Section 601EB of the Corporations Act, 2001 requires that ASIC must register a scheme within 14 days of lodgement unless it appears to ASIC that amongst other things the scheme’s constitution does not meet the requirements of sections 601GA and 601GB.

ASIC has issued a new regulatory RG 134 as to its views as to when a scheme’s constitution does not meet the requirements of sections 601GA and 601GB.

The more things change the more they stay the same

Under the former prescribed interest scheme system of managed funds, there was a requirement for a general compliance clause to be included up-front in a scheme trust deed.

In RG 134, ASIC has introduced a requirement with similarities to the above former requirement. In this regulatory guide ASIC encourages responsible entities to ensure that the constitution contains an overriding provision to the effect that, to the extent a provision of the constitution is inconsistent with the Corporations Act, it will be of no effect.

Although this is not compulsory, as a matter of practice such a provision will have to be included because ASIC says if the constitution does not appear to contain such a clause, ASIC are likely to spend more time assessing it to ensure that it is not inconsistent with the Corporations Act. ASIC warns that this could result in any concerns ASIC has about various provisions being raised later in the 14-day registration period. Therefore an application for registration might have to be withdrawn if the concerns are raised too late in the registration process rather than have ASIC reject the application.

Consideration provisions

The constitution of a scheme must make adequate provision for the consideration that is to be paid to acquire an interest in the scheme. ASIC has issued guidance on these requirements including class order relief that may be relied upon to satisfy this requirement. Importantly if this class order relief is not relied upon and there is any discretion given to the responsible entity in the calculation of the consideration, ASIC recommends first obtaining a view on those provisions from ASIC before lodging the registration application.

Fees

If the responsible entity is to have any rights to be paid fees out of scheme property, or to be indemnified out of scheme property for liabilities or expenses incurred in relation to the performance of its duties, those rights must be specified in the scheme’s constitution and must be available only in relation to the proper performance of those duties;

ASIC has now interpreted this requirement to prohibit payment of any fees in advance of performance of duties. This may be an issue for tax effective schemes where in order to obtain a deduction the fees have to be paid in advance.

Further ASIC requires that a constitution either:

  • expressly state that any rights to fees or indemnification out of scheme property is subject to the proper performance by the responsible entity of its duties under the provisions for fees and indemnities, or
  • include a provision that has the effect of incorporating this restriction (e.g. a provision which states that, to the extent a provision of the constitution is inconsistent with the Corporations Act, it will be of no effect).

Provisions such as the responsible entity is entitled to be paid an “hourly rate to be determined by it from time to time” or “on standard commercial terms for work undertaken’ for performing functions in operation of the scheme” are no longer acceptable.

Complaints handling

The Constitution for a scheme must make adequate provisions for how complaints made by members in relation to the scheme are to be dealt with.

ASIC has simplified this requirement by stating that the constitution may include a provision to the effect that the responsible entity will comply, as an AFS licensee, with the dispute resolution requirements in s912A(2) for retail clients in dealing with member complaints in relation to the scheme which will minimise the need for duplicate procedures.

Withdrawal rights

If members are to have a right to withdraw from the scheme, the scheme’s constitution must specify the right, if the right may be exercised while the scheme is liquid, set out adequate procedures for making and dealing with withdrawal requests and if the right may be exercised while the scheme is not liquid, provide for the right to be exercised in accordance with Part 5C.6 and set out any other adequate procedures (consistent with that Part) that are to apply to making and dealing with withdrawal requests. The right to withdraw, and any provisions in the constitution setting out procedures for making and dealing with withdrawal requests, must be fair to all members.

ASIC in the regulatory guide sets out a number of provisions that it will not permit to be included in these provisions.

Winding up

The constitution of a scheme must make adequate provisions for winding up the scheme.

ASIC has now interpreted this as requiring more than just when the scheme is to be wound up but also the constitution must address the process for winding up the whole “program or plan of action” that constitutes the scheme. It sets out what is required to meet this requirement.

Legal enforceability

The constitution must be binding between the responsible entity and members. ASIC in the regulatory guide sets out what ASIC requires in order for this standard to be met.