In March 2014, the Corporations and Markets Advisory Committee (CAMAC) released a paper,1 which, among other things, focused on the following areas:

  • governance framework for registered managed investment schemes (schemes), including the scheme constitution, the responsible entity and the compliance and risk management framework, and
  • regulatory powers and enforcements.

This paper was a follow-up to another released in July 2012 that made recommendations on issues relating to financially distressed schemes. Submissions to CAMAC in relation to this discussion paper closed in early-June.

We summarise below some of the key corporate regulatory proposals put forward by CAMAC in its March 2014 paper which may impact on responsible entities of managed investment schemes (REs) and their officers. A key theme in CAMAC’s recommendations is to align the regulatory regime for schemes with that of corporate entities, unless there are compelling reasons for treating schemes differently, which will likely increase the capacity for ASIC and scheme members to bring action against REs and their officers.

Key takeaways

Among other things, CAMAC recommends:

  • uniting the regime regulating corporate entities and managed investment schemes as much as possible,
  • increasing the capacity for scheme members to bring an action against the RE and its officers,
  • imposing a more prescriptive and specific approach to risk management on managed investment schemes,
  • imposing additional disclosure obligations on schemes,
  • bringing the enforcement regime in respect of schemes under a civil standard regime (as opposed to the higher criminal standard), and
  • clarifying the consequences of transactions or acts that contravene the Corporations Act 2001 (Cth) (Act).

If CAMAC’s reform recommendations are implemented, the scope, capacity and likely success of proceedings brought against managed investment schemes will increase. However, the consequences of particular acts, transactions or conduct that attract penalty under the Act will be clearer.

Extending corporate governance framework to schemes

Registered managed investment schemes have a RE that must be a public company that holds an Australian financial services licence to operate the scheme (AFSL). The RE owes various duties under Chapter 5C of the Act and is subject to the financial services licensing regime.

However, CAMAC’s paper identifies key investor protection features of corporate governance which apply to companies that do not apply to managed investment schemes. For example:

  • scheme members cannot access the statutory derivative action procedure which is available to investors in corporate entities, and
  • the oppression remedy under the Act does not extend to scheme members.

CAMAC recommends extending the ability to bring an action for oppression or to initiate a statutory derivative action to scheme members. If this recommendation is adopted it will significantly widen the scope for proceedings to be brought against defaulting officers of REs.

Risk management

A review conducted by ASIC found that although REs generally demonstrated compliance with the obligation to maintain adequate risk management systems, there were a number of inadequacies.

CAMAC recommends introducing a risk management regime specifically for managed investment schemes. It leaves open whether this should be done in conjunction with the current framework or whether a new risk management regime altogether should be introduced specifically tailored to schemes.

Specifically, CAMAC observes that the ‘purpose of the risk management requirements for schemes would be to provide a governance framework that encourages attention being given to the full range of risks that might be involved in the conduct of the scheme’s business’ (our emphasis).

If this very specific and prescriptive approach to risk management is implemented, it could significantly increase the regulatory burden placed on schemes. This could also potentially open the scope for proceedings against schemes in respect of any risks not disclosed (regardless of the risk’s remoteness).

CAMAC’s recommendation is also particularly relevant given the prevalence of class action proceedings against schemes in the wake of the Global Financial Crisis. A common theme across such proceedings is the allegation that the risk management plans were inadequate and that the continuous disclosure is also inadequate. The likelihood of such action may increase with more proscriptive risk management requirements.

Increased ASIC powers

Currently ASIC has a range of surveillance and investigative powers in relation to schemes. CAMAC’s view is that additional investigative powers may assist ASIC in regulating schemes. Currently, ASIC has the power to check whether an RE is complying with the scheme constitution and the scheme’s compliance plans. CAMAC suggests that this power may be complemented by powers to:

  • require production of any document, and
  • require disclosure of information known to an agent (or former agent) or other person engaged by the RE.

Enforcement powers

CAMAC has also recommended additional enforcement options in relation to schemes to be made available to ASIC. In particular, CAMAC recommends that enforcement provisions applying to schemes should be brought under the civil penalty regime, unless there are compelling reasons otherwise. The effect would be to lower the bar to successfully pursue enforcement proceedings.

For example, provisions governing withdrawal by a member from a managed investment scheme not in accordance with the Act constitutes a criminal offence rather than giving rise to a civil penalty. In contrast, for companies, provisions relating to share capital transactions attract the civil penalty regime rather than constituting a criminal offence. CAMAC thinks that there is no reason to treat either situation differently given that both govern capital management. CAMAC also thinks that a civil penalty regime will lower the bar for regulators to successfully pursue enforcement proceedings in relation to managed investment schemes.

Consequences of contraventions

Currently, some provisions in the Act provide that a transaction that contravenes a particular provision is invalid. However, none of the provisions relating to schemes state whether or not a contravention of those provisions invalidates the contravening transaction. Notwithstanding the Act’s silence on this matter, there are various general law factors relevant to determine if there is the requisite parliamentary intention to invalidate a contract associated with a contravention. However, none of these factors are determinative on their own.

Although the courts have dealt with the validity of scheme transactions that contravene the Act as those cases arise, CAMAC thinks that this is undesirable because it leads to commercial uncertainty. For example, a RE may purport to amend a scheme constitution unilaterally on the basis that the RE ‘reasonably considers the change will not adversely affect members’ rights. External parties may not want to transact if the transaction depends on the amendment and there is a risk that litigation may be necessary to determine the validity of those transactions.

CAMAC’s proposal is to set out a clear legislative statement about the consequences of a contravention in relation to schemes. This would avoid the need for a party to bring proceedings in order to determine if a particular contravening transaction is invalid. This is also particularly helpful in instances where third parties have already obtained rights, where the courts may be more reluctant to hold a transaction invalid.


The central theme to CAMAC’s list of reform recommendations is to align the regulatory regime for schemes with that of corporations, in the absence of compelling reasons for regulating schemes differently. The likely effect of adopting CAMAC’s reform recommendations is to increase the capacity for ASIC and scheme members to bring proceedings against REs and their officers. Directors and senior management of REs should therefore ensure that they are complying with all regulatory requirements.

Yun Yong