By Partner Marc Kemp
The recent Federal budget included measures to abolish some government bodies by 1 July 2015. One of those is the Corporations and Markets Advisory Committee (CAMAC). This is a pity for those involved in the funds management industry because it means that CAMAC is no longer accepting submissions in response to its thoughtful discussion paper on managed investment schemes. The discussion paper is a wide-ranging review, from the registration of schemes to their winding-up, and considers several bugbears of scheme operators and their advisers. It would be a matter of some regret if these were allowed to linger unaddressed for another 10 years.
Three of them are discussed in ASIC's May 2014 report on deregulatory initiatives (Report 391). It is to be hoped that others are picked up as part of the Financial System Inquiry.
In Report 391, ASIC 'suggests' that managed investment schemes could be automatically registered when an application is lodged, along the lines of the company registration system. This contrasts with the current process, which involves ASIC commenting on the scheme's constitution during the two-week registration assessment period. ASIC's review serves a useful function in theory, given the importance of protecting consumers and the uncertainty that pervades compliance with the mandatory content requirements of scheme constitutions in s601GA of the Corporations Act (which requires, among other things, that constitutions 'make adequate provision' for the price to be paid for units in a scheme and the winding-up of a scheme, and set out 'adequate procedures' for withdrawing from a scheme). In practice, however, ASIC's comments tend to be inconsistent, and similar constitutions can generate entirely different comments. This can lead to 'regulatory friction' and increased costs. Ideally, ASIC's resources would be increased to allow it to adopt a more systematic review approach resulting in consistent outcomes (and perhaps the 'better funding model' that ASIC has proposed in its submission to the Financial System Inquiry would allow it to do this). Absent that, however, the suggestion that schemes be automatically registered warrants serious consideration.
ASIC's second suggestion is that the requirement for unlisted disclosing entities to lodge continuous disclosure with ASIC be replaced by a requirement instead to publish disclosures on the entity's website. We endorse this change, as likely better reflecting consumer expectations and ridding scheme operators of an obligation that has been more consistently honoured in the breach.
Finally, ASIC confirms that it is examining the regulatory and commercial barriers to electronic delivery of disclosure material, including material to be delivered by schemes.
As welcome as ASIC's deregulatory sentiments are, other sensible suggestions in the CAMAC paper remain in limbo.
An inquiry as sweeping as the one being undertaken by Chair David Murray and his colleagues is unable to have regard to the many detailed and technical suggestions in the CAMAC paper. In addition, the specific areas of improvement identified by CAMAC do not fit neatly into any of the categories (identified by David Murray in an address to the Australian Business Economists on 1 May) that appear to be the focus of the inquiry, being the risk of moral hazard; the effect of current regulation on the flow of capital in Australia; and the geographic, demographic and technological causes of change to the financial system.
The CAMAC paper distils the experience of a decade's operation of managed investment schemes under the current regulatory regime and, having done so, suggests improvements that will not dramatically recast the way that schemes are regulated, but which will remove grit from the gears of schemes' smooth operation and, in so doing, probably reduce uncertainty and complexity and their handmaiden, cost. This would ultimately benefit consumers, who have more than $314 billion1 invested in managed investment schemes in Australia.
We therefore recommend that the Financial Systems Inquiry have regard to the CAMAC discussion paper, with a view to taking account of those suggestions in the paper that are aimed at improving the current regulatory settings of managed investment schemes.
The CAMAC paper's guiding principle was that schemes should be regulated as companies 'unless there are compelling reasons for treating schemes differently'. We do not subscribe to the view that schemes ought simply to be regulated in the same way as companies (a scheme structured as a trust, for example, is a very different thing to a company after all). But there are good arguments for making certain requirements of the Corporations Act apply consistently to both in the context of listed schemes, particularly to schemes that are stapled to companies and to internalised schemes (where the responsible entity is ultimately owned by the members of the scheme). Four examples suffice:
- The holder of an option over units should not be a 'member' of a scheme any more than a holder of an option over shares is not (and should not be) a shareholder of a company.
- Where appropriate, the requirements for the calling and conduct of meetings of scheme members should be harmonised with those applying to companies, particularly in relation to requisitioning scheme meetings, quora, the role of the chair, proxy voting (except in relation to voting on remuneration of key management personnel where a scheme is listed but its responsible entity is not) and adjournment.
- Interests in listed managed investment schemes being more akin to shares in a company than to other financial products (such as insurance), there is a good argument that they should be issued under a prospectus rather than (as is presently the case) a product disclosure statement. As CAMAC notes, this would impose a new duty on product issuers to undertake a due diligence exercise to discover information that, in all the circumstances, the issuer ought reasonably to have obtained by making inquiries (unlike the PDS requirement, which only requires those responsible for a PDS to disclose what they actually know). But, in practice, this would not impose a greater burden on scheme operators, who routinely undertake due diligence exercises no different from those undertaken by issuers of prospectuses, among other reasons so that they are able to support reliance on the statutory defence of taking reasonable steps to ensure that a PDS is not defective.
- Finally, in the context of scheme takeovers, although a robust 'trust scheme' method has developed along the lines of the Part 5.1 company schemes of arrangement, extending the operation of this Part to listed schemes would formalise the mechanism and ensure court oversight of the process (although most trust schemes are undertaken under court supervision, this is not always the case).
However, with one exception, we do not think that the argument for consistent treatment is as compelling when applied to unlisted managed investment schemes, many of which do not operate (and are not intended to operate) like companies, such as money market funds and schemes that simply invest in listed markets.
In its paper, CAMAC also suggested the introduction of a statutory framework under which liquidators of an 'insolvent' scheme would have a statutory right to claim remuneration and expenses for their work in winding up a scheme. CAMAC also reaffirmed its support for the introduction of voluntary administration procedures for insolvent schemes. We have been closely involved in the winding-up of several schemes in recent years, seeing first-hand the costs incurred in the absence of a statutory framework akin to that which applies to companies. As an exception to our reluctance to apply company rules too readily to unlisted schemes, we commend these suggestions by CAMAC to the Financial System Inquiry.
CAMAC was set up in 1989 to provide a source of independent advice to the Federal Government on issues that arise in corporations and financial markets law and practice. Its 2012 and 2014 discussion papers on managed investment schemes demonstrate the useful role it has been able to play. It would be a pity if it went with a whimper, its useful suggestions consigned to oblivion. CAMAC is dead. Long live the FSI.
- Australian Bureau of Statistics, Managed Funds, Australia, Dec 2013.