In April 2016, the Federal Government committed to the introduction of a new tax and regulatory framework for two new types of collective investment vehicles (each a “CIV”) – a corporate CIV (“CCIV”) and a limited partnership CIV – with the former to be introduced in 2017 and the latter in the following year.
As the CCIV is set to be unveiled soon, many in the funds management industry are wondering what it will look like and, in particular, whether it will resemble the various corporate fund models already in existence. In view of that, we have examined the key features of Europe’s most prominent fund models and how they may influence the CCIV model.
SICAVs and OEICs
The SICAV (société d'investissement à capital variable) is an investment vehicle used in various European civil law jurisdictions, but its best known variant is found in Luxembourg and has the following key features.
- Self-managed by a board of directors (which may in turn appoint an investment manager)
- Has variable share capital, valued on the basis of the SICAV's net asset value
- Can issue or redeem shares at any time for a value determined on the basis of their net asset value
- Can issue various share classes, which may be denominated in different currencies and have different terms (for example, in relation to dividend policies and fees)
The UK’s OEIC (open ended investment company) has similar features, but unlike the SICAV, most OEICs appoint a single authorised corporate director (“ACD”) to manage the fund rather than a board of natural person directors (though the option remains to appoint a board).
Both a SICAV and an OEIC can be set up as a single entity or, more commonly, as an umbrella entity with various sub-funds, each of which has a separate investment strategy and is segregated from the other sub-funds. Both models also require the appointment of a depositary to safe keep fund assets and supervise certain functions of the board or ACD (as applicable).
The SICAV is widely acknowledged as the most prevalent offshore investment vehicle in the world, and dominates the cross border fund market across Asia. However, the OEIC, which is a newer vehicle, is gaining prominence in these markets and, as a result, is becoming increasingly familiar among international investors.
ACD vs natural person directors
Most investors are familiar with the form and functions of a board of natural person directors. By comparison, the concept of an ACD is less well known in some jurisdictions. However, the ACD model will be recognisable in Australia, where the existing regime for managed investment schemes places statutory responsibility for a scheme’s management on a licensed body corporate known as the “responsible entity”.
Assuming the CCIV is to be developed as a model for both domestic and international investors, it would make sense if a structure with an ACD was adopted, given its familiarity to Australian fund managers and investors, and the growing prominence of ACD-managed OEICs in key Asian export markets. An ACD-centric model would also avoid any concerns of blame-shifting between a board of directors and a management company by making clear that statutory responsibility for the management of the CCIV rests solely with the corporate director.
The appointment of custodians in Australia is by now standard fare, particularly for retail funds. However, this has always been an optional element of the managed investment scheme regime, and accordingly, the role and responsibilities of the custodian generally do not extend to the supervision of the responsible entity.
In this respect, the introduction of a mandatory depositary to perform some kind of monitoring role over the ACD would represent a significant departure from the domestic status quo. However, from an international perspective, making the depositary optional may be inconsistent with mutual recognition arrangements with other countries where depositaries are mandatory, as is the case with parties to the Asia Region Funds Passport (“Passport”).
Accordingly, to the extent that the CCIV is to function both as a domestic alternative to the managed investment scheme and a vehicle capable of regional distribution under the Passport, the model is likely to require the appointment of depositary – though this may be only appropriate for CCIVs marketed to retail clients. Indeed, one of the key challenges is identifying which regulatory requirements should not apply to, or be optional for, wholesale CCIVs. Under the current managed investment scheme regime, wholesale schemes are not required to be registered and can therefore avoid restriction on design and cost.
Sub-funds: protected cells or separate legal entities?
As noted above, OEICs and SICAVs are almost invariably established as umbrella structures with separate sub-funds exposed to different asset classes and investment universes. Investors gain access to a sub-fund by acquiring shares in the OEIC or SICAV belonging to a class which is attributable to the sub-fund. In this sense, shareholders are able to access discrete economic pools through a centralised corporate structure, which in theory leads to economies of scale and lower management costs.
That said, the legal form of a sub-fund may vary between jurisdictions. For example, the SICAV regime has taken the “protected cell” approach, where sub-funds are not separate legal entities but rather protected cells which are quarantined from one another under statute, so that assets and liabilities in each sub-fund remain insolvency-remote from one another. By contrast, the OEIC regime offers the option for sub-funds to be established as either protected cells or wholly-owned subsidiaries, though the former approach is much more prevalent in practice.
While there is long established precedent underlying the corporate form, and in particular the legal status of wholly-owned subsidiaries, there appears to be a clear preference for the protected cell approach in the UK, with the underlying logic being that it is simpler and cheaper to implement and regulate (particularly as it dispenses with the need to appoint subsidiary directors and make lodgements ordinarily required of companies). This alone may be enough to see protected cells included in the CCIV legislation.
The Federal Government’s announcement of the CCIV last year made clear that the model was being developed to enhance the international competitiveness of the Australian funds management industry. It follows that those tasked with crafting the policy for this new vehicle will likely look to other prominent fund domiciles to ensure that the CCIV is in step with its international competitors. And what better starting point is there than the two most successful cross-border fund models in the world?
Whether the CCIV adopts any of the features of the SICAV and OEIC remains to be seen, but it would certainly surprise us if that is not the case.