The proposals in the CAMAC report are deserving of more discussion and debate by the industry.
In July last year, the Corporations and Markets Advisory Committee (CAMAC) released its report into managed investment schemes (the Report). No doubt due to the significant level of both on-shore and off-shore law reform to be implemented by the funds management industry over the past 12 months, the report has not received the level of follow-up discussion and debate it deserves.
CAMAC’s initial discussion paper into managed investment schemes was released in 2011 and received over 20 submissions from industry, legal practitioners, ASIC, insolvency practitioners and others. The Report highlights a number of key areas of proposed reform. Highlighted below are just two of the key proposals worthy of further discussion and debate by the industry.
1. Collective investment schemes as separate legal entities
To address issues such as the difficulty of finding suitable temporary responsible entities or replacement responsible entities for schemes with insolvent responsible entities and the difficulties that can be encountered by counterparties in recovering out of a scheme’s assets where a responsible entity has jeopardised its right of recovery from the scheme, the Report proposes the adaptation of the current registered managed investment scheme structure.
Known as the “SLE Proposal” CAMAC proposes retaining the registered managed investment scheme structure for collective investment vehicles in Australia but giving each registered managed investment scheme the status of a separate legal entity. The scheme itself would hold legal title to all scheme property and be the principal to all third party contracts; it could sue or be sued in its own right. The responsible entity would be an agent of the scheme.
The SLE Proposal is to be commended and it could well address the issues highlighted above. However, the proposal needs to be considered in light of the international investment funds market in which Australian fund managers compete.
A unit trust is not a collective investment vehicle commonly used in offshore jurisdictions. More common collective investment structures include open or closed-ended investment companies and limited liability partnership structures.
There is a strong argument that to enhance the competitive position of Australian investment funds (or perhaps just to bring them onto a level playing-field with their international counterparts) and to make it easier for offshore investors to get comfortable with investing into Australian funds, Australia should instead be looking to adopt tax-flow through open and closed-ended investment companies and limited liability partnership structures in Australia.
This should at least be discussed and debated, particularly in the context of the Johnson Report and the Asia Pacific funds passport initiatives currently underway.
2. Voting requirements for replacing a responsible entity
Under the current law, the threshold for replacing a responsible entity of an unlisted registered managed investment scheme is an extraordinary resolution, requiring 50% of the total votes that can be cast by members entitled to vote, voting in favour of the replacement (whether they vote or not).
This threshold can by extremely hard to reach, even though a change in responsible entity may be in the best interests of members. This is particularly the case where large portions of unitholdings are held under passive custody arrangements where the custodian is not compelled to vote.
This will be even more difficult under ASIC’s updated regulatory guidance for IDPS platforms which provides that an IDPS operator cannot vote unless it is instructed by investors.
CAMAC suggest that this voting requirement be replaced with a simple majority vote mechanism, with a threshold requirement that at least 25% of the total votes of eligible scheme members being cast.
Whilst a simple resolution with a 25% threshold requirement will be easier to achieve than the current extraordinary resolution requirement, there is room for further discussion and debate around whether the 25% threshold requirement is necessary.
Further discussion and debate is also needed on what is the appropriate mechanism where a responsible entity of a solvent scheme wishes to retire. Should a resolution of members be required at all? There may be an argument that, where a responsible entity of a solvent scheme wishes to retire, it should be sufficient that the outgoing responsible entity has complied with its duty to act in the best interests of members in finding a suitable replacement responsible entity for the scheme.
These CAMAC highlights touch on just 2 of the many important proposals set out in the Report that are deserving of more discussion and debate by the industry.
Henry Davis York made one of the submissions to CAMAC in response to the 2011 discussion paper.