The Monetary Authority of Singapore recently sought public consultation on the features of its proposed new vehicle for collective investment, the Singapore Variable Capital Company. Partners Marc Kemp and Charles Armitage, and Senior Overseas Practitioner James Kanabar review the key elements of the new vehicle and consider the lessons which might be gleaned in relation to the introduction of a new Australian corporate vehicle for collective investment, announced by the Federal Government as part of the 2016-17 budget and scheduled (perhaps somewhat optimistically) to be introduced by 1 July.
The proposed key features of the Singapore Variable Capital Company (S-VACC) are as follows:
- Bespoke legislative framework: it will be created by a bespoke and standalone legislative framework but will be subject to existing Singaporean law regulating collective investment schemes.
- Variable share capital: as its name suggests, an S-VACC's share capital will be variable and equal at all times to its net asset value, and valuations and redemptions of shares must generally be carried out at NAV. S-VACCs can make distributions from net assets.
- Flexibility: investments and investors: S-VACCs will not be subject to investment diversification requirements and will be available for use by both retail and wholesale funds and across a range of asset classes. The S-VACC has been designed to be used for both open and closed-ended collective investment schemes.
- Umbrella structure: an S-VACC can be established as either a single entity or as an umbrella entity with multiple sub-funds. Each sub-fund will share administrative and management functions with, but will be segregated and insolvency remote from, the other sub-funds. The sub-funds will not have separate legal personality but:
- will be required to be individually registered and may be wound up as if they were separate entities; and
- the S-VACC may sue or be sued in respect of a particular sub-fund and may exercise rights of set-off in relation to a particular sub-fund.
So that third parties dealing with S-VACCs are aware of segregated assets and liabilities of sub-funds, S-VACCs will be required to disclose – including in documents in which a sub-fund is referred to – the name, unique sub-fund identification number, and that the sub-fund has segregated assets and liabilities.
- No corporate directors: S-VACCs will have a board of directors comprising only natural persons. This contrasts with English open ended investment companies (OEICs), another variable capital company commonly used as a collective investment scheme – while English OEICs are permitted to have multiple directors (including individuals), market practice dictates that most have a single corporate director.
- Externally-managed: in addition to its own board of directors, S-VACCs must have an external manager, which will be subject to the existing Singaporean regulatory framework (for example, relevant licensing requirements). However, the MAS has proposed an element of commonality between the boards of an S-VACC and its manager, with at least one director sitting on both boards.
- Limited liability for investors: the liability of an S-VACC shareholder will be limited by statue to the amount (if any) unpaid on the shares held by that shareholder.
- Insolvency: S-VACCs will be subject to a statutory winding-up regime based on the equivalent regime for Singaporean companies.
- Confidentiality: S-VACCs will not be required to disclose their register of shareholders to the public but must make the register available to supervisory and law enforcement agencies, where necessary.
- Meetings: annual meetings may be dispensed with at the discretion of the directors, subject to certain safeguards.
In its 2016-2017 budget, the Federal Government announced its proposal to introduce two new forms of collective investment vehicle:
- the new Australian Corporate vehicle for collective investment (Corporate CIV), to be available from 1 July 2017; and
- a limited partnership vehicle, to be available from 1 July 2018.
We previously considered each of these vehicles and the implications of their introduction and use in Australia (the Corporate CIV was discussed in the September 2015 edition of Unravelled; and limited partnerships in the October 2015 edition).
The stated deadline for the introduction of the Corporate CIV is fast approaching and, given we are yet to see exposure drafts of the implementing legislation, it appears unlikely that the Corporate CIV will be ready for use by 1 July. With that in mind and noting both that the Federal Government's aim in introducing the new vehicles is in part to improve Australia's ability to compete with other financial centres in the region (caused in part by offshore investors' purported lack of familiarity with the unit trust) and that the Monetary Authority of Singapore has framed the establishment of the S-VACC as an effort to further develop Singapore as a global centre for funds management and establishment, it is worth considering what lessons can be gleaned from the proposed features of the S-VACC:
- Bespoke legislation: those of us who work regularly with the Corporations Act 2001 (Cth), together with the myriad associated Class Orders and ASIC Regulatory Guides, know just how difficult it can be to navigate. As the driver for introducing the Corporate CIV is to make Australian funds easier to comprehend and more accessible to foreign investors, it may make sense to adopt the Singaporean approach by creating standalone enabling legislation to legislate for the form and characteristics of the Corporate CIV, rather than adding an additional layer of complexity to the Corporations Act. To the extent necessary, the separate legislation could incorporate applicable sections of the Corporations Act (eg, the provisions dealing with insider trading and financial reporting), while avoiding sections that would be inapplicable (eg, the rules on capital maintenance).
- Protected cells or wholly-owned sub-funds: although the MAS uses the term 'sub-fund', it is actually proposing a cellular structure. Protected cell companies (also referred to as segregated portfolio companies) such as the proposed S-VACC, the Luxembourg SICAV and the majority of English OEICs have a single legal personality, board of directors and set of constitutional documents, which can be advantageous from the perspective of cost and administrative ease. The assets of each cell are segregated and cells can be wound up as if they are separate entities (which could be key when seeking to attract investors to acquire interests in a single cell). PCCs are also familiar to overseas investors, being prevalent in a number of traditional 'fund' jurisdictions, including the Cayman Islands, Delaware, Guernsey, Ireland and Jersey. Like PCCs in other jurisdictions, the MAS is proposing to provide for the existence and nature of cells in the legislation, limiting the need for complicated drafting in the constituent document.
- Compulsory custodian: the appointment of a separate custodian is not required by Australia's existing managed investment scheme regime. Where a custodian is appointed, its role does not typically extend to supervision of the fund manager, which is contrary to the position for Luxembourg SICAVs and English OEICs, and the proposed position for S-VACCs. Although a mandatory custodian requirement would represent a significant change to the Australian managed investment regime, in the context of Corporate CIVs marketed to retail investors, and noting the approach of the other parties to the Asia Region Funds Passport, it may be a change that Treasury is considering. It may have the added advantage of allowing such funds to be marketed in those European jurisdictions (eg, Germany) which require a fund to have such a custodian under the private placement regime in the Alternative Investment Fund Managers Directive, Such a supervisory role would involve a change from existing custodial services in Australia, which Australia's custodians would need to respond to. As many of the larger custodians are global, this could presumably be achieved.
- Management: before we go back to the future and adopt the Singaporean model of requiring a corporate scheme to appoint a separate corporate management company, it is worth recalling why Australia moved away from a structure requiring schemes to have two responsible corporate entities in Australia. The prescribed interest scheme (the precursor to the managed investment scheme) required each scheme to have a separate trustee and management company, often resulting in the management company absolving itself of responsibility and simply using the trustee's acquiescence to gauge compliance with the law and the terms of the scheme. It was for that and other reasons that the Australian Law Reform Commission Report 65 in 1993 recommended that each scheme have a single, clearly defined entity which would be responsible for running the scheme, which culminated in the emergence of the responsible entity as we know it today. The dual trustee/manager structure would not appear to be conceptually inconsistent with the approach in other jurisdictions, as the S-VACC demonstrates, but before we jettison Australia's current single responsible entity model the concerns raised by the 1993 Report should be taken into account.
- Statutory limited liability for investors: the introduction of statutory limitation of liability for investors would represent an important improvement on the position for investors in a trust scheme, who are not currently afforded such protection. If the Federal Government wants the Corporate CIV to compete on at least an equal footing with its Asian-Pacific equivalents such as the S-VACC, it is imperative that the liability of investors is limited by statute.
- Voluntary administration: trusts in Australia suffer from the lack of a statutory regime for voluntary administration. As noted by the (sadly now defunct) Corporations and Markets Advisory Committee in its 2012 report on managed investment schemes, this shortcoming was manifest in the context of distressed trust schemes in the wake of the GFC. To avoid these issues, the Corporate CIV should be subject to a statutory winding-up regime (including a voluntary administration procedure), which could be achieved by incorporating the applicable sections of the Corporations Act.
- Disclosure of shareholders: the proposed S-VACC regime does not require the public disclosure of shareholder lists, which is consistent with the regime for Australian trusts which are managed investment schemes but represents a departure from the position for Australian proprietary companies. To ensure an equal footing with unit trusts, Corporate CIVs should not be required to publicly disclose their shareholders (other than, for example, any requirement under the Corporations Act as it currently applies to registered managed investment schemes, or the ASX Listing Rules as they apply to listed trusts).
- Flexibility: in an effort to ensure it is widely-used and attracts the broadest range of managers and investors, the S-VACC will be an extremely flexible vehicle. Although the consultation paper does not deal with tax issues, one can safely assume that an investment in an S-VACC will, irrespective of its underlying investments, whether it is wholesale or retail and whether it is open or closed-ended, be tax neutral. It can only be hoped that the Treasury will take the desirability of such flexibility into consideration when designing the Corporate CIV.
- Conversion of existing funds: the S-VACC consultation paper contemplates that overseas funds which are equivalent to the S-VACC may want to (and should be able to) transfer to Singapore (presumably – and in order to make this a viable option – without any Singaporean tax consequences). There has also been discussion, although not in the consultation paper itself, about allowing existing Singaporean funds set up as other entities to convert to S-VACCs (again, presumably without any Singaporean tax consequences). Introducing the first feature into any Australian Corporate CIV regime seems unlikely (and in any event it is not clear that there would be much appetite among offshore fund sponsors to change the domicile of their funds to Australia). The second feature is conceptually attractive, but may be very difficult to achieve in practice, requiring (as it might) the harmonisation of tax and stamp duty, compatibility with upstream investor structures and arrangements, and the seamless translation of trust concepts into the new corporate vehicle. We like a challenge, but suspect fund sponsors may see this as a bridge too far.