Treasury has released for consultation, on 13 June 2018, a further exposure draft of parts of the legislation required for the establishment of the new form of managed fund in Australia, the Corporate Collective Investment Vehicle (CCIV).
The first exposure draft of the legislation, released in August 2017, included only the core provisions for structure and operation of CCIVs. This new draft adds provisions on related party transactions, members’ rights and meetings. The topics to be covered in later exposure drafts include insolvency, takeovers, product disclosure, licensing, penalties, and the question of whether and how existing funds will be able to transition to a CCIV structure.
While there have been improvements in the legislation as compared to the 2017 draft, the requests in industry submissions for change on some major issues have not been accommodated.
There will be no requirement to establish a CCIV, so whether this ultimately is a useful tool for the Australian funds industry will depend on factors flowing from the design of the regime such as cost, risk, marketability here and overseas and ease of implementation.
A number of the helpful changes as compared to the 2017 exposure draft legislation are points that were raised in submissions by KWM and others:
- the supervisory task of the depositary has changed from a requirement to “ensure” compliance in certain functions, to simply “verify”;
- the new drafting deals a little better with the allocation of assets among sub-funds, by providing that the default position will be the proportion of assets that is fair and reasonable, but leaves the prescription of a method to regulations;
- previously redemption of shares could only occur in response to a member request, but this has been expanded to include redemption by the corporate director; and
- the definitions of retail CCIV and wholesale CCIV have moved away from a test that would have been an impediment to promoting both retail and wholesale funds – there is now a more standard concept of “retail” that aligns with whether a PDS is required to be given.
Issues not addressed
Across the 119 pages of draft legislation, the most significant issues for some in the funds management industry continue to be around the depositary, which is mandatory for retail CCIVs.
This issue was vigorously debated in consultations. In this exposure draft of the legislation, under the heading 1234D (Independence requirement for depositary) Treasury has only included a drafting note: “The independence requirement for depositaries is under development”. However, the Exposure Draft Explanatory Materials sets out Treasury’s vision for what level of independence would be required in various scenarios. There seems to be little change from the prior exposure draft which would prevent use of a depositary in the same corporate group as the investment manager, but it does seem to be possible now for a related company of the depository to carry out fund administration so long as there are no common directors - an important improvement for efficiency. It will be interesting to see how the issue of structural separation of asset holding from investment management develops in the context of the ongoing debate about vertical integration in the financial services industry. Both ASIC and Treasury acknowledge in their submissions to the Financial Services Royal Commission that that there are benefits as well as costs of vertical integration, and do not rule it out if conflicts are handled appropriately.
Changing the depositary
There is also no change from the position that the depository cannot be removed except by a special resolution at a meeting of members. Arguably, this tends to entrench the depositary in its role, as compared with the position of a responsible entity of a managed investment scheme which is able to change a custodian based on quality and price of services (acting in the best interests of members).
There is a new requirement to register each sub fund, which would be given an Australian Registered Fund Number (ARFN). Although the process seems simple, there is no set timeframe for processing at ASIC. In the previous draft legislation there was only a requirement to notify ASIC when a new sub-fund was established.
The remaining tranches to complete the legislative package may be released relatively soon, if only so that the Government can minimise the gap between the progress of this legislation and the Asia Region Funds Passport, which was introduced into Parliament in March.
We plan to continue our involvement in consultations and submissions, and will keep you informed.
We would be interested to hear your views, and whether you intend to make submissions. The consultation period is open until 11 July 2018, and submissions may be made on line through the Treasury website in the Consultation Hub under Corporate Collective Investment Vehicle.