ASIC CLASS ORDER [07/18]
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 07/18] 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, where the constitution provides for a formula or method to determine the issue price of an interest, the responsible entity may retain a discretion under the constitution to influence an aspect of the consideration to acquire an interest, 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;
(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) any 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 class order also permits the responsible entity to issue interests at a discounted price it determines rather than at the full market price (in the case of a listed scheme) or the price that results from the application of the formula/method in the constitution referred to above (in the case of an unlisted scheme) if the constitution contains provisions to the effect of the terms of the class order in the following limited circumstances:
(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 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 at a discount (within a range permitted by the constitution) 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 similar to those 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.
2. Purpose of the class order
On 18 January 2007 ASIC executed Class Order [CO 07/18] to amend Class Order [CO 05/26]. The amendments are summarised in the table in Section 3. Since Class Order [CO 05/26] was executed ASIC has received feedback about the practical application of its provisions and has further developed its policy. Some of the amendments made by Class Order [CO 07/18] (particularly items 2 and 3 of the table) reflect ASIC changes that ASIC has made to its policy. Other technical amendments (such as items 4, 5 and 6) were made to existing provisions of the class order with a view to making the requirements of the class order more transparent and readily understood.
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 07/18].
No | Item | Before Class Order [CO 07/18] | After Class Order [CO 07/18] |
1 | 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: (a) the underwriting agreement is entered on terms that are not more favourable to the associate than arm's length terms; and (b) the underwriter holds an Australian financial services licence that authorises it to underwrite issues of interests in a managed investment scheme and contains conditions that prevent it from: (i) exercising voting rights in respect of interests it acquires as underwriter; and (ii) transferring interests in off-market trading to an associate of the responsible entity (other than an associate acquiring interests in a fiduciary capacity), where it acquires, as underwriter, interests in a scheme of which its associate is the responsible entity. See subsection 601GAA(12A), which also covers sub-underwriting by associates. |
2 | Placements to associates of the responsible entity | The responsible entity could not issue any interests in a placement to a person that was its associate. | The responsible entity may now issue interests in a placement to an associate who will acquire the interests in an eligible fiduciary capacity, provided that the proportion of placement interests issued to the associate does not exceed the proportion of scheme interests it held before the placement. This means that only associates who are existing scheme members before the placement may participate, and they may only do so to the extent necessary to preserve their proportionate holding in the scheme.
The term "eligible fiduciary capacity" includes life insurers, superannuation trustees, responsible entities of registered schemes, custodians and trustees for professional investors.
NB. The responsible entity may also issue interests to its associate as an underwriter (see item 2).
See subsections 601GAA(12B) and 601GAA(12C) |
3 | Rights issues – clarification of equal treatment relief | 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. | This part of the class order is intended to facilitate pro rata rights issues that are sometimes referred to as “jumbo” offerings and involve an accelerated offer to institutional investors over a very short period followed by an offer to retail investors. It permits some unequal treatment by the responsible entity as between institutional and retail investors that would otherwise be prohibited. The amendment is intended to make the operation of the exemption clearer.
See Item 5 paragraph (b) |
No | Item | Before Class Order [CO 07/18] | After Class Order [CO 07/18] |
4 | Clarification of “related issue” | For the purposes of subsection 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 revised 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" subsection 601GAA(2) – e.g. a rights issue, a distribution reinvestment plan or an interest purchase plan.
See subsection 601GAA(13) |
5 | Interaction between section 601GAB and section 601GAA | The purpose of subsection 601GAB(11) is to prevent a responsible entity from circumventing the specific section 601GAA requirements that apply in the case of a discounted issue by limiting the application of the section 601GAB formula. | This provision has been redrafted to clarify its operation.
See subsection 601GAB(11)
|
6 | Definition of “approved foreign market” | The definition of “approved foreign market” included Borsa Italiana, Bourse de Paris, Eurex Amsterdam, NASDAQ National Market, New Zealand Stock Exchange, Stock Exchange of Singapore and Zurich Stock Exchange. | The definition of “approved foreign market” has been updated to reflect changes in the names of some of these markets since the class order was executed in May 2005. Zurich Stock Exchange has been absorbed into SWX Swiss Exchange.
See subsection 601GAA(13) |
7 | Definition of “ASX” | “ASX” was defined as Australian Stock Exchange Limited. | The definition of “ASX” has been updated to reflect the change of name to ASX Limited.
See subsection 601GAA(13) |
4. Consultation
Item 1
ASIC developed its policy on Item 1 after having consulted interested financial institutions and the Law Council of Australia about its proposed policy change.
Item 2
ASIC developed its policy on Item 2 after having consulted interested financial institutions and their legal advisers about its proposed policy change.
Items 3, 4, and 5
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 the policy that underlies the class order and its intended operation clearer on the face of the document.
Items 6 and 7
These variations were done to ensure references in the class order to approved foreign markets and the ASX were up-to-date.