Managed Investment Schemes – proposed reforms

The problems with managed investments schemes (MIS) have been well documented in recent times. A 2016 Senate Report into Agribusiness MIS addressed the collapse of many such schemes resulting in

‘inexperienced investors [losing] not only their investment and prospects of future income but [being] also saddled with the burden of repaying the loans and interest on a valueless asset’.

As an earlier 2012 CAMAC report said,

“in part, these problems reflect difficulties arising from the specific arrangements entered into to operate particular agribusiness schemes. However, from a broader perspective, they also reflect developments in recent years in the use of schemes, from their original predominant role as passive investment vehicles, to their increasing use as vehicles to conduct entrepreneurial activities with enhanced investor involvement. The failure of some entrepreneurial schemes has generated legal problems that were not anticipated when the current legal framework for schemes was developed”.

The 2014 Financial System Inquiry report had said that regulation of MIS should be improved, giving priority to matters relating to consumer detriment, including illiquid schemes and freezing of funds. The government agreed to develop legislative amendments to enhance the regulatory framework for MIS, drawing on the CAMAC report and the then forthcoming 2016 Senate Committee Report.

Corporate Collective Investment Vehicle (CCIV) Bill

The outcome of that is that the government is seeking submissions on a draft Corporate Collective Investment Vehicle (CCIV) Bill, which would add a new chapter in the Corporations Act establishing a regulatory framework for MIS. A related Bill is the Asia Region Funds Passport (Passport) Bill, proposed as another new regulatory chapter to the Corporations Act. 

An exposure draft of what may be complex consequential amendments will be released for consultation in the coming months.

The need for “internationally recognisable” investment products

The government says that a key policy objective in developing the CCIV framework is to increase the competitiveness of Australia’s managed fund industry through the introduction of what are internationally recognisable investment products.

“To this end, the Government has analysed the regulatory regimes of leading fund domiciles, target export markets, and major financial centres in our region. European economies are the most common global domiciles for cross-border funds management. Funds managed in Europe are subject to the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and operate with a corporate structure”.

Australian funds management is generally conducted through a MIS, which has a trust-based structure. Like UCITS funds, CCIVs will operate with a corporate structure, meaning they will have the legal form of a company limited by shares with most of the powers, rights, duties and characteristics of a public company.

The CCIV regulatory framework uses a conventional company limited by shares but is modelled on the United Kingdom’s Open-Ended Investment Companies (OEIC) regime so that it is a regime recognisable to offshore investors and fund managers. Investors can freely purchase and sell shares of an OEIC and the share value reflects the net asset value of the underlying assets.  They are governed by a separate corporate code.   

Under the draft Bill, it is proposed that a CCIV, being a company, will generally be subject to the ordinary company rules under the Corporations Act unless otherwise specified.

“However, features of the MIS regime have also been incorporated into the design of CCIVs to the extent that they are consistent with the policy objective. In doing so, regulatory parity is maintained (to the extent possible) between the existing MIS framework and the CCIV framework. This will ensure efficient operation of the domestic funds management industry and ease of transition for fund managers wishing to migrate members from a MIS to a CCIV”.

Insolvency of CCIVs, and MIS

Down the track, the government says it will also be consulting on developing an insolvency regime for CCIV which may include features of Chapter 5; and generally applying the provisions of Chapter 6 and Chapter 7 to retail CCIVs.

The difficulties presented by the insolvency of MIS – that is, their financial collapse – is the subject of detailed discussion in Insolvent Investments (2015, Lexis Nexis , Stewart Maiden, editor).  Mr Maiden refers to the issues of “large scale and extraordinary complexity” when MIS become insolvent and he and other authors examine the issues in detail, including through the case law concerning Timbercorp, Gunns, and Great Southern, to name only some.  Dr Nuncio D’Angelo likewise highlights the difficulties in the intersection of commercial trusts, including MIS, and insolvency law, and necessarily, the need for reform: Commercial Trusts, Lexis Nexis, 2014, D’Angelo, Ch 6.

Passport

The Passport is a common framework of coordinated regulatory oversight to facilitate cross border issuing of managed investment funds. Australia, Japan, Korea, New Zealand and Thailand are signatories to the Passport’s Memorandum of Cooperation (MoC), which took effect on 30 June 2016.

The introduction of a new tax and regulatory framework for CIVs was announced in the 2016 Federal Budget. The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely held and engaging in primarily passive investment. Investors in these new CIVs will generally be taxed as if they had invested directly.

CCIVs will offer an internationally recognisable investment vehicle which can then be readily marketed to foreign investors, including through the Passport.

Roundtables

Treasury is hosting a number of roundtable meetings to facilitate targeted consultation on these Bills. Those interested are asked to make an expression of interest to civreform@treasury.gov.au by 30 August 2017.

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