On 4 September ASIC released regulatory guidance on the updated regime for Australian financial services (AFS) licensing relief available for trustees of wholesale equity schemes.

The previous AFS licensing relief regime governed by ASIC Class Order [CO 07/74] Wholesale equity schemes: Licensing relief for trustees expired on 1 October 2017. Prior to its expiration, ASIC undertook public consultation to determine whether to repeal or remake the licensing relief. ASIC concluded that the licensing relief continues to form a useful part of the legislative framework and remade the relief without significant change.

The relief has been remade under the ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849, with supplementary amendments made under ASIC Corporations (Amendment and Repeal) Instrument 2017/848 to make wholesale equity scheme manager financial resource responsibilities consistent across related instruments. These instruments came into effect in September 2017.

Changes have been made under the new Instruments to reflect a strengthening of financial and custody requirements for responsible entities and custodians which were made in 2013 under Class Order [CO 13/760] Financial requirements for responsible entities and operators of investor directed portfolio services, Class Order [CO 13/761] Financial requirements for custodial and depository services and Class Order [CO 13/1410] Holding assets: Standards for providers of custodial and depository services.

The ongoing purpose of the regime is to help the venture capital and private equity industry by removing unnecessary regulatory impediments to structuring investments into these industries through wholesale equity schemes.

We summarise below the updated requirements and conditions to qualify for trustee AFS licensing relief under wholesale equity schemes.

For a trustee to be eligible for relief, the following four requirements must be satisfied:

  1. The scheme must be a "wholesale equity scheme", which is a scheme that meets all of the following criteria: a. the scheme is not registered; b. all trust property (other than incidental property) consists of investment products; c. at all times, the value of the investment products quoted on a financial market do not exceed 20% of the trustee's reasonable estimate of the market value of the trust property; and d. all members of the scheme are wholesale clients.
  2. The scheme must be operated by a related body corporate of the trustee (usually the manager).
  3. The manager must have an AFS licence that authorises it to provide all of the wholesale equity financial services that are provided by the trustee when relying on the relief; and the licence must contain conditions to the effect that the manager must: a. as far as possible comply with the Corporations Act as if the trustee were providing the financial services as the manger's representative; b. have in place a deed poll to the effect that the manger will indemnify each beneficiary in relation to any liability that arises from the trustee's provision of the financial services; and c. for the purposes of the 'relevant financial conditions' of the manager's AFS licence—treat the assets, liabilities, cash inflows and cash outflows of the trustee as though they were the assets, liabilities, cash inflows and cash outflows of the manager.
  4. The trustee or manager must report to ASIC if the trustee has failed to comply with the "conditions for relief" which are outlined below. The report must be made in writing and within 10 business days of becoming aware, or when it should reasonably have become aware, of a matter that gives it reason to believe that the trustee has failed to comply, other than in an immaterial respect, with the conditions.

The "conditions for relief" are outlined below:

  1. The trustee must be solvent at all times and have positive net assets; comply with the tailored cash needs requirement in Class Order [CO 13/761] (except for net tangible assets (NTA) requirements); and lodge an audit opinion on the trustee's compliance with the financial requirements contained in Class Order [CO 13/761] within the specified timeframe;
  2. The trustee must comply with the minimum custody requirements for providers of custodial and depository services in Class Order [CO 13/1410]; and
  3. The trustee must take all reasonable steps to ensure that no interests in the scheme are acquired by a person as a retail client.

The ASIC guidance provides that a failure by the trustee to meet a condition of relief will not necessarily cause the relief to cease. However, the relief will cease if the requirement to report the failure is not complied with (see requirement four above). Upon receiving a report on failure to comply, ASIC will consider the report and determine whether to exclude the relevant trustee from relief.

Amendment of financial requirements for managers

As the AFS licensee, the manager operating a wholesale equity scheme must meet the financial requirements relevant to the authorisations on its AFS licence.

ASIC has made amendments under Instrument 2017/848 to make the manager holding the AFS licence, where trustee licensing relief is given, responsible for meeting the enhanced financial and custody requirements introduced under Class Order 13/760 and Class Order 13/761 as if the assets, liabilities cash inflows and cash outflows of any eligible trustee were included in the assets, liabilities, cash inflows and cash outflows of the manager.

If a trustee relied on the old class order immediately before its repeal on 26 September 2017, and the repeal did not occur at the end of the financial year of the trustee, the old class order will continue to apply in relation to the trustee until the end of that financial year.