ASIC CLASS ORDER [CO 05/0874]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
Subsection 601QA(1)(a) — Variations
The Australian Securities and Investments Commission (ASIC) makes ASIC Class Order [CO 05/0874] under paragraph 601QA(1)(a) of the Corporations Act 2001 (the Act).
1. Background
Under subsection 601FC(4) a responsible entity of a registered managed investment scheme may only invest scheme property, or keep scheme property invested, in another managed investment scheme if that other scheme is registered under Chapter 5C of the Act. Class Order [CO 98/55] exempts responsible entities of registered managed investment schemes from subsection 601FC(4) of the Act in a number of specified circumstances.
2. Class Order [CO 05/0874] Investments in unregistered schemes - amendment
Class Order [CO 05/0874] effects only one amendment to [CO 98/55], which is to extend indefinitely the relief set out in paragraph 2, which was previously due to expire on 30 September 2005. The effect of that relief, which is now unlimited in duration, is to allow responsible entities of registered managed investment schemes to invest scheme assets in unregistered managed investment schemes the underlying assets of which consist solely or substantially of a pool or collection of debts, or other financial obligations, of a similar nature. Such assets are commonly referred to as asset-backed securities. In order to rely on the relief, the responsible entity must be satisfied that it:
(a) is entitled to have the investment (less any fees) repaid on or by a date (the "final maturity date") that is determined on or before the issue of the interest;
(b) is entitled to distribution of income at a rate that is:
(i) determined on or before the issue of the interest; or
(ii) calculated in accordance with a method that is determined on or before the issue of the interest;
(c) is not entitled under the unregistered scheme to any other income from the investment; and
(d) is satisfied on reasonable grounds, when the investment is made that:
(i) the investment (less any fees) will be repaid on or by the final maturity date; and
(ii) all income from the investment will be paid when it is due,
having regard to all the circumstances including any relevant credit rating issued by a ratings agency.
3. Consultation
Consultation was not required as the class order is minor or machinery in nature. However, ASIC conducted targeted consultation by writing to the two relevant industry associations seeking views on whether there was a continued need for the relief in light of legislative changes since the relief was first made available, and whether it was appropriate for ASIC to continue the relief without a sunset clause.
ASIC received responses from both industry associations. They both expressed the view that the relief should be continued. Class Order [CO 05/0874] takes those views into account.
Overview
The Australian Securities and Investments Commission (ASIC) introduced ASIC Class Order [CO 05/0874] under the Corporations Act 2001 to provide ongoing regulatory relief to responsible entities of registered managed investment schemes, allowing them to invest in unregistered schemes with assets that are asset-backed securities. This class order was introduced to address a gap in the regulation of managed investment schemes, ensuring that entities could make such investments under certain conditions without needing to register the underlying unregistered schemes. The class order extends indefinitely the relief provided by a previous class order [CO 98/55], which was set to expire on 30 September 2005. ASIC did not require formal consultation for this class order, considering it minor and of a machinery nature, but did engage in targeted consultation with relevant industry associations, who supported the continuation of the relief.
Scope and Application
ASIC Class Order [CO 05/0874] applies to responsible entities of registered managed investment schemes, allowing them to make certain investments in unregistered managed investment schemes under specific conditions. The order amends Class Order [CO 98/55] by extending indefinitely the relief that permits investments in unregistered schemes, provided that the underlying assets consist solely or substantially of a pool or collection of debts or other financial obligations, such as asset-backed securities. To qualify for this relief, the responsible entity must meet certain criteria, including being entitled to have the investment repaid by a specified date and being satisfied that all income from the investment will be paid when due. This class order operates under the Corporations Act 2001 and its provisions are applicable nationally across Australia. Although consultation was deemed unnecessary, ASIC sought and received feedback from relevant industry associations, who supported the continuation of the relief without a sunset clause. The order does not specify any exclusions or thresholds, but it can be further extended or modified through subordinate instruments if necessary.
Key Provisions
ASIC Class Order [CO 05/0874], which was made under subsection 601QA(1)(a) of the Corporations Act 2001, primarily serves to amend the relief provided by Class Order [CO 98/55]. This relief, which has now been extended indefinitely, permits responsible entities of registered managed investment schemes to invest in unregistered managed investment schemes, provided that the underlying assets of these unregistered schemes consist solely or substantially of a pool or collection of debts, or similar financial obligations, commonly referred to as asset-backed securities. To qualify for this relief, the responsible entity must be assured that certain conditions are met, including the repayment of the investment by a specified final maturity date, the determination of income distribution rates before the issuance of the interest, and the absence of any other income from the investment under the unregistered scheme.
The obligations imposed by this Class Order are relatively straightforward. Responsible entities must ensure that they are entitled to the repayment of their investments on or by the final maturity date, which must be determined before the issuance of the interest. Additionally, they must be able to demonstrate that the income distribution rates are either determined before the issuance of the interest or calculated according to a method that is determined beforehand. Furthermore, responsible entities must satisfy themselves on reasonable grounds that the investment will be repaid by the final maturity date and that all income from the investment will be paid when due, taking into account all relevant circumstances, including any credit ratings issued by ratings agencies.
There are no specific offences, penalties, or civil or criminal consequences outlined for breaches of this Class Order. However, any failure to comply with the conditions set forth in the relief may result in consequences under the broader provisions of the Corporations Act 2001. This may include actions for breaches of statutory duties, civil penalty provisions, or other regulatory consequences as determined by the Australian Securities and Investments Commission (ASIC). It is essential for responsible entities to adhere to the conditions to avoid any potential legal repercussions under the Act.