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What are the compliance requirements for regulated managed investment schemes?

In our previous article, Managed investment schemes and when they must be registered, we looked at the definition of managed investment schemes, and what distinguishes a registered from an unregistered managed investment scheme.

In this article, we’ll look at regulated managed investment schemes and associated compliance requirements.

Different compliance requirements apply depending on:

  • whether the venture is a managed investment scheme;
  • if so, whether the managed investment scheme is a financial product; and
  • if the managed investment scheme is a financial product, whether the scheme is required to be registered.

If a managed investment scheme does not meet all of the following requirements, as set out under the Act:

  • it has more than 20 members; or
  • it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or
  • a determination [is in force under which ASIC has determined that a number of managed investment schemes are closely related and must be registered when the total number of investors across all the scheme exceeds 20]

then an interest in it is excluded from being a financial product and the AFS licensing framework will not apply.

If your venture is a managed investment scheme and interests in it are financial products, you will need to obtain and maintain an AFS licence, regardless of whether the scheme needs to be registered or not.

If it transpires that your venture is not a managed investment scheme, do not assume that that releases you from capture by the AFS licensing regime.  It may be that your activities still relate to a financial product, particularly under the “general definition” of the term “financial product” in the Act.[i]

Often, a scheme that falls short of the definition of “managed investment scheme” will meet the definition of “a facility through which, or through the acquisition of which, a person… makes a financial investment”.  This kind of facility is a financial product and activities in relation to it will generally require an AFS licence.  Again, legal advice will be required to assess whether this definition applies.

An entity which is issuing a facility for making a financial investment or interests in a managed investment scheme might well be providing a number of financial services alongside this, particularly if the underlying investment assets are financial products themselves.  In this case, it is likely that the entity will be dealing in (and possibly even issuing) these other financial products and, in the case of an unregistered managed investment scheme, possible that it is providing a custodial or depository service in relation to them. (Holding the assets of a registered managed investment scheme by the responsible entity of the scheme is exempt from the definition of providing a custodial or depository service.[ii])

The entity will need to obtain an AFS licence covering these services and products.  This is an involved process, requiring the entity to meet a number of initial requirements in order to obtain the licence, such as appointing suitable “responsible managers”.  Holding an AFS licence also gives rise to a number of ongoing and recurring obligations.  Holley Nethercote Compliance can help you with a licence application and ongoing compliance needs.

Both operators of unregistered and registered managed investment schemes must meet financial requirements under Chapter 7 of the Act.  Those for registered managed investment schemes are more onerous but the complete suite of financial requirements that apply to any AFS licensee will depend on the full set of authorisations held.

If you are providing financial services in relation to a managed investment scheme operated by another person, you will need to make sure that your AFS licence authorisations cover you for providing those services (for example, financial product advice and dealing) in relation to managed investment schemes.

Additional compliance requirements for registered schemes

For schemes that need to be registered, additional regulatory obligations apply.

Firstly, such schemes will, by their nature, be subject to various AFS licensing requirements which would not typically apply to unregistered managed investment schemes, such as the need to maintain professional indemnity insurance, be a member of the Australian Financial Complaints Authority, and provide a PDS to investors.

Secondly, such schemes are subject to a number of regulatory obligations under Chapter 5C of the Act.  As well as needing to register the scheme with ASIC, you will need to set up a public company to act as “responsible entity” for the scheme.[iii]  You will also need to lodge a constitution and compliance plan with ASIC,[iv] and meet a range of other onerous obligations.

Options other than managed investment schemes

If the prospect of running a managed investment scheme seems daunting, there may be ways of achieving your goals without having to operate the scheme yourself.

One option is to look for an AFS licensee which is prepared to act as trustee (or, in the case of a registered scheme), responsible entity, for your scheme, under an arrangement whereby you manage and promote the scheme.  You may be able to undertake these activities under your own, more limited AFS licence, or under an arrangement whereby you are appointed as an authorised representative by the licensee.  This is complex and should only be undertaken pursuant to legal advice.

Other options you may wish to consider, if your goal is to attract investors to contribute funds in order to pursue benefits, are using a company structure and/or taking advantage of the crowd-sourced funding regime, which enables certain types of company to make offers of ordinary shares to retail investors through the platform of a crowd-sourced funding intermediary, where the intermediary holds an AFS licence.

A further option to consider is issuing debentures to investors via a company structure.

Advantages and disadvantages of managed investment schemes versus other investment structures tend to relate to day-to-day control and taxation.

If you merely wish to make or call attention to offers of managed investment scheme interests through a business introduction service, it is still likely that you will require an AFS licence.  However, relief is available from offer and disclosure requirements, pursuant to an ASIC Legislative Instrument.[v]

The future of managed investment schemes

The Government recently announced a review of the regulatory framework for managed investment schemes, noting that the current framework has been in place for 20 years.[vi]

Public consultation is expected to start by mid-2023, with findings reported to Government by early 2024.

Public consultation is open until 29 September 2023, with findings to be reported to the Government by early 2024.[vii]

What now?

If you have an investment venture in mind and are not sure whether it is a managed investment scheme, get legal advice early.  Make sure the advice addresses not only whether your plan involves a managed investment scheme but also, if it does, whether interests in the scheme are financial products and, if so, whether the scheme needs to be registered.  Contact us here at Holley Nethercote Lawyers for help.

Making a submission to Treasury

If you are seeking assistance with making a submission to Treasury, our policy team can help you draft your feedback and submit on your behalf.  Find out more about the policy work we do here.

Author: Samantha Hills (Partner)

This article was published in the Financial Standard – Understanding managed investment schemes: Licensing and registration.

[i] Section 763A.

[ii] Section 766E(3).

[iii] Section 601FA.

[iv] Section 601EA.

[v] ASIC Corporations (Business Introduction Services) instrument 2022/77.

[vi] https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/review-regulatory-framework-managed-investment-schemes

[vii] https://treasury.gov.au/review/review-regulatory-framework-managed-investment-schemes