ASIC CLASS ORDER [CO 11/942]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
The Australian Securities and Investments Commission (ASIC) makes [CO 11/942] under paragraphs 601QA(1)(b), 926A(2)(a), 992B(1)(a) and 1020F(1)(a) of the Corporations Act 2001 (the Act).
Paragraph 601QA(1)(b) of the Act provides that the Australian Securities and Investments Commission may declare that Ch 5C of the Act apply to a person as if the provisions were omitted, modified or varied in a certain way.
Paragraph 926A(2)(a) of the Act provides that ASIC may exempt a person from a provision of Pt 7.6 of the Act (other than Divs 4 and 8).
Paragraph 992B(1)(a) of the Act provides that ASIC may exempt a person from a provision of Pt 7.8 of the Act.
Paragraph 1020F(1)(a) of the Act provides that ASIC may exempt a person from a provision of Pt 7.9 of the Act.
Background
On 20 October 2009, the Full Federal Court held in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147 that a funded representative action and solicitors’ retainers for two representative proceedings against Brookfield Multiplex Ltd in the Federal Court were a managed investment scheme that should have been registered for the purposes of the Act.
On 4 May 2010, the Government announced that it would make regulations exempting representative proceedings and proof of debt arrangements from:
(a) the definition of managed investment scheme in s9 of the Act; and
(b) Pts 7.6, 7.7, 7.8 and 7.9 of the Act as long as there are appropriate arrangements in place to manage conflicts of interest.
ASIC executed [CO 10/333] on 5 May 2010. [CO 10/333]:
- provides for Ch 5C to apply as if the definition of a managed investment scheme in s9 of the Act were varied to exclude a litigation funding scheme and a proof of debt funding scheme.
- exempts funders, lawyers and their representatives and other persons from the requirements to hold an AFSL or act as an authorised representative of a licensee to provide financial services associated with a litigation funding scheme and a proof of debt funding scheme.
- exempts from the requirement comply with the disclosure provisions in Pt 7.9 of the Act in relation to interests in a litigation funding scheme and a proof of debt funding scheme.
On 15 March 2011, the New South Wales Court of Appeal held in International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50 that a litigation funding agreement was a financial product under s763A of the Act because it is a facility through which financial risk is managed.
On 23 June 2011, ASIC executed [CO 11/555]. [CO 11/555] varied [CO 10/333] to exempt a person from the requirements in the Act for a litigation funding arrangement or a proof of debt funding arrangement to the extent the arrangement, or an interest in the arrangement, is otherwise characterised as a financial product, or an interest in a financial product, including an interest in a single member arrangement that is characterised as a financial product.
The relief in [CO 10/333] originally had effect until 30 September 2010. [CO 11/555] extended the transitional relief to 30 September 2011.
Purpose of [CO 11/942]
[CO 11/942] will further enable the temporary operation of a litigation funding scheme and a proof of debt funding scheme that is characterised as a managed investment scheme under the Act without compliance with the requirements of the Act until 29 February 2012.
[CO 11/942] will also extend the transitional relief from the requirements in the Act for a litigation funding arrangement and a proof of debt funding arrangement that is otherwise characterised as a financial product, or an interest in a financial product, until 29 February 2012.
This is to allow additional time for the Government to implement the legislative reform for litigation funding schemes and proof of debt schemes.
Operation of [CO 11/942]
[CO 11/942] varies [CO 10/333] by replacing 30 September 2011 in paragraph 10 with 29 February 2012.
Consultation
ASIC did not undertake consultation with respect to [CO 11/942] as it provides relief only for a short period pending implementation of the Government’s decision by regulation.
Overview
The ASIC Class Order [CO 11/942], enacted in 2011 under the authority of the Corporations Act 2001, was introduced to address a gap in the regulation of litigation funding and proof of debt funding schemes. This legislation was necessitated by a series of court decisions that raised questions about the classification of such schemes under existing financial services laws. The Australian Securities and Investments Commission (ASIC), acting under the powers conferred by the Corporations Act, issued this class order to provide temporary relief from certain regulatory requirements. The primary policy objective of [CO 11/942] was to allow the continued operation of litigation and proof of debt funding arrangements, which had been deemed to be managed investment schemes or financial products, without immediate compliance with the full regulatory framework until more comprehensive legislative reforms could be enacted. This transitional measure aimed to provide stability in the interim period while the government worked on legislative changes.
Scope and Application
The ASIC Class Order [CO 11/942], made under the Corporations Act 2001, applies to persons, entities, and arrangements involved in litigation funding and proof of debt funding schemes. The primary scope of the Order is to modify the application of certain provisions of the Corporations Act to these schemes, effectively exempting them from certain regulatory requirements until the Government can implement permanent legislative changes. The geographic reach of the Order is national, as it applies throughout Australia. The Order was necessitated by court decisions that previously classified these funding schemes as managed investment schemes, subjecting them to regulatory oversight. The Class Order aims to provide temporary relief by exempting these schemes from specific sections of the Corporations Act, including those relating to financial product disclosure and authorisation requirements, until 29 February 2012. This extension allows additional time for the Government to enact the necessary legislative reforms. The Order extends the transitional relief initially provided in [CO 10/333] and subsequently in [CO 11/555], ensuring that the temporary exemption remains in effect until the new legislation is in place.
Key Provisions
The Australian Securities and Investments Commission (ASIC) Class Order [CO 11/942] is designed to temporarily modify the application of the Corporations Act 2001 to certain types of funding arrangements. The primary sections involved in this regulation include sections 601QA, 926A, 992B, and 1020F of the Act. These sections grant ASIC the authority to exempt certain parties from specific provisions of the Act under particular conditions. The order aims to allow litigation funding schemes and proof of debt funding schemes to operate temporarily without full compliance with the Act until 29 February 2012.
The obligations imposed by this class order on the parties involved include the exemption from certain regulatory requirements such as holding an Australian Financial Services License (AFSL) or acting as an authorised representative of a licensee when providing financial services related to litigation funding schemes and proof of debt funding schemes. Additionally, the order exempts these schemes from the disclosure requirements outlined in Part 7.9 of the Act. It is essential for the parties to ensure that appropriate arrangements are in place to manage conflicts of interest as stipulated in the order.
Failure to comply with the provisions of the Corporations Act 2001 can lead to significant legal consequences. While the Explanatory Statement does not explicitly detail specific offences or penalties related to breaches of this class order, breaches of the Act generally can result in substantial penalties. For instance, individuals and entities found in breach of the Act may face fines and, in severe cases, imprisonment. The penalties can vary significantly depending on the nature and severity of the breach, with maximum penalties potentially reaching up to $1.5 million for corporations and $300,000 for individuals, as stipulated by the relevant sections of the Act. It is crucial for all parties involved to adhere to the regulatory framework to avoid these severe repercussions.