCIV will be required to appoint a "depository" to hold the assets. A wholesale CCIV may appoint a depository however this is not a mandatory requirement. The depository of a CCIV may either be a public company or a foreign company registered under the Act that holds an AFSL authorising it to act as a depository and must meet the independence requirements.
Depository independence is a requirement that the CCIV Bill notes is still under development. The Explanatory Materials to the CCIV Bill (EM) outlines the proposed operation by way of a guide. The EM states the depository must be independent from the CCIV, the corporate director and any other entity that is performing corporate director functions. The EM then provides an illustration of the different degrees of independence to the different relationships, which have been modelled off the United Kingdom's implementation of the UCITS regime. The independence requirement is a departure from what currently occurs in the Australian funds management industry. Responsible entities are not prevented from appointing a custodian that may be an associate or related body corporate. It will be interesting to see how this develops.
Developments since the previous consultation
The CCIV Bill is a revised exposure draft of the 2017 CCIV Bill. One of the welcome amendments relates to the retirement of a corporate director. The 2017 CCIV Bill modelled the requirements for retiring a corporate director off the existing regime for the retirement of a responsible entity for a registered MIS. This meant the 2017 CCIV Bill required CCIV members to pass an extraordinary resolution to retire and appoint a new corporate director. An extraordinary resolution requires the approval of at least 50% of all members (including those not present in person or by proxy). This is a very high threshold and one which is particularly significant where a large portion of members comprise investor directed portfolio services (IDPS) platforms, which do not usually vote unless directed. Following consultation and submissions on this issue, the CCIV Bill has amended this provision to a special resolution. A special resolution requires approval by 75% of members entitled to vote, which in our view, is the appropriate threshold.
Nevertheless, there are still a few outstanding issues that will need to be addressed in this second consultation. In particular:
- Inter-funding – The CCIV Bill does not permit inter-funding. In our view, a fund manager should, for example, be able to establish several sub-funds, which may include several single sector funds (such as a global securities fund, an Australian securities fund, a fixed income fund etc) as well as several multi-sector funds that may invest in each of the single sector funds.
- Changing the constitution – The CCIV Bill does not provide a mechanism for changing a constitution, where the change will adversely affect members rights in only one sub-fund. The benefit of the CCIV structure is the potential to operate a number of sub-funds and we submit there will often be circumstances where certain amendments are required to the CCIV constitution that apply in respect of one (or some) of the sub-funds. Accordingly, it does not appear to make sense (in this situation) for all members of the CCIV to be required vote on such a resolution.
- Replacing the depository – The CCIV Bill requires a members meeting for the purpose of retiring and appointing a new depository. This proposal does not appear appropriate to us. This mechanism could be replaced with a mechanism whereby the corporate director can propose the replacement of a depository and provided ASIC does not object within say, 10 business days, and the depository is independent of the corporate director, the change of depository of a CCIV is to take effect.
Asia Region Funds Passport
The CCIV framework is intended to compliment the Asia Region Funds Passport regime, which was passed by Parliament on 29 June 2018. A copy of the Corporations Amendment (Asia Region Funds Passport) Act 2018 may be found here.
CCIVs will provide Australian fund managers with a vehicle that is compliant with Passport requirements and is similar to the European-style corporate funds that offshore investors are familiar with. A copy of our recent article on the Asia Region Funds Passport may be found here.
Treasury intend on releasing a second tranche of legislation, which will cover the remaining substantive aspects, including external administration, consequential amendments to apply the financial services regime to CCIVs and penalty provisions.
Transition arrangements from the existing MIS regime to the CCIV are also currently being worked on and these arrangements will be key to fund managers who are looking to switch to the new framework.
We are also waiting for the revised CCIV tax framework to be released, which will be key to the CCIV regime. Industry is hopeful that changes will be made to Australia's withholding tax regime as part of this process.