Managed investment schemes - an outline

Published Wednesday, 3 January 2001 by by Simone Desmarchelier

On 1 July 1998 the Managed Investments Act (Cth) (Act) introduced the concept of a managed investment scheme. A managed investment scheme is a scheme (often in the form of a unit trust) in which people contribute money (or money's worth) to acquire interest to benefits produced by the scheme. These contributions are pooled or used in a common enterprise and members of the scheme do not have day to day control over the operation of the scheme. There are carve outs for certain types of schemes such as superannuation trusts. What it replaces The Act replaces the old "prescribed interests" regime. The Act is incorporated into Chapter 5C of the Corporations Law (Law). The most significant change is the replacement of the separate roles of trustee and manager with the single role of Responsible Entity. The Act also introduces new measures (such as a Compliance Plan and Compliance Committee) to ensure adequate investor protection. When does a scheme have to be registered? A managed investment scheme must be registered with the Australian Securities and Investments Commission (ASIC) where:

• the scheme has 20 or more members; or
• the scheme is promoted by a person who was in the business of promoting managed investment schemes.

A managed investment scheme does not need to be registered if the issues of interests in the scheme are "excluded issues" within the meaning of section 66 of the Law. Where the Law requires a managed investment scheme to be registered a number of matters need to be addressed. These are set out below. Appointment of Responsible Entity A Responsible Entity, who has the dual role of trustee and manager of the scheme, must be appointed. A Responsible Entity must be an Australian public company holding a dealer's licence to act as a Responsible Entity. It must have minimum net tangible assets of $50,000 or, where the scheme's assets are in excess of $10 million, 0.5% of the value of the scheme's assets, up to a maximum of $5 million. The Law imposes extensive duties on the Responsible Entity and its officers. These include the duty to act honestly, exercise a reasonable degree of care and diligence, act in the best interest of members of a scheme and to treat scheme members equally. Breaches of the Law which relate to the scheme and which have or are likely to have a material adverse effect on the interests of members must be reported by the Responsible Entity to ASIC. Breach of a duty by a Responsible Entity attract civil penalties (up to $1 million for the Responsible Entity and up to $200,000 for its relevant officers) and in some cases criminal sanctions. Custodian Where the Responsible Entity has less than $5 million in net tangible assets ASIC requires it to appoint a Custodian to hold the assets of the scheme. The only exception to this requirement is where the Responsible Entity manages real property, physical assets and cash deposits and has at least $500,000 in net tangible assets. Constitution Each registered managed investment scheme must have a Constitution. A Constitution is similar to a trust deed but must contain at minimum the matters prescribed by the Act and the policy statements of the ASIC. These include: consideration payable for interests in the scheme, powers of the Responsible Entity in dealing with or investing scheme property, complaints resolution and winding up of scheme. Compliance Plan A Compliance Plan must be prepared, usually in conjunction with the scheme's auditors. A Compliance Plan is a detailed document which sets out the measures which a Responsible Entity is to apply in operating the managed investment scheme to ensure compliance with the Law and the scheme's Constitution. Chapter 5C of the Law and ASIC's policies set out the requirements for a Compliance Plan which include ensuring: scheme property is clearly identified as such and held separately from other scheme property and property of the Responsible Entity, scheme property is regularly valued, and adequate scheme records are kept. Compliance Committee Where the board of directors of the Responsible Entity does not consist of at least half "external" directors the Law requires a scheme to have a Compliance Committee. The Compliance Committee must consist of at least three members, the majority of which are "external". Its role consists of monitoring the extent to which the Responsible Entity complies with the scheme's Constitution, the Law and the scheme's Compliance Plan, reporting any breaches of the Law or the scheme's Constitution to the Responsible Entity and, where the Responsible Entity does not take appropriate action to deal with such a matter, to report the matter to the ASIC. Procedure for registration of a scheme Where the Law requires a managed investment scheme to be registered the Responsible Entity must lodge with the ASIC a signed copy of the scheme's Constitution and Compliance Plan. Where the scheme, the Compliance Plan and the Constitution comply with the requirements of the Law, the ASIC must register the scheme within 28 days of lodgement. Transitional matters The Act applies to all schemes which are created after 1 July 1998. The Act requires structures which existed before 1 July 1998 and which fall within the definition of a "managed investment scheme" to comply with the Act and the new regime within two years from that date. This will include up dating an "approved deed" and appointing a Responsible Entity The ASIC has the power to extend this period in limited circumstances. In the meantime the old law will apply to those schemes. Simone Desmarchelier May 1999