The Corporations and Markets Advisory Committee (CAMAC) has released a discussion paper on the regulation of managed investment schemes (MIS). While some of the proposals are to improve technical defects in the law, a number have the potential to make fundamental changes to the operation of managed funds.
The stated philosophy behind many of the proposed changes is to align the regulation of MIS with that of companies unless there are “compelling reasons” for treating MIS differently, and to generally reduce complexity and compliance burdens for industry. This is stated to be consistent with the current Government’s deregulatory agenda.
Submissions in response to the discussion paper are due by 6 June 2014.
A sample of proposed reforms
In its 261 pages, the discussion paper covers almost all aspects of the operation of MIS. Some of the key points are set out below.
- Product disclosure statements: After a detailed description of the complexity of the PDS regime, CAMAC asks “Are there any reasons why prospectuses (including a due diligence requirement) should not be required for the issue of interests in managed investment schemes?” Coupled with the overall philosophy of aligning company and MIS regulation, this could see a return-to-the-past change with MIS interests being offered to retail investors under a prospectus, as they were before the Financial Services Reform Act 2001.
- Scheme registration: There is a suggestion that MIS could be registered by the same process as companies, simply by lodging documents which are not on their face defective. The requirement for the documents such as the MIS constitution to comply with the Corporations Act would remain, but there would be no active two-week vetting process by ASIC.
- Registration of wholesale funds: CAMAC states that it “can see no reason why wholesale schemes should not be subject to the regulatory provisions of the Corporations Act in the same manner as companies that may only have wholesale investors.” This seems to disregard retail investor protection as a driver for much of the prescriptive regulation of MIS, and overlook the wish of wholesale clients and issuers to negotiate bespoke terms for their investment ventures outside the retail regulatory framework.
- Risk focus: There are ideas, expressed in general terms at this stage, to move the focus of regulation away from mechanical compliance checking and onto management of actual risks of the particular MIS. For example, the investment strategy of a fund may need to be monitored through a compliance plan, and there is reference to greater transparency of investment guidelines.
- Definitions: Although proposed changes to definitions in the Corporations Act related to MIS regulation may seem innocuous, some could have profound effects. For example, a suggested change to the definition of “scheme property” could see application money subject to additional, possibly overlapping or unworkable regulation. A change to the meaning of “liquid” to refer to assets that can be realised for their book value in 7 days could see many MIS that now allow redemptions unable to offer that facility. Similarly, definitions of class, client and rights issue will need to be scrutinised.
- Other key changes: Other suggested changes on which industry may be moved to comment are proposals to abolish the power of responsible entities to amend MIS constitutions without a meeting, to apply a responsible entity voting exclusion at a meeting to change responsible entity of a listed MIS, to extend the application of takeover laws to large unlisted MIS, and only allow restructuring of MIS through a court-approved process similar to schemes of arrangement for companies. The proposals for a MIS to be a separate legal entity and the introduction of a voluntary administration regime which were proposed in a 2012 CAMAC paper to address difficulties in administration of insolvency are still on the table, and the idea of statutory limitation of MIS investors’ liability is again revived.
The proposals are positive in that there is the opportunity for input into a process that could improve the efficiency and productivity of the managed investments sector. However, industry engagement will be important in ensuring that changes are not made that have inappropriate or unintended consequences.