ASIC has finalised its amended regulatory guidance on the content requirements for registered managed investment schemes.

ASIC has acted in response to industry submissions which argued that they should not require all existing managed investment scheme constitutions to be amended to comply with their new content requirements, as proposed in Consultation Paper 188 (September 2012). The new policy, set out in new Regulatory Guide 134 (Managed investments: constitutions) released on 5 June 2013, will only apply to constitutions lodged for scheme registration from 1 October 2013.

Unit pricing discretions

For provisions in a scheme constitution that allow discretions to decide unit prices, ASIC has introduced a “safe harbour” approach. New constitutions lodged for registration that comply with the new ASIC Class Order [CO 13/655] can expect to be processed without undue challenge. The alternative of making submissions to ASIC before lodging the registration application, arguing that alternative drafting complies with section 601GA(1)(a) of the Corporations Act, is also available. The earlier Class Order [CO 05/26] has not been revoked and can be relied upon for schemes registered before 1 October, unless the responsible entity publishes a notice on its website that it relies on [CO 13/655].

Among the key changes as compared with the existing [CO 05/26] are the removal of several existing restrictions. The limit for listed schemes making discounted placements to 15% of the number of existing units has been removed (although ASX requirements still apply); the restriction on issues to associates of the responsible entity under a placement by a listed scheme no longer applies (although the related party provisions of the Corporations Act and ASX Listing Rules will still apply); and the provisions which regulate discounted rights offers have been simplified (including removing the requirement for a stated maximum percentage discount in the constitution).

The requirement for a documented policy setting out the discretions exercised in setting unit prices has been retained. Indeed, ASIC has gone further with this requirement, issuing Class Order [CO 13/657] which declares that the requirement to prepare a pricing policy is added to the list of the responsible entity’s formal duties in section 601FC(1) of the Corporations Act. In a third instrument, Class Order [CO 13/656], ASIC continues the relief from equal treatment for foreign offers of interests and acquiring interests on forfeiture.

What changes will need to be made in new scheme constitutions?

For a scheme registration application to be lodged from 1 October 2013, a number of changes as compared to the form of constitutions currently used are likely to be required to achieve registration of the scheme, including:

  • Fees and expenses: Any ability to change the benchmark for fee calculations must be clearly identified, the responsible entity will not be able to be indemnified from the scheme as an expense for work performed for “hourly rates” or on “standard commercial terms” (rather, any such amounts must be specified as fee), and the responsible entity may not be paid fees in advance of performing the duties to which the fees relate. However in response to submissions, ASIC abandoned its proposal to ban the recovery from the scheme of establishment costs.
  • Complaints: Constitutions will be required to provide that the complaints process for retail clients will comply with section 912A(2) of the Corporations Act relating to dispute resolution systems for licensees. ASIC has taken on board submissions that it would be unfair to impose this for schemes with only wholesale clients, and has provided some flexibility.
  • Withdrawals: Constitutions may need to include more prescriptive provisions regarding the key conditions under which members can exercise a right to withdraw, rather than setting out some aspects in the PDS. Taking an approach which moves away from the outcome in Basis Capital Funds Management Ltd v BT Portfolio Services Ltd [2008] NSWSC 766, ASIC has said it will not be possible for a constitution to provide that units are taken to be redeemed before the relevant time for valuing scheme assets, saying they consider that investors should not lose their right to benefit from any increase in value. ASIC had proposed to require that a particular timeframe to pay redemptions be set in the constitution, but has abandoned the idea.
  • Winding up: In its Consultation Paper 188, ASIC had proposed that constitutions should include a range of prescriptive provisions as to how a scheme is to be wound up. However, ASIC has heeded submissions arguing that an insolvency regime for schemes is properly the realm of legislation rather than ASIC policy. Constitutions should require little if any amendment to comply with the new policy on winding up.

What should responsible entities to do?

  • Ensure that constitutions for new schemes to be lodged for registration from 1 October 2013 comply with RG 134.
  • Where convenient and practicable, take into account the concepts expressed in RG 134 when preparing constitutions for lodgment before 1 October, on the basis that in some areas the new policy represents views that ASIC has been raising for some time on registration applications.
  • Ensure that unit pricing discretion policies are in place, and that any PDS states that a copy will be made available free to investors on request, for new schemes registered from 1 October, or for other schemes for which the responsible entity has notified on its website that it is relying on the new unit pricing Class Order.
  • Check that existing constitutions comply, at least, with the existing RG 134 (last updated in 2000). ASIC has indicated that it will not take any action against a responsible entity on the basis that a constitution for an existing registered scheme does not comply with the Corporations Act if it is consistent with the old RG 134.
  • Consider whether compliance with the new requirements for new schemes will require any changes to the responsible entity’s systems or processes for operating schemes.
  • Ensure that product disclosure statements for new funds accurately reflect any new constitution provisions that are included, such as in relation to unit prices, fees and complaints.