The Commonwealth Government has released the draft Asia Region Funds Passport (Passport) and Corporate Collective Investment Vehicle (CCIV) Bills and explanatory materials for public comment. The draft legislation proposes amendments to the Corporations Act 2001 (Cth).
The Passport is a region-wide initiative designed to facilitate the offer of interests in certain collective investment schemes (CIS), established in Passport member economies, to investors in other Passport member economies. It aims to provide Australian funds managers with greater access to economies in the Asia-Pacific region by reducing existing regulatory hurdles. The CCIV scheme creates a new type of investment vehicle, which will allow Australian funds managers to pursue overseas investment opportunities through a company structure. It is intended to complement the Passport by making Australian funds more accessible to foreign investors.
The Government is accepting submissions on the draft Bills until 21 September 2017. Depending on how quickly the final legislation is passed, the Passport could come into effect as early as 1 January 2018.
Background to the Passport
In 2009, the Australian Financial Centre Forum released a report (the Johnson Report), which recommended a package of reforms to make it easier for Australian fund managers to attract overseas investment in funds run and administered out of Australia. One of the recommendations was to develop an Asia Region Funds Passport.
The purpose of the Passport is to support the development of an Asia-wide managed funds industry through improved market access and regulatory harmonisation. The Passport will allow fund managers from other Passport economies to sell their products in Australia, increasing competition and choice for Australian consumers, and providing cost-effective opportunities to gain investment exposure to a wider range of assets. It will also mean that Australian fund managers will more easily be able to sell their products in other Passport economies. Current signatories to the Passport Memorandum of Cooperation (MoC) are Australia, Japan, New Zealand, Korea and Thailand.
Key features of the proposed Passport regime
The Passport will allow CISs, which are based and regulated in one economy (the home economy) to be sold to investors in other economies (host economies). The draft Bill contains a number of notable features:
- Passport funds are regulated CISs, and sub-funds of CISs, that are registered as a passport fund in a participating economy. CISs are more broadly defined than registered schemes. They can comprise a range of investment vehicles such as partnerships, managed investment funds and corporate investment vehicles.
- CISs will be sold through a process of mutual recognition, whereby two or more ‘sufficiently equivalent’ jurisdictions agree to recognise certain aspects of each other’s regulatory systems.
- The home economy regulator will be responsible for supervision and enforcement of requirements relating to the funds, as set out in the home economy laws and regulations and in the Passport Rules.
- The host economy regulator will be generally responsible for supervision and enforcement of investor-facing obligations (such as disclosure and distribution).
- Each Passport economy will be subject to ongoing reporting requirements.
- The Minister must publish a list of participating economies. In certain circumstances, the Minister may prevent certain operators of passport funds, or certain classes of passport funds, from offering interests in the funds in Australia.
- Passport funds and operators in Australia and participating member economies are obliged to implement and comply with the Passport Rules (contained in Annex 3 of the MoC). Among other things, these Rules set out the requirements that must be satisfied to become a Passport fund (ie, that operators have a minimum of USD $1 million in capital plus additional capital of 0.1% of assets under management in excess of USD $500 million (capped at USD $20 million) and that they satisfy a qualifications test). The Passport Rules were discussed in detail in our previous update.
The draft legislation also outlines the process by which Australian CISs may be registered by ASIC as Passport funds, by which foreign Passport funds can notify ASIC of their intention to offer interests in the fund to Australian investors, and the circumstances under which ASIC can reject registration.
Key features of the proposed CCIV regime
In addition to the Passport, the Federal Government is also accepting submissions on the draft CCIV regime, which is a new vehicle that seeks to make Australian funds more comprehensible to foreign investors. Key features of the draft CCIV Bill are:
- A company can only register as a CCIV if it is limited by shares, the director company is a public company that holds a financial services licence authorising it to operate a CCIV and it is not a foreign company.
- There are two types of CCIVs: wholesale and retail. Wholesale CCIVs are subject to fewer regulatory requirements than retail CCIVs (for example, they are not required to have a compliance plan or depositary).
- A CCIV must be operated by a single corporate director, who possesses specific powers and obligations. The corporate director’s obligations to the members of the CCIV take precedence over their obligations to their own shareholders. A corporate director may appoint an agent to carry out their functions. A CCIV cannot possess any officers or employees other than the corporate director.
- A CCIV must have at least one sub-fund at all times, and may comprise of multiple sub-funds. All business of a CCIV must be conducted through a sub-fund. The assets of each sub-fund must be held separately, and the assets from one fund cannot be used to meet the liabilities or expenses of another.
- A CCIV can be open-ended or closed-ended.
There was some hope that stand-alone legislation, facilitating a simpler regulatory and compliance regime, would be enacted for the introduction of CCIVs given their purpose. However, funds seeking to access the CCIV regime will not have that benefit and will need to navigate the Corporations Act.
Australian registered schemes and responsible entities, as well as other investment managers with different corporate structures, will be able to register as Passport Funds and offer interests in participating economies without needing to be licensed or regulated in those economies. This requires compliance with the Passport Rules. It is hoped that the Passport will increase the demand from offshore fund operators for Australian distributors and other service providers to facilitate the offer of interests in offshore CISs in Australia under the Passport.
Participating in the Passport regime may necessitate distributors and service providers having authorisations to provide financial services to retail clients, which should be reviewed. Additionally, fund operators, investment managers and other vehicles, currently relying on other exemptions from financial services licensing requirements in Australia and Asia, may be better placed to participate in the Passport regime.
The current consultation window to provide feedback on the proposed regime is narrow, though there will be an additional consultation period in the future. Submissions for the first consultation period close on 21 September 2017. Now that draft legislation has been released, operators and service providers wishing to participate in the regime or service participants in the regime should consider whether they are appropriately resourced and authorised.