The Australian Securities and Investments Commission (ASIC) has issued Consultation Paper 188 (CP) in which it proposes to update its guidance in Regulatory Guide 134: Managed investments: Constitutions. The provisions in the Corporations Act which the CP touches are relatively imprecise and are open to different interpretations. It is therefore a welcome development that ASIC is seeking to further clarify its views.
ASIC has proposed that the guidance will commence for all managed investment schemes seeking registration from 1 May 2013 but ASIC will also “encourage” responsible entities of existing registered schemes to amend constitutions to meet its new guidelines. We will return to that subject later.
ASIC is seeking feedback from interested parties by 13 November 2012.
Key points arising from the CP include the following:
- “Safe harbour” for unit pricing requirements – ASIC will revoke class order [CO 05/26] and create a “safe harbour” on which responsible entities can choose to rely to ensure that a constitution makes adequate provision for the consideration to acquire or redeem units in a managed investment scheme. Responsible entities can choose not to rely on the “safe harbour” but if they do so, they should expect greater scrutiny during the registration process.
- “Safe harbour” broadly consistent with [CO 05/26] in relation to unit pricing formulae – ASIC proposes to retain the principles of the unit pricing model outlined in [CO 05/26]. Disappointingly, ASIC has not dropped the requirement for a unit pricing discretions policy, which has long been considered a compliance burden with little, if any, benefit to retail investors.
- “Safe harbour” is less restrictive than [CO 05/26] in relation to placements, rights offers etc – recognising that responsible entities are already bound by separate obligations to manage conflicts, restrictions on related party transactions and requirements to treat members fairly and prefer members interests, ASIC importantly proposes to dispense with the restrictions on associates participating in and underwriting placements by listed schemes as well as rights offers and distribution reinvestment schemes. This is a welcome step and brings the treatment of registered schemes more in line with companies. In addition, prescriptive requirements on how a rights offer (including a pro rata offer of options) should be structured will be removed. It is worth noting though that the relaxation will not assist schemes which have “hard wired” the current regime into their constitutions – specific constitutional provisions will remain legally enforceable against the responsible entity unless the constitutions are amended.
- More prescription required for complaints handling provisions – ASIC proposes that a scheme constitution should be consistent with ASIC’s approved procedures for dispute resolution for the purposes of section 912A(2)(a)(i). ASIC indicates that this requirement would be discharged by including in the constitution an obligation on the responsible entity to comply with the dispute resolution requirements approved by ASIC for section 912A(2)(a)(i). This could pose a number of practical problems for responsible entities: (i) ASIC’s approved procedures are not appropriate to be hard-wired as binding obligations (for example, the requirement in AS ISO 10002-2006 to “immediately” acknowledge a complaint cannot be complied with and might result in a responsible entity breaching the constitution each time it receives a complaint); and (ii) ASIC’s policy could change from time to time.
- More prescriptive withdrawal provisions required – ASIC proposes more detailed guidance about how a constitution can meet the requirement to set out “adequate procedures” for dealing with liquid withdrawal requests. ASIC proposes that constitutions should address four key areas in relation to liquid withdrawals: how to exercise a right to withdraw; the nature of the consideration receivable; restrictions on exercising the right to withdraw; and clarifying when a person ceases to be a member of a managed investment scheme. It is not clear from the CP how detailed the drafting on these matters will need to be but it is clear that ASIC does not consider it sufficient that key elements of the withdrawal procedure are set out in a product disclosure document. Importantly, ASIC thinks that a withdrawal should not be effective if the scheme ceases to be liquid before the time at which scheme property is valued for purposes of determining the withdrawal price. ASIC’s focus on withdrawal rights and timing of withdrawals is not unexpected in light of concerns that some investors received more favourable treatment than others in redemptions through the GFC.
- More detail required on winding-up procedures, including mandatory audit requirements – ASIC notes that the winding up of a managed investment scheme is a process rather than an event and the constitution of a managed investment scheme should address the key aspects of winding up the scheme. It is not surprising that ASIC is seeking more clarity on this subject given the lack of clarity in the Corporations Act when it comes to the liquidation of schemes – a fact that has been recognised in a recent report by the Corporations and Markets Advisory Committee (CAMAC). It is proposed that the constitution of a managed investment scheme should address the following five matters: the identification of scheme assets; the distribution of proceeds; how the costs of winding up will be met; any ability for members to continue to make payments during the winding up process; and how a responsible entity should conduct itself in an insolvent winding up. Again, it is not entirely clear how much detail on these subjects ASIC expects to see. Importantly, ASIC considers it to be appropriate that the constitution should provide for an independent audit of the final accounts after winding up (as opposed to merely a review).
- A warning on fees and expenses – a right to payment of fees or expenses should not, ASIC cautions, relate to conduct before the responsible entity takes office as responsible entity of the scheme and should not allow for payment in advance of the responsible entity performing its relevant duties (ie fees must always be in arrears, never in advance).
Impact on existing constitutions – ASIC will encourage compliance for managed investment schemes that are already registered:
- if the responsible entity forms the view that the amendments can be made unilaterally, by the next date any other unilateral amendment of the constitution is made on or after 1 May 2013; and
- if the responsible entity forms the view that member approval is required to approve the amendments, by the next date a members’ meeting is held.
It is not clear what form ASIC’s “encouragement” will take. The fact that ASIC would like to see consistency in constitutions going forward is understandable but is not a sufficient imperative or justification for responsible entities to make changes. Responsible entities will need to consider whether amendments are in the best interests of members (including whether amendments could risk trust resettlement).
The CP represents a continuation of the important debate about the extent to which a responsible entity should be free to exercise discretions on important matters such as issuing and redeeming units and terminating the scheme. Whether the CP strikes the right balance will, we suspect, be the subject of debate during the consultation period.