Registered scheme constitutions - ASIC's revised policy

On 5 June 2013 ASIC released its revised policy about the content of registered managed investment scheme (scheme) constitutions: Regulatory Guide 134 Managed Investments: Constitutions (RG 134).

RG 134 sets out ASIC's interpretation of s.601GA and s.601GB of the CorporationsAct 2001 (Act). ASIC will not register a scheme unless it determines, in accordance with RG 134, that the constitution complies with the Act. The modifications to the Act made under the new policy are set out in ASIC class orders.¹

Some of ASIC's new policy requirements, particularly in relation to winding up, fees and expenses, and withdrawal rights, are more detailed and onerous than the previous policy requirements. However there has also been a relaxation of some previous policy requirements, including in relation to consideration to acquire.  

ASIC will apply the new policy from 1 October 2013 when assessing constitutions lodged as part of an application to register a scheme. For schemes registered before 1 October 2013 (existing schemes), ASIC states that it will not take any action against a responsible entity or its officers on the basis that a constitution does not comply with s601GA and 601GB of the Act as long as it meets the requirements in the previous version of RG 134 (and the related class orders, which will remain in force for pre-1 October 2013 schemes).²

Responsible entities that operate existing schemes may, but need not, amend their scheme constitutions so that they conform to the new RG 134. Responsible entities proposing to amend a scheme constitution would need to take into account their duties to members, and recent significant case law developments in this area.³

What is the constitution required to include?

Under s601GA of the Act, the constitution must make adequate provision for, or specify, certain prescribed matters. These are:

• the consideration to acquire an interest in the managed investment scheme;
• the powers of the responsible entity in making investments or dealing with scheme property, borrowing or raising money;
• the method for dealing with complaints about the managed investment scheme;
• winding up the managed investment scheme;
• the rights of the responsible entity to be paid fees or be indemnified out of scheme property; and
• any rights of members to withdraw from the managed investment scheme.

Under s601GB of the Act, the constitution must also be a document that is legally enforceable between the members and the responsible entity of the scheme.

Consideration to acquire

ASIC's new policy on the consideration to acquire scheme interests provides for the issue price of interests to be based on a formula or method set out in the constitution of a scheme.

The formula or method under the constitution for a listed scheme must be based on the market price of quoted interests in a relevant class at or around the time of issue. For an unlisted scheme, the formula or method under the constitution must be based on the value of scheme assets of a class, less any liabilities that may be attributable to interests in that class divided by the number of interests on issue in that class. Relief under Class Order [CO 13/655] permits a responsible entity to exercise certain discretions in determining the amount of the consideration calculated using the formula or method, for example the amount of adjustments for transaction costs. ASIC's policy to maintain documents and records in connection with the exercise of discretions is broadly similar to that set out in the previous policy and Class Order [CO 05/26].

The new policy also deals with specific kinds of issues of interests at a discount, such as placements, rights issues and distribution reinvestment plans. Again, this policy is broadly similar to that set out in the previous policy and Class Order [CO 05/26], however a number of restrictions and conditions that previously applied to the class order relief have been removed. For example, in relation to placements of scheme interests, the new policy (as set out in Class Order [CO 13/655]) includes a condition that the relevant interests are quoted on the ASX or an approved foreign market. However in respect of interests quoted on the ASX, the condition (previously applicable under Class Order [05/26]) that the issue, together with any related issue in the previous year does not, immediately before the issue, comprise more than 15% of the interests in that class, no longer applies. Further, the condition that (except in limited circumstances) interests are not permitted to be issued to the responsible entity or its associates no longer applies.

For other situations where interests are commonly issued at a discount, such as rights issues or distribution reinvestment plans, a number of conditions and restrictions included in Class Order [CO 05/26] have also been removed.

The relief in relation to consideration to acquire is set out in Class Order [CO 13/655].⁴ For schemes registered prior to 1 October 2013, which would not ordinarily be subject to ASIC's new policy under RG 134, a responsible entity can elect to have Class Order [CO 13/655] apply to those schemes by publishing and maintaining a "notice of reliance" on its website.

The constitution can incorporate the content of Class Order [CO 13/655] by referring to it, rather than including provisions drafted on the basis of the class order: RG 134.29. Where the constitutional provisions are non-standard, ASIC encourages responsible entities to request a review of the relevant provisions ahead of the formal registration application: RG 134.31.

Powers of the responsible entity

ASIC's policy in relation to the responsible entity's powers to invest or deal with the scheme property, and any powers to borrow or raise money for the purposes of the scheme (in s.601GA(1)(b) and s.601GA(3) of the Act), is not highly prescriptive. ASIC considers that it appropriate for a responsible entity to have the flexibility to determine the level of detail to include in the constitution about its powers.

Complaints

ASIC proposes to align the requirement to deal with complaints in the constitution with the internal dispute resolution requirements under s.912A(2) of the Act for an AFS licensee: RG 134.140. This is intended to prevent the responsible entity from potentially having to maintain two distinct complaints handling procedures in place for retail clients.

Under the revised RG 134, the responsible entity would only need to include in the constitution a provision stating that it will comply with the dispute resolution requirements approved by ASIC for s.912A(2)(a)(i) in dealing with complaints by retail clients (these are set out in ASIC RG 165.74).

The requirements relating to dealing with complaints also apply in respect of wholesale clients. ASIC considers that it may be appropriate for different requirements to apply for wholesale clients (who may have more resources available to them for dealing with complaints than retail clients) and that the responsible entity should be able to devise and include in the constitution provisions for its own complaints handling procedures for wholesale clients: RG 134.145.

Winding up

ASIC's proposals in relation to constitutional provisions for winding up a registered scheme (see RG 134.183) are more prescriptive than under current ASIC policy. These proposals appear to be driven largely by problems and uncertainties that ASIC has encountered in relation to the winding up of some managed investment schemes over the last few years.

In ASIC's view, key aspects of winding up a managed investment scheme that the constitution should address are:

• enabling the identification of the assets of the scheme. This may be an issue particularly for some contract-based schemes where it may be difficult to distinguish scheme property and non-scheme property.
• distribution of proceeds, including who will apportion the net proceeds of realisation between members, what criteria will be used to apportion the net proceeds of realisation between members, and the priority of persons in respect of the receipt of proceeds.
• identification of the party that will bear the costs of winding up and in what priority they will be paid (for example the responsible entity could be required to bear the costs of winding up if there are no available scheme assets).
• any power to require members to continue making payments during the process of winding up the scheme or any ability to accept such payments from members in order to maximise the net proceeds of realisation.
• how the process of winding up the scheme will occur if the responsible entity and/or the scheme is "insolvent", and if the responsible entity and the scheme are "solvent".
• independent audit (rather than simply a "review") of the final accounts of the scheme after winding up the scheme, to be conducted by a registered company auditor or audit firm.
• the constitution of a managed investment scheme can include a provision that permits a responsible entity to postpone the realisation of the assets of the scheme on winding up for as long as it thinks fit, however the responsible entity should take into account its duties in deciding to postpone.

Rights to be paid fees or to be indemnified

ASIC's proposed policy in relation to constitutional provisions dealing with fees and expenses is more detailed and prescriptive than its existing policy.

Some key matters in relation to fees and expenses are:

• rights to fees (RG 134.124): the constitution need not set out a fixed amount that is actually paid as fees, and may set out a maximum fee, part of which can be waived. However, for a right to a fee to be specified (as the Act requires), the performance to which it relates, the time at which the fee accrues and each variable (including timing variables) affecting the amount payable must be detailed in the constitution and not left to the determination of the responsible entity.
• payment in advance (RG 134.131): the constitution must not allow for a right to payment of fees in advance of the responsible entity's proper performance of its duties to which the fees relate (in effect, fees must be paid in arrears, not in advance) or before the responsible entity takes office.

Withdrawal rights of members

Liquid schemes

ASIC sets out in its policy the criteria it will apply for determining whether the scheme members have a "right to withdraw" and the requirements that apply if there is such a right.

ASIC's new policy deals with several key issues:

• triggering a right (RG 134.159): the constitution must set out how a member may trigger the right to withdraw, and any pre-conditions that apply. The right should not be subject to pre-conditions that the responsible entity may in its discretion determine, or be subject to pre-conditions that may change from time to time at the responsible entity's discretion.
• amounts paid to members (RG 134.161): the constitution must specify the consideration that will be given to members to satisfy withdrawal requests. This includes the price that will apply to the interests that are the subject of the withdrawal request, when the consideration is paid and the maximum period for payment, and the nature of the consideration that members will receive.
• restrictions on dealing with withdrawal requests (RG 134.164): restrictions on the right of withdrawal should be described in the constitution, including in relation to suspension of withdrawals, the right to impose minimum and maximum limits on the number or value of interests that may be withdrawn, and the right to satisfy requests on a partial or staggered basis.
• ceasing to be a member of a managed investment scheme (RG 134.167): on the assumption that the responsible entity will determine if the managed investment scheme is liquid or non-liquid as at the time at which the valuation of scheme property occurs (valuation time), ASIC takes the view that the constitution should not deem a member to have withdrawn before the valuation time. This is because, until that time, the member has a right to the benefits produced by the managed investment scheme because the member will share in any increase in value of the scheme property and therefore holds an interest.

Fairness to all members (RG 134.175)

In relation to fairness in respect of withdrawals, the key issues dealt with in RG 134 include that constitutional provisions should provide:

• that the withdrawal price (including for in-specie payments) be determined on the basis of market valuations of scheme property that are consistent with the range of ordinary commercial practice for valuing that type of scheme property and are reasonably current.
• that withdrawal offers be made in a manner to ensure that all members to whom the offer is made have access to a copy of the offer. If an offer is only made via the internet or other form of public communication (e.g. in a newspaper), the responsible entity should consider whether the procedure will be fair and consistent with a responsible entity's duties under s.601FC(1)(d).

Legal enforceability

ASIC states that, for a scheme constitution to be legally enforceable (as required under s.601GB), it should be contained in a document that is in a legally binding form, and expressly bindthe responsible entity and the members of the scheme (RG 134.206). The constitution should be validly executed by the responsible entity.

ASIC has maintained its policy to the effect that the constitution of a managed investment scheme should not include provisions that make the terms of the constitution subject to another document other than an Act of Parliament, or regulations or instruments made under an Act. Responsible entities will continue to be able to incorporate Appendix 15A of the ASX Listing Rules in their constitutions: RG 134.220.

In RG 134.214, ASIC states that it encourages responsible entities to ensure that the constitution contains an overriding provision to the effect that, to the extent a provision of the constitution is inconsistent with the Act, it will be of no effect. In the absence of such a clause, ASIC may spend more time assessing a constitution to ensure it is not inconsistent with the Act.

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