Doing Business in Australia 2015: Investment Funds

Investment funds in Australia

Investment funds (described as funds, managed funds or schemes) are typically structured in Australia as a unit trust and would ordinarily come within the (broadly drafted) definition of a “managed investment scheme” under the Australian Corporations Act 2001 (Cth) (Corporations Act). Investment funds offered to retail investors typically have to be registered with the Australian corporate regulator, the Australian Securities and Investments Commission (ASIC).

The Australian retail funds market is mature, with a high degree of regulation. The retail funds market is growing and is currently the fourth largest pool of funds under management in the world. As at 31 December 2014, the managed funds industry had A$2.48 billion in funds under management, an increase of A$57.6 billion (3%) on the September quarter 2014 figure of A$2.4 billion (source: Australian Bureau of Statistics).

Regulatory framework and bodies

Investment funds are primarily governed by the Corporations Act. In addition to the Corporations Act, operators of funds can be subject to the following legislation:

  • Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act),
  • Electronic Transactions Act 1999 (Cth),
  • Income Tax Assessment Act 1997 (Cth) (ITAA 1997),
  • Income Tax Assessment Act 1936 (Cth) (ITAA 1936),
  • A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act),
  • Taxation Administration Act 1953 (Cth), and
  • Privacy Act 1988 (Cth). 

If a fund is structured as a unit trust, general trust law (including fiduciary duties) will also apply to the operation of the trust.

If a fund is listed on a financial market, the operator of the fund must comply with the rules of the relevant market, which is usually the Australian Securities Exchange (ASX), and the rules for the ASX include the:

  • ASX Listing Rules, and
  • ASX Operating Rules.

In addition, trading in interests in a fund must be conducted in accordance with the operating rules and market integrity rules of the relevant financial market (for example, the ASX Operating Rules and the ASIC/ASX Market Integrity Rules).

ASIC is the primary regulatory body responsible for regulating managed investment schemes. ASIC is constituted under and acts in accordance with the:

  • ASIC Act 2001 (Cth), and
  • ASIC Regulations 2001 (Cth).

ASIC is empowered under the Corporations Act to modify certain aspects of the Corporations Act applicable to funds by issuing instruments that either:

  • apply to industry participants generally (class order relief), or
  • apply to specific entities (individual relief).

In addition to modifying the Corporations Act, ASIC provides guidance on how it administers its regulatory duties through the release of publications referred to as regulatory guides as well as other reports. These are available on ASIC’s website. Prior to implementing any changes, ASIC generally engages with industry participants for their input through the release of consultation papers and inviting submissions on its proposals. 

Other regulatory and supervisory bodies relevant to investment funds include the:

  • ASX, in the case of listed funds. This is the largest market operator for listed retail funds,
  • Australian Tax Office (ATO), and
  • Australian Transaction Reports and Analysis Centre (AUSTRAC).

Australian financial services licensing and relief

The operator of an investment fund that is a registered managed investment scheme (i.e. retail) is referred to as the “responsible entity”. In the case of unregistered managed investment schemes which are offered to wholesale investors, the operator is more typically referred to as the “trustee”. 

The operator of an investment fund must:

  • be an Australian public company (if the fund is a registered scheme),
  • hold an AFS licence authorising it to provide various financial services relevant to the operation of the fund, including (if the fund is a registered scheme) a specific authorisation to operate a registered managed investment scheme, and 
  • if the fund is a registered scheme, either have a majority of directors who are external directors or have a compliance committee (to oversee the retails fund’s compliance requirements) with a majority of “external members”.

An investment fund must be operated in accordance with all of the following:

  • the fund’s trust deed (called a “constitution”, if registered) and, if registered, a “compliance plan”, and
  • the Corporations Act and the general law (for example, in accordance with both common law and equity) as it applies to both the responsible entity/trustee and the fund itself.

Although a responsible entity or trustee is responsible for operating an investment fund, it is open to a responsible entity or trustee to outsource the day-to-day management of a fund’s assets to a third party investment manager. 

Furthermore, an investment manager (including overseas managers) who do not satisfy the requirements for being a responsible entity or trustee (for example because of its corporate structure or  because it does not hold the necessary AFS licence authorisations) can enter into an arrangement where an external or “outsourced” responsible entity or trustee is engaged.

An outsourced responsible entity/trustee will operate a fund according to an investment strategy determined by the investment manager. From a strictly legal perspective, however, it is the responsible entity/trustee of a fund that engages the investment manager.

Offshore investment managers who wish to establish an Australian fund to operate as a feeder fund for an offshore fund often engage an outsourced responsible entity or trustee. However, offshore investment managers will always need to consider whether their investment management activities will be caught by the AFS licensing requirements in the Corporations Act. Certain offshore managers who are regulated in jurisdictions that ASIC considers to have a regulatory framework sufficiently similar to the Australian regime (such as the UK, US, Singapore, Hong Kong and Germany) may be eligible to apply for relief from licensing to enable them to provide investment management services in conjunction with an outsourced responsible entity/trustee appointment. 

In addition, those managers who benefit from relief, will also be able to manage offshore funds offered to wholesale investors in Australia (see Marketing, below).

Marketing

The marketing of investment funds will normally constitute providing “financial product advice” and so will be a “financial service” for the purposes of the Corporations Act. 

If marketing a retail fund is taken to be “financial product advice”, then generally, the entity marketing the fund (which may be the fund operator or someone else) must:

  • hold an AFS licence with an authorisation to provide financial product advice,
  • be authorised by the holder of an AFS licence to provide final product advice on behalf of the licensee as their appointed authorised representative, and
  • as an alternative to holding an AFS licence, be able to rely on an appropriate licensing exemption. 

Exemptions from holding an AFS licence may apply to persons providing financial services in Australia. For example:

  • issuers of financial products can market their own products, subject to certain conditions (such as making prescribed disclosures), and
  • certain foreign financial services providers (including managers and issuers of offshore funds) who are regulated in jurisdictions that ASIC considers to have a regulatory framework sufficiently similar to the Australian regime (such as the UK, US, Singapore, Hong Kong and Germany) may be eligible to apply for the relief from licensing noted above to enable them to market funds to Australian “wholesale” clients.