ASIC has issued a consultation paper that sets out a number of alternative proposals to amend its current regulatory guide as to the content of Constitutions for managed investment schemes. Submissions close on 13 November 2012.

In the consultation paper, ASIC is proposing to change its current approach to reviewing Constitutions that are lodged with it, and describes the two contrasting options that it is currently considering.

The first option that ASIC proposes is that the amended regulatory guide will express, in general terms, ASIC’s views on how it believes a constitution can meet the statutory requirements but will leave open that there may be other ways for the constitution to comply.

The second option is that, except for ASIC’s proposals in relation to issue prices and withdrawal prices, the regulatory guide will provide guidance on when ASIC, in making its assessment of whether a managed investment scheme should be registered, will object to a constitutional provision involving the statutory requirements.

In addition to the change to its overall approach to reviewing Constitutions, ASIC also outlines proposed changes to its approach to a number of the specific statutory requirements for a constitution.

In particular, in relation to the current requirement that a constitution contain details of the consideration to be provided to acquire an interest in the scheme, ASIC proposes to revoke the current class order and introduce a new safe harbour to give responsible entities certainty about the level of detail that a Constitution needs to contain to comply with the requirement that it makes adequate provision for the consideration given to acquire an interest in the scheme.

This will have the potential to affect provisions that often exist in current constitutions regarding placements, rights issues and dividend reinvestment plans where often there is a discount available or some discretion in relation to the consideration. ASIC says that there should be a focus on mechanisms to prevent dilution and unfairness for members.

Also there are proposed changes in relation to the content of provisions dealing with a winding up of the scheme. Under the consultation paper, there are proposals to require Constitutions to include provisions that deal with the following matters:

  • the identification of the assets of the managed investment scheme
  • distribution of the net proceeds of realisation of the managed investment scheme
  • identification of how the costs of the winding up will be paid
  • any ability for members to continue to make payments to maximise the realisation proceeds, and
  • how winding up will occur if the responsible entity is insolvent and/or there are insufficient assets to indemnify the responsible entity for the windingup costs.

While ASIC intends to apply its new position in relation to the content of Constitutions to all managed investment schemes seeking registration from 1 May 2013, ASIC will also encourage responsible entities to amend the Constitutions for existing managed investment schemes to meet the new guidelines. We therefore suggest that all responsible entities may want to consider the implications that ASIC’s consultation paper may have for their businesses, and provide submissions to ASIC on the impact that this change in administrative position may have on their businesses.