Publications / Corporate Advisory
For managed investment schemes registered from 1 October 2013, the scheme constitution must comply with ASIC’s updated requirements, as set out in revised Regulatory Guide 134 published by ASIC earlier this year.
McCullough Robertson partner, Tim Wiedman, summarises the requirements scheme constitutions must satisfy post-1 October 2013.
ASIC’s requirements for scheme constitutions are characterised into the following six categories, which reflect the constitution content requirements of section 601GA Corporations Act:
- consideration to acquire an interest
- the powers and rights of the responsible entity
- complaints handling
- withdrawal rights
- winding up, and
- legal enforceability.
ASIC’s view on how these requirements must be addressed in a scheme constitution are summarised below.
Consideration to acquire an interest
Section 601GA(1)(a) Corporations Act requires a scheme constitution to make adequate provision for the consideration that is to be paid to acquire an interest in the scheme.
ASIC considers that a scheme constitution will meet this requirement if it:
- includes provisions which reflect the content of class order 13/655, or
- incorporates the contents of class order 13/655 by referring to the class order in the constitution (that is, the constitution provides that the requirements of class order 13/655 form part of the constitution and apply to the scheme).
Alternatively, if interests in the scheme are issued for nil consideration (such as a serviced strata scheme) or a fixed price (such as a contributory mortgage scheme) then the constitution will not need to reflect or incorporate class order 13/655.
Class order 13/655 sets out the circumstances in which a responsible entity can exercise discretion in determining the price at which interests are issued. Under class order 13/655, a responsible entity can exercise certain discretions in calculating the issue price of interests if the price is based:
- for interests quoted on a financial market (excluding the AQUA market), on a reasonably current market price, or
- for other interests (including interests quoted on the AQUA market), net asset value.
For example, a responsible entity may include an estimate of transaction costs associated with acquiring assets in determining the issue price provided, for an unlisted scheme, the issue price of interests is based on net asset value. Alternatively, for quoted interests in a listed scheme, a responsible entity can exercise discretion in calculating the issue price to determine the exact point of time at which the market price is determined, including whether it is based on completed trades or bids or offers on a date or average prices over a period.
Where the responsible entity’s process does not rely on the relief granted by class order 13/655 (except where the responsible entity does not need to rely on the relief such as for a fixed price scheme), ASIC recommends the responsible entity give ASIC a draft of the relevant provisions before lodging the application to register the scheme. The responsible entity should also include an explanation of how provisions meet the requirements, and are consistent with the purpose, of section 601GA(1)(a) Corporations Act.
ASIC generally require at least ten business days to review the provisions and provide their comments. A responsible entity should not lodge the application to register the scheme until ASIC has completed its review.
The constitution can also allow a responsible entity to exercise discretion in determining the issue price for placements, rights issues, dividend reinvestment plans, interest purchase plans, negotiated fee arrangements with wholesale clients, stapled securities and forfeited interests provided the provisions reflect, or incorporate, the relevant ASIC class order relief applying to the particular circumstance.
Powers and rights of the responsible entity
Power to deal with scheme property and raise money
The scheme constitution:
- must, if the responsible entity will have power to borrow or raise money, specify this power
- must expressly state that any rights to fees or indemnification out of scheme property is subject to the proper performance by the responsible entity of its duties or include a provision that incorporates this restriction
- may specify a maximum fee to which the responsible entity is entitled (and the responsible entity can charge a fee less than the maximum)
- must, for fees payable to the responsible entity, specify:
- the time at which the fee accrues
- the performance to which it relates, and
- each variable (including timing variables) affecting the amount of the fee
- if a fee is variable and determined by reference to an index benchmark, use an index that is similar to the type of scheme to be operated, and
- if the constitution includes provisions regarding the replacement of that index, specify that the index must be replaced with a similar index and the circumstances when the index can be replaced.
The scheme constitution must not:
- enable the responsible entity to invest scheme property and assets which are inconsistent with the type of scheme the responsible entity is authorised to operate under its AFSL
- allow for the right to payment of a fee in advance of the performance of the duties to which the fee relates
- allow the responsible entity to determine the frequency with which its fees are calculated and paid, or
- enable the responsible entity to indemnify itself from scheme property at an hourly rate to be determined from time to time or on standard commercial terms for the work undertaken.
Section 601GA(1)(c) Corporations Act requires a constitution to make adequate provision for the method by which complaints are to be dealt with. Section 912A(2) Corporations Act requires licensees, who provide financial services to retail clients, to have a dispute resolution system consisting of an internal dispute resolution procedure and membership of an external dispute resolution scheme.
Where the scheme is open to retail clients, the constitution can comply with the obligation in section 601GA(1)(c) by either:
- including a provision that the responsible entity, as an AFS licensee, will comply with the dispute resolution requirements in section 912A(2), or
- specifying the complaints handling procedure (which should comply with the requirements of section 912A(2)).
If the scheme is also open to wholesale clients, the constitution should specify:
- that the complaints handling provisions applying to retail clients also apply to wholesale clients, or
- set out the complaints handling procedures available to wholesale clients.
If the scheme is not open to retail clients or wholesale clients and consequently the scheme constitution does not include provisions about dealing with complaints from, as applicable, retail or wholesale clients, then the constitution must also include a provision which prohibits the issue of interests in the scheme to, as applicable, retail or wholesale clients.
If members have a right to withdraw from the scheme then the constitution must:
- specify this right
- set out adequate procedures for making and dealing with withdrawals, and
- if the scheme is not liquid, contain procedures which are consistent with the provisions of part 5C.6 Corporations Act (which contains procedures for making withdrawal offers where a scheme is not liquid).
To meet the obligation to set out adequate procedures, ASIC consider the following key elements must be dealt with in the constitution:
- provide sufficient information to determine how a member may trigger the right to withdraw (e.g. make a withdrawal request) and what (if any) preconditions apply (e.g. a requirement that interests must be held for a minimum time period before exercising withdrawal rights)
- restrictions on a member’s right to withdraw must be specified, such as:
- circumstances in which a responsible entity may suspend and resume withdrawals
- the right to impose minimum and maximum limits on the number or value of interests that may be withdrawn
- the ability to satisfy requests on a partial or staggered basis, and
- any other circumstance that fetters a member’s right to withdraw
- the price for which interests will be redeemed
- when the amount is paid to members and the maximum period for payment after withdrawal (which, for non-liquid schemes, must not exceed 21 days)
- the nature of the amount that members will receive and how non-monetary assets will be valued
- if a scheme becomes illiquid after a member has made a request to withdraw but before the time scheme property is valued, only allow that member to withdraw in accordance with the requirements of part 5C.6 for non-liquid schemes, and
- if the procedures enable withdrawal requests to be satisfied by in-specie payments, include provisions requiring the relevant assets to be based on valuations consistent with the range of ordinary commercial practice for valuing assets of that type and be reasonably current.
Conversely, the constitution must not:
- give the responsible entity a discretion to determine any pre-condition from time to time or at its own discretion
- allow the responsible entity to set out the circumstances in which it may suspend the right to withdraw in another document, and
- not contain provisions that treat withdrawing members as having ceased to be a member before the time the scheme property is valued for the purposes of calculating the withdrawal price.
To satisfy the requirement in section 601GA(1)(d) to make adequate provisions for winding up the scheme, the constitution must:
- contain procedures for identifying and dealing with scheme assets and liabilities in order to realise them
- include provisions about the distribution of net proceeds after realisation of scheme assets, identifying who will apportion the net proceeds between members, the criteria used to apportion net proceeds between members and the priority of persons
- identify the party that will bear the costs of winding up the scheme (which will generally be the responsible entity)
- if members will have the ability, or are required to continue, to make payments during the winding up process, recognise these obligations
- for contract based schemes, include provisions to deal with winding up the scheme where the scheme or responsible entity is insolvent, and
- provide for an independent audit of the final accounts to be conducted by a registered company auditor or audit firm after the scheme is wound up.
The constitution should be expressed as binding between the responsible entity and members.
ASIC encourages responsible entities to ensure the constitution contains an overriding provision stating that, to the extent a provision of the constitution is inconsistent with the Corporations Act, it will be of no effect.
Further, for schemes which are, or may be, listed on ASX their constitution may include a provision that incorporates by reference and gives overriding effect to Appendix 15A of the ASX Listing Rules.
APPLICATION TO EXISTING SCHEMES
For schemes registered before 1 October 2013, ASIC has confirmed that if the constitution met the requirements of ASIC’s policy applying at the time the constitution was registered (or subsequently amended) ASIC will not take action either to deregister the scheme or against the responsible entity or its officers on the basis the constitution does not comply with the Corporations Act.
However, ASIC encourages responsible entities of existing schemes to assess whether their constitution complies with the requirements of updated Regulatory Guide 134 and, if not, consider what action could be taken to remedy any non-compliance.
HOW CAN MCCULLOUGH ROBERTSON ASSIST
McCullough Robertson can assist responsible entities to draft constitutions which satisfy ASIC’s updated requirements and to assess whether existing constitutions are consistent with these requirements.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.