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Client Update: The new corporate collective investment vehicle: Wholesale application?

7 September 2017

In brief: We reported on 1 September that the Federal Government had released exposure draft legislation for the new corporate collective investment vehicle (or CCIV). In this article Partner Marc Kemp (view CV) and Consultant Derek Heath (view CV) consider whether the CCIV is likely to replace the unit trust as the vehicle of choice for wholesale (as opposed to retail) fund structures.

Private unit trusts are, on the whole, lightly regulated in Australia. It is in part for this reason that many wholesale investment vehicles, from widely-held property and infrastructure funds to more closely held consortium vehicles and capital partnerships, are set up as unit trusts and operate as unregistered managed investment schemes. (Of course they may choose to register under Chapter 5C of the Corporations Act, in which case the full panoply of that chapter, from compliance plans to unit pricing requirements and responsible entity duties, applies; but unlike funds offered to retail investors they are not required  to register.)

On 25 August Treasury released exposure draft legislation for the CCIV, to be housed in a new Chapter 7A of the Corporations Act. We reported on this development in our Client Update: New corporate collective investment vehicle exposure draft legislation released. The exposure draft deals with the creation of the CCIV itself, while more exposure draft legislation will be released in future months, dealing with consequential changes to the Corporations Act and changes to the tax laws needed to allow the CCIV to be treated in the same way as an attribution managed investment trust for tax purposes (essentially, pass-through status).

On its face, the CCIV structure is an attractive one to fund managers and investors alike. Investors (shareholders) will have the benefit of statutory limitation of liability; creditors will have direct access to the assets of the CCIV rather than indirect access to trust assets through the trustee's (sometimes precarious) right of indemnity; and fund managers will have a vehicle that is perhaps more readily understood, particularly by offshore investors, and that is able to contract in its own name, avoiding the need for the trustee to incur trust liabilities and protect its personal position with limitation of liability clauses.

But as with everything, there is a price – in this case, it's the price of potentially bringing wholesale fund vehicles established as a CCIV more under the purview of ASIC than would have been the case for a private unit trust structure.

Although regulation is by no means the only factor, it is probably safe to say that, all other things being equal, a fund manager, promoter or consortium leader is likely to choose a less heavily regulated vehicle than a more heavily regulated one – there are obvious savings in time, cost and complexity, and less regulation often allows more flexibility to establish a vehicle compatible with the particular requirements of investors and the relevant transactions. As such, it is certainly a question that needs to be answered, whether CCIVs will, given the additional regulatory burden that looks likely to come with them, really be as attractive to wholesale fund managers and their investors as they might otherwise seem.

To help develop that conversation, the table below compares the current regulation of an unregistered wholesale trust (and fund manager) with the regulation that, based on the current  exposure draft, would apply to a wholesale CCIV. It will be immediately evident that the price to pay for the benefits of a CCIV is more regulation. Although the exposure draft is likely to change during the consultation process, we expect many of the features identified below to remain and so, on this measure, it is likely that the sun has not set on the unit trust yet. 

 

Requirement

Unregistered managed investment scheme (unit trust)

CCIV (wholesale)

Must register with ASIC
A CCIV must be a registered company – it cannot be a foreign company.

Operator must hold an AFSL
The Operator of a CCIV is the corporate director – broadly, the equivalent of the trustee of an unregistered managed investment scheme structured as a unit trust.

Operator must be a public company
Unlike a trustee of a unregistered managed investment scheme, the corporate director of a CCIV will be required to be a public company, with greater financial disclosure requirements than a proprietary company, and (unlike a proprietary company) subject to the related party transaction rules in Chapter 2E of the Corporations Act.

Operator has statutory liability for acts of agents
The CCIV rules are very similar to the rules applying to registered managed investment schemes, which impose strict statutory liability on the responsible entity for loss caused by its agents.

Statutory restrictions on appointment and removal of Operator
The CCIV rules are very similar to the rules applying to registered managed investment schemes, with investors having a statutory right to call a meeting of investors and vote to remove and replace the Operator.

Statutory provisions for transfer of rights and liabilities on change of Operator
The CCIV rules are very similar to the rules applying to registered managed investment schemes. In practice it is not clear how important these 'statutory novation' rules will be for CCIVs, because (unlike a unit trust where the trust has no legal personality, the trustee is itself the party to all 'trust contracts') the CCIV will have legal personality and should itself be party to all relevant contracts.

Statutory authority to establish legally separate sub-funds
The CCIV is required to establish at least one sub-fund. The sub-fund is not a separate legal entity. Each sub-fund must have a separate class of shares and ASIC must be notified when a sub-fund is established. This structure would, in theory, allow an Operator to establish a single CCIV and then to operate many funds, each as a separate and distinct sub-fund of the CCIV. This is likely to be useful for managers which operate large numbers of relatively simple funds investing in liquid assets (eg, tradeable securities), but may be less useful for funds that invest in illiquid assets (eg, real estate or infrastructure). Sub-funds may not be allowed to own assets jointly with each other and, as the corporate director will be required to act in the best interests of the members of each sub-fund, the risk of conflicts of statutory duties may restrict transactions between sub-funds, limiting their utility.

Required to have an independent, third party asset-holder with obligation to supervise Operator
A retail CCIV must have an independent Depositary. The Depositary role is more onerous than the role a custodian would play at the moment, as the depositary would have a duty to supervise certain decisions by the Operator, including share pricing and the redemption of shares.

Restrictions on issue price for interests
For retail CCIVs the constitution must set out the consideration that is to be paid to acquire a share in the CCIV (very similar to the rules applying to registered managed investment schemes).

Restrictions on redemptions – based on liquidity
These are imposed for retail CCIVs only and the rules are similar to those that apply to registered managed investment schemes.

Restrictions on redemptions – based on solvency
A wholesale CCIV can reduce capital (including by redeeming redeemable shares) if the reduction is fair and reasonable and if the relevant sub-fund is and will remain solvent (that is, able to pay its debts as when they become due and payable). It may also reduce share capital if permitted by the CCIV's constitution.1

Prohibitions on: financial assistance to acquire interests; self-acquisition of interests; and taking security over interest
Because CCIVs are companies, the rules that apply to a company acquiring shares in itself or taking security over its own shares are applied (in modified and simplified form). Similarly, a CCIV cannot provide financial assistance for the acquisition of its shares (again, the rules are modified from the general company rules).

Rules for what must be in the constitution and statutory restrictions on amending the constitution
A wholesale CCIV must have a constitution but there are no content requirements. The rules for retail CCIVs are very similar to those that apply to registered managed investment schemes.

2

Statutory duties imposed on Operator and directors, officers and employees of Operator
These are imposed for retail CCIVs only and the rules are similar to those that apply to registered managed investment schemes.

Statutory rules about number of external directors of Operator
These are imposed for retail CCIVs only and the rules are similar to those that apply to registered managed investment schemes.

Required to have a compliance plan (and plan audited)
These are imposed for retail CCIVs only and the rules are similar to those that apply to registered managed investment schemes. 

ASIC's power to make rules regulating the Operator and the structure
ASIC has power to make rules for all CCIVs not just retail ones. This is in addition to powers to make exemptions and modifications.

3

The experience in the United Kingdom may also be instructive, as the CCIV has in large parts been modelled as the UK's open-ended investment company (or OEIC). The experience of our Alliance partner, Linklaters, has been that OEICs are overwhelmingly used as retail fund vehicles, typically subject to detailed regulation either as UCITS (Undertakings for Collective Investment in Transferable Securities) or as NURS (Non-UCITS retail schemes). They are not typically used as wholesale funds, given the regulatory framework under which they are established. Managers have a number of other options when structuring wholesale funds (including, in a European context, fund vehicles established in other jurisdictions such as Jersey, Guernsey, Luxembourg or Ireland). When considering vehicles established in the UK, limited partnership structures (be they English or Scottish) are often used for closed ended wholesale funds. It may be for this reason that Treasury and ASIC are consulting on the CCIV in tandem with the Asia Region Funds Passport, which is intended to simplify the offer of retail funds in participating countries.

In its 2011 report (released by the Federal Government on 4 June 2015) the Board of Taxation recommended the introduction of a limited partnership collective investment vehicle (or LP CIV), with the same tax neutrality available to managed investment trusts. We reported on this recommendation in our article The beginning of the end of the unit trust's monopoly? A look at limited partnerships. A look at limited partnerships. In its report, the Board noted the remarks made by stakeholders that limited partnerships are typically restricted to institutional and sophisticated investors and, although it did not recommend that this restriction be applied to an LP CIV, it may be (and we hope) that Treasury has in mind that the LP CIV will be a more lightly regulated equivalent to the CCIV. The Federal Government has announced that it will look to introduce an LP CIV once the CCIV had been introduced. We look forward to finding out.

Footnotes
  1. It is not yet clear whether it will be feasible to redeem CCIV shares as easily as units in a wholesale fund can be redeemed. 
  2. It appears that the normal rules for amending a company's constitution will apply (a special resolution of shareholders is required). Curiously, an Operator of a retail CCIV will have power to amend the CCIV constitution itself (as long as the amendments are not  adverse to shareholders). 
  3. ASIC has this power indirectly for unregistered schemes through licensing requirements.

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