Client Update: Asia Region Funds Passport Bill introduced
6 April 2018
In brief: Nearly nine years after the Johnson Report recommended the establishment of an Asia Region Funds Passport, last week the Corporations Amendment (Asia Region Funds Passport) Bill was introduced into Parliament, delivering on Australia's commitment as set out in the Asian Region Funds Passport's Memorandum of Cooperation. Partner Penny Nikoloudis (view CV) and Associate Mai Go report on this significant milestone.
Once introduced, the Asia Region Funds Passport will allow Australian fund managers to offer interests in qualifying funds to investors across multiple participating economies in the Asian region with limited additional regulatory requirements. Similarly, fund managers in other participating economies will be able to market their qualifying funds to Australian investors using the more streamlined regulatory process, which should increase competition and choice for Australian investors (see our Focus: The Asia Region Funds Passport begins to take shape for more detail on the regime).
The Hon Kelly O'Dwyer MP said last week:
The Funds Passport is an important step to further Australia’s economic integration with the Asia region. It will provide Australian fund managers with access to Asia’s expanding middle class and high net worth individuals, by allowing them to offer their products into the region without having to go through duplicative approval processes in each economy.
In August 2017, Treasury released for consultation the first exposure draft of the Asia Region Funds Passport Bill and explanatory materials. Following consultation, Treasury sought further public comment on revisions to the exposure draft legislation in February this year (the Draft Bill).
The Corporations Amendment (Asia Region Funds Passport) Bill (the ARFP Bill) tabled on 28 March 2018 largely reflects the Draft Bill that we saw earlier this year.
We have set out below an overview of some of the changes that were made in the ARFP Bill since the first exposure draft that we last reported on. We have also noted below whether the ARFP Bill has addressed some of the more significant concerns that we had raised in our submissions to Treasury on the exposure draft.
Changes made in ARFP Bill
Australian passport funds
Application for registration as Australian passport fund
Applications to have a managed investment scheme (MIS) registered as a passport fund may be withdrawn via notice at any time before the scheme is registered as a passport fund.
The ARFP Bill does not specify the consideration period for ASIC to process the application. We expect this will result in uncertainty and administrative difficulties, particularly when many fund operators will require some certainty to organise offering timelines and marketing trips.
ASIC's decision to register a passport fund (incoming or outgoing) still requires a subjective assessment by ASIC of the fund's likelihood of complying with the relevant law. In our view, guidelines are required so that there is some certainty about the process.
Notified foreign passport funds (NFPF)
ss1213 – 1213D
Notice of intention to offer interests in a foreign passport fund
Foreign passport fund operator may withdraw a notice of intention at any time during the consideration period.
Consideration period has been changed from 21 days to 15 business days, beginning on the day after the notice is lodged with ASIC.
ASIC and the foreign passport fund operator may agree, in writing, to an extension of the consideration period, but the extension must not be for more than five business days.
We think there should be a limit on the number of times the consideration period can be extended, and we would suggest that this be permitted to occur only once.
ss1213E – 1213F
Characterisation of notified foreign passport fund (NFPF)
NFPF is a MIS for the purposes of the Corporations Act, even if it would not otherwise be a MIS because of the definition of MIS in s9. However, this does not affect the other legal characteristics of a NFPF for the purpose of the Corporations Act.
Neither the operator of a NFPF nor a NFPF is to be treated as a company for the purposes of the corporations legislation, merely because it is registered as a foreign company under Div 2 of Pt 5B.2.
We submitted that an amendment to the MIS definition is required because bodies corporates are expressly excluded from the definition. As such, if a foreign passport fund is constituted as a body corporate, simply including a note to the MIS definition will be inconsistent with the actual definition (before the CCIV regime is introduced). It appears this issue has now been addressed by s1213E(1).
For a NFPF that is a body corporate, the requirement to be registered as a foreign company enables ASIC to make certain information publicly available.
In our view, there should be no additional requirement to register as a foreign company given the information that ASIC will have access to as part of the ARFP application process, and that this additional administrative requirement and the associated disclosure obligations will limit the attractiveness of Australia as a market.
ss1213G – 1213N
Foreign passport fund offences
Penalty regime inserted for where a NFPF, a NFPF operator, or a person with responsibilities in relation to a NFPF engages in conduct that constitutes an alleged offence against the Corporations Act or ASIC Act.
Prohibition against a NFPF issuing debentures in Australia.
Australian members have a right to a copy of any reports required to be prepared by the NFPF operator under home economy laws.
Australian member or former member may apply to the court for an order for copies of NFPF books.
ss1213P – 1213Q
Obligation to provide information to ASIC
ASIC may require a NFPF operator to lodge a copy of the register of members.
Stop Orders, Deregistration and De-notification
To determine whether a foreign fund has complied with the Passport Rules in Australia, ASIC must request in writing to the home regulator of the fund, for its opinion on the interpretation of any of the provisions of the Passport Rules for the home economy that are equivalent to a Passport Rule provision for Australia under consideration by ASIC.
ss1216 – 1216L
Deregistration and denotification
Process for deregistration of an Australian passport fund, and denotification of a NFPF is via application to ASIC.
ASIC may initiate deregistration of an Australian passport fund if it is of the opinion that the fund is not complying with relevant Australian laws.
ASIC must denotify a fund as a NFPF if the fund has been deregistered as a passport fund in the home economy.
ASIC may declare that relevant Australian laws may continue to apply after an Australian passport fund has been deregistered or a NFPF removed.
Sets out the amendments consequential to Chapter 8A.
In particular, it includes amendments to:
the Anti-Money Laundering and Counter-Terrorism Financing Act 2006;
Corporations Act; and
ASIC Act 2001, which are intended to extend relevant consumer protections to Australian investors in NFPFs.
Some of the key amendments include, but are not limited to,:
the requirement of a NFPF operator to have an external dispute resolution arrangement in place for the operation of the fund;
continuous disclosure and reporting obligations applying to NFPFs;
including NFPF products as financial products for the purposes of Chapter 7 of the Corporations Act; and
licensing exemptions for:
custody of assets of a NFPF, regardless of location of the assets;
acquiring or disposing of the property of a NFPF; and
issuing, acquiring or disposing of derivatives and foreign exchange contracts to allow NFPFs to hedge their exposure to risk without requiring an AFSL or an Australian distributor.
A key issue is that there is no harmonisation of the disclosure laws across participating economies (and we recognise that this is a feature of the ARFP framework itself, rather than the legislation). This means that operators will need to prepare separate disclosure documents in each jurisdiction in which they wish to market, which results in significantly increased costs and timing delays, particularly given many jurisdictions have extensive disclosure requirements (for instance, the PDS disclosure requirements in Australia, including the recent changes to fees and costs disclosure).
In our view, a key element of the passport working efficiently is for managers to be able to prepare the necessary documentation required to comply with the disclosure laws in their home jurisdiction and a supplement (eg a ‘wrapper’) for each relevant host economy that ensures the disclosure document, as a whole, satisfies the disclosure requirements of that host economy. If this approach were to be adopted, amendments to Part 7.9 of the Corporations Act would need to be made to facilitate the preparation of a disclosure document of this nature. Alternatively, the short PDS regime could be made available to NFPFs.
Activation of the Passport regime will only take place once two of the participating economies (being Australia, Japan, South Korea, New Zealand and Thailand) complete implementation. At this stage, however, it seems that Australia may be the only participating economy to implement its commitment under the Memorandum of Cooperation signed by the Federal Government on 28 June 2016. The Passport Joint Committee (which is made up of representatives from signatory economies) will meet in Sydney this month to discuss progress on the implementation of the regime.
While it is still early days, we suspect that the uptake of the ARFP regime will largely depend on how the corresponding tax reforms and the Corporate Collective Investment Vehicle (CCIV) Bill, which are to complement the ARFP Bill, will look once tabled. In Australia specifically, the industry has been pushing for a non-resident withholding tax rate of zero for Australian Passport Funds to ensure that they are able to compete effectively with Foreign Passport Funds. As it is anticipated that the CCIV bill will not be brought before Parliament until later this year, and the status of the tax reforms is still uncertain, it may be some time before we are able to appreciate the full effect of the ARFP reforms.
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