ASIC CLASS ORDER [05/1236…]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act
Subsection 601QA(1) – Variation
The Australian Securities and Investments Commission (ASIC) makes Class Order [CO 05/1236…] under subsection 601QA(1) of the Corporations Act 2001 (the Act). That subsection provides that ASIC may exempt a person or class of persons from specified provisions of Chapter 5C of the Act (which deals with managed investment schemes) and declare that provisions of Chapter 5C of the Act apply to a person or class of persons as if they were omitted, modified or varied as specified in the declaration.
1. Background
Chapter 5C of the Act requires the price at which interests in a registered managed investment scheme are issued to be governed by the terms of the scheme's constitution. When new interests in the scheme are issued, the issue price must be the price that the constitution dictates, rather than a price that the scheme's responsible entity has set.
ASIC used its statutory powers to modify provisions of the Act and grant exemptions
from the Act under subsection 601QA(1) by executing its Class Order [CO 05/26] Constitutional provisions about the consideration to acquire interests. The effect of that class order is that if the constitution of a registered managed investment scheme contains provisions to the effect of the terms of the class order, then the responsible entity (operator) of the scheme can set the issue price of interests in some circumstances. This means that the responsible entity may issue interests at a discount to the price that normally applies under the constitution in the following limited circumstances set out in the class order.:
(a) placements of quoted interests – the issue of interests that are quoted on the Australian Stock Exchange ("ASX") or an approved foreign exchange at a discount of up to 10% to the current market price (subject to the approval of disinterested members by special resolution if more than 15% of interests in the scheme are issued in this manner in a 12 month period);
(b) pro rata rights issues - issues of interests (including options) at a discount (within a range permitted by the constitution) to existing members of the scheme in proportion to the value of the interests in the scheme each member holds;
(c) interest purchase plans – issues of up to $5,000 worth of interests in any 12 month period to scheme members who wish to increase their investment in the scheme;
(d) distribution reinvestment plans – issues of additional interests (within a range permitted by the constitution) at a discount to members who choose to reinvest all or part of the distribution payable to them for the interests they hold in the scheme;
(e) schemes involving no or limited pooling – issues of interests at a price set by the responsible entity in circumstances where the price one member pays does not affect the price other members pay;
(f) forfeited interests - the sale of interests that were partly paid and forfeited due to non-payment of the outstanding balance in accordance with requirements governing the forfeiture of partly paid shares in no liability companies; and
(g) negotiated fee agreements – the negotiation between the responsible entity and wholesale clients of reduced fees that result in those wholesale clients paying a lower amount to acquire interests in the scheme.
Chapter 5C also requires that, where members have a right to withdraw from the scheme, the constitution must set out adequate procedures for making and dealing with withdrawal requests.
2. Purpose of the class order
On 21… December 2005 ASIC executed Class Order [CO 05/1236….] to amend Class Order [CO 05/26]. These amendments were necessary because ASIC made some changes has decided to clarify to its policy. See, which are summarised in the table in Section 3.
3. The class order
The table below summarises the changes that ASIC has made to Class Order [CO 05/26] as a result of the execution of Class Order [CO 05/…].
ASIC Policy Statement [PS 134] Managed investments: Constitutions ("PS 134"), stated that unless interests were to be issued at a discount in the prescribed circumstances set out in Class Order [CO 05/26], the consideration to acquire an interest had to be independently verifiable from the terms of the constitution so that no aspect of it could be influenced by the responsible entity or any third party. If members had a right to withdraw from the scheme, the withdrawal procedures (relevantly including the amount ("withdrawal amount") paid to members withdrawing interests from the scheme) needed to be independently verifiable from the terms of the constitution so that neither the responsible entity nor any third party could influence the withdrawal procedures.
Class Order [CO 05/1236] has been executed to clarify ASIC's policy. Under the class order relief, the constitution may allow the responsible entity a discretion to influence an aspect of the consideration to acquire an interest or the withdrawal amount, so long as the responsible entity:
(a) acts reasonably in exercising the discretion;
(b) either exercises its discretion in accordance with a current documented policy or provides a written explanation explaining how the discretion was exercised and why such exercise was reasonable;
(c) retains the documents that are relevant to each discretion for seven years; and
(d) provides a copy, upon request and at no charge, of any documents referred to in paragraph (b) to:
(i) any member of the scheme; and
(ii) a person who has received or should have received a Product Disclosure Statement for an interest in the scheme; and
(e) informs all members of their right to request a copy of the documents referred to in paragraph (b).
The responsible entity must meet the above requirements from 1 May 2006.
No
| Item
| Before Class Order [CO 05/…]
| After Class Order [CO 05/…]
|
1
| Responsible entity discretion to set elements of the non-discount issue price and influence withdrawal procedures
| Unless interests were to be issued at a discount in the prescribed circumstances set out in Class Order [CO 05/26], the consideration to acquire an interest had to be independently verifiable from the terms of the constitution so that no aspect of it could be influenced by the responsible entity or any third party.
If members had a right to withdraw from the scheme, the withdrawal procedures needed to be independently verifiable from the terms of the constitution so that neither the responsible entity nor any third party could influence the withdrawal procedures.
| The constitution may allow the responsible entity a discretion to influence an aspect of the consideration to acquire an interest or the withdrawal procedures, so long as the responsible entity:
(a) discloses information about each discretion to members;
(b) documents the circumstances in which it may exercise each discretion;
(c) documents how it exercises each discretion and why such an exercise is reasonable;
(d) retains the documents that are relevant to each discretion for seven years; and
(e) makes the documents identified in paragraphs (b) and (c) above available to:
(i) any member who requests the documents, at no charge;
(ii) independent directors of the responsible entity;
(iii) members of the compliance committee for the scheme; and
(iv) the auditor of the scheme compliance plan.
|
2
| Issues of stapled securities that include managed investment interests
| The responsible entity of a listed managed investment scheme could issue 15% interests in the scheme at a price it determined (other than through a rights issue, interest purchase plan, distribution reinvestment plan or negotiated fee arrangement) without member approval in any 12 month period. Where interests in the scheme are required to be traded with other financial products as a stapled security and stapled securities are issued at the price set by the constitution, with no discount applied (e.g. the market price) the responsible entity determines the price of the interests by allocating part of the stapled security issue price to the interests. The issue of those interests would count towards the 15% interests for which the responsible entity could set the issue price without member approval in a 12 month period.
| Where stapled securities that include an interest in a managed investment scheme are issued at the price prescribed in the constitution, the responsible entity's allocation of part of the issue price of the stapled security to the scheme interest does not fall within the 15% interests in the scheme that can be issued at a price set by the responsible entity without member approval in a 12 month period.
See s601GAA(9A) [and the alternative 601GAA(8A)]
|
3
| Underwriting of rights issues and placements by associates of the responsible entity
| The responsible entity could not use its associate as the underwriter of a rights issue or a placement. Any responsible entity that wished to do this would need to seek relief from ASIC in addition to the class order relief.
| The responsible entity may now use its associate as the underwriter of a rights issue or a placement of interests in a listed managed investment scheme provided that the following requirements are met:
(a) the underwriting agreement is entered on arm's length terms and for the sole purpose of the underwriter assuming the risk of acquiring interests not taken up by the persons to whom they are initially offered, and on-selling those interests to third parties for which it may be paid a fee;
(b) the underwriter either holds an Australian financial services licence that authorises it to underwrite issues of interests in a managed investment scheme or is regulated for the provision of this financial service in a foreign jurisdiction and is exempt from the requirement to hold an Australian financial services licence for underwriting issues of interests in a managed investment scheme;
(c) where the underwriter holds an Australian financial services licence, the licence contains conditions that apply where the underwriter is an associate of the responsible entity of the scheme, interests of which it is underwriting, that prevent the underwriter from:
(i) exercising voting rights in respect of interests it acquires as underwriter; and
(ii) knowingly selling interests it acquires as underwriter to a person it knows is its associate;
(d) where the underwriter is a foreign financial service provider and ASIC has exempted the underwriter from the requirement to hold an Australian financial services licence, the exemption must contain conditions that apply where the underwriter acquires interests in a scheme of which its associate is the responsible entity that prevent the underwriter from:
(i) exercising voting rights in respect of interests it acquires as underwriter; and
(ii) knowingly selling interests it acquires as underwriter to a person it knows is its associate.
|
4
| Rights issues – clarification of equal treatment relief
| The responsible entity was exempted from its obligation in paragraph 601FC(1)(d) to treat all members of the same class equally if it issued interests to professional investors before they were issued to "some other members".
| The class order has been amended to make it clear that the exemption does not allow the responsible entity to issue interests to wholesale clients on an earlier date, to the exclusion of all retail investors. The responsible entity may only discriminate among members as to the issue date by reference to the timing of their acceptance of the offer, and may not discriminate on the basis of whether a member is a wholesale or a retail client.
See Item 5 paragraph (b)(i).
|
5
| Differential treatment of "professional investors"
| The responsible entity was allowed to treat professional investors differently from other investors by giving them a shorter offer period and issuing interests to them earlier than they were issued to some other members.
| The term "wholesale clients" has replaced "professional investors". The term "wholesale clients" encompasses a broader category of investors than professional investors.
See Item 5 paragraph (b)(ii).
|
6
| Market price
| There was no definition of the term "market price" as used in the class order.
| The term "market price" has been given the same meaning as it has in the ASX Listing Rules.
See s601GAA(13)
|
7
| Clarification of "related issue"
| For the purposes of s 601GAA(2), interests can only be issued in a placement without member approval if the interests issued, together with any "related issue", do not comprise more than 15% interests in the scheme. The term "related issue" was defined as an issue of interests at a price set by the responsible entity other than a placement issue approved by members or an issue of interests in accordance with "other provisions" of the constitution.
| The definition of "related issue" makes it more apparent that an issue of interests under a placement that members have not approved is a "related issue" that counts towards the 15% in 12 months threshold. An issue of interests at a price set by the responsible entity that members have not approved is only excluded from being a related issue if it was done in accordance with a provision of the constitution "other than" s601GAA(2) – ie. in accordance with s601GAA(3), 601GAA(4), 601GAA(5), 601GAA(6), 601GAA(7) and 601GAA(8).
See s601GAA(13)
|
4. Consultation
Item 1
On 1 October 2004 ASIC released a Consultation Paper titled Proposed relief for managed investment scheme constitutions. ASIC called for submissions on its Consultation Paper by 30 November 2004. ASIC received eight (8) submissions from private law firms, industry associations and other participants in the managed funds industry. ASIC took into account the submissions it received in developing its policy on Item 1.
A Regulation Impact Statement (RIS) was prepared for [CO 05/1236]. A copy of the RIS is attached.
Item 3
ASIC developed its policy on Item 3 after having consulted interested financial institutions and the Law Council of Australia about its proposed policy change.
Items 2, 4, 5, 6 and 7
These are minor and technical variations to the relief contained in Class Order [CO 05/26] that ASIC has made in response to queries it has received from legal advisers representing financial institutions that issue interests in managed investment schemes in reliance on the class order relief. ASIC has made these changes with a view to making its policy that underlies the class order clearer on the face of the document.