The Establishment and Operation of Managed Investment Schemes – Page 3

Question 7.3.3. Does the current law adequately prevent the possibility of double compensation for an act or omission by an RE’s agent and, if not, how should the law be clarified?

7.4 Disclosure of interests of directors of the responsible entity

The issue

If a managed investment scheme is listed, but the RE is not, the directors of the RE are not subject to the same disclosure requirements as directors of listed companies.476

Current position

Section 205G requires directors of a listed company to notify the relevant market operator, among other things, of:

• their interests in securities of the company or related bodies corporate, and

• contracts that confer rights to interests in managed investment schemes made available by the company or related bodies corporate.

This obligation does not apply to the directors of the RE of a listed scheme where the RE
itself is not listed.

The Turnbull Report noted477 that the predecessor of s 205G contained a requirement for disclosure in situations where the scheme was listed but not the RE.478 It appears that this requirement was inadvertently omitted when the section was amended.479

Analysis and discussion

CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.

There appear to be no sufficient reasons for treating schemes differently in this instance. The omission of directors of scheme REs from this disclosure requirement appears to have been unintentional.

The Turnbull Report favoured an amendment to rectify this omission.480

Question 7.4.1. Should the requirements for disclosure of interests of directors of REs of listed schemes be brought into line with the disclosure requirements in this area for listed companies?

476 Turnbull Report Section 5.2.2.
477 ibid.
478 Former s 235(1A).
479 By the Corporate Law Economic Reform Program Act 1999.
480 Section 5.2.2 and rec 17.

The responsible entity and others involved in the operation of a scheme

7.5 Related party transactions

The issues

The related party provisions for schemes may be too wide, in particular where agents of a person engaged by an RE are treated as related parties.

Should an RE’s contravention of the related party provisions attract criminal liability?

Current position

Related party transaction provisions were introduced for public companies by the Corporate Law Reform Act 1992 to protect shareholders against the possibility ‘that the value of their investment would be eroded by a party related to the company arranging for the company to enter into a transaction which gives a benefit to the related party’.481 The provisions ‘only prevent transactions with related parties with the potential to adversely affect shareholders’ interests, not full value commercial transactions’.482

With the introduction of Chapter 5C, the related party transaction provisions were applied to registered schemes ‘to prohibit a responsible entity from providing a financial benefit to a related party that could diminish or endanger scheme property’.483

The giving of a financial benefit in relation to a registered scheme is governed by a procedure having the following features:484

• donor of the benefit: the benefit is given by:

– the RE

– an entity485 that the RE controls,486 or

– an agent of, or person engaged by, the RE

• source or effect of the benefit: the benefit is given out of, or could endanger, scheme property

• donee of the benefit: the donor and the donee are the same person or the benefit is given to:

– a related party of the donor, or

– one of the persons falling within the above category of donor of the benefit or a related party487 of such a person

481 Explanatory Memorandum to the Bill for the Managed Investments Act 1998 para 13.2.
482 ibid.
483 id at para 13.3. The ALRC/CASAC report recommended the application of related party provisions to schemes (paras 10.23-10.25). The application of the related party provisions to schemes was considered in Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342, particularly at [701]-[734].
484 Replacement s 208(1), (2) introduced into the related party provisions by s 601LC.
485 As defined in s 191.
486 As defined in s 191.
487 As defined in s 228.

The responsible entity and others involved in the operation of a scheme

• conditions for giving the benefit: either:

– the donor of the benefit must obtain the approval of the scheme’s members in the way set out in ss 217 to 227 and give the benefit within 15 months after the approval (this condition is also satisfied if the members approve the making of a contract that requires the giving of the benefit and the contract was made before, but was conditional on, the approval or was made within 15 months after the approval), or

– the giving of the benefit must fall within certain exceptions applicable to related party transactions involving companies.488

This procedure is not required for the RE to pay itself fees or exercise rights to an indemnity, as provided for in the scheme’s constitution under s 601GA(2).489

If a benefit is given without satisfying one of the stipulated conditions:

• the relevant contract or transaction is not affected490

• the RE is not guilty of an offence491

• the RE is not liable to a civil penalty492

• persons involved in a contravention of the related party provisions commit an offence if their involvement is dishonest493 or incur a civil penalty if their involvement is not dishonest.494

Analysis and discussion

Scope of the provisions

The related party provisions for schemes were adapted from those for companies, to recognise the structural differences between a company (which exists as a separate legal entity having its own officers and members) and a scheme (which does not constitute a separate legal entity, but rather has an RE, which provides the officers who perform the tasks involved in the operation of the scheme, and members). One commentary summed

488 Section 601LC refers to the exceptions in ss 210 to 216. However, ss 213 (small amounts given to a related entity) and 214 (benefit to or by closely-held subsidiary) do not apply to schemes (s 601LD). See Explanatory Memorandum to the Bill for the Managed Investments Act 1998 para 13.4. The onus of proving that a transaction falls within one of these exceptions falls on the defendant: Waters v Mercedes Holdings Pty Limited [2012] FCAFC 80 (followed in Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342 at [712]-[716], [721]).
489 Replacement s 208(3) introduced into the related party provisions by s 601LC. The onus of proving that a transaction falls within this exception falls on the defendant: Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation)
(Controllers appointed) (No 3) [2013] FCA 1342 at [720].
490 s 209(1)(a), applied by s 601LA.
491 s 209(1)(b), applied by s 601LA.
492 Subsection 209(2) (as modified by s 601LA(a)) is the civil penalty provision and only applies to a person involved in a contravention by an RE. The definition of ‘involved’ in s 79 does cover the person who committed the contravention, in this case the RE. The RE could not, in any event, be a ‘person involved’ in the context of s 209, as a person dishonestly involved commits an offence under s 209(3), whereas s 209(2), as modified by s 601LA(a), provides that the RE is not guilty of an offence.
493 s 209(3), applied by s 601LA.
494 s 209(2), applied by s 601LA, s 1317E(1)(b).

The responsible entity and others involved in the operation of a scheme

up the differences between the related party provisions for companies and those for schemes as follows:

Essentially, s 601LA [the provision that sets out the structural modifications of the provisions applicable to companies for schemes] treats the responsible entity as if it were the public company in the related party provisions, for certain purposes, and for other purposes it treats the members of the scheme as if they were the public company. Thus, while a public company cannot contravene Ch 2E by receiving a benefit, but only by giving it, the extended related party provisions for registered schemes can be contravened if the responsible entity receives or gives a benefit out of the scheme property.495

The categories of donees of the benefit who come within the related party provisions for schemes are broader than those for public companies. Related parties of a public company are:

• its directors

• any directors of an entity that controls the public company

• if the public company is controlled by an entity that is not a body corporate – each of the persons making up the controlling entity

• spouses of persons in the first three categories

• parents and children of persons in each of the above categories

• an entity controlled by another related party (unless the entity is also controlled by the public company).496

Related parties of public companies do not automatically include, for instance, their agents or persons engaged by them. By contrast, an agent of, or person engaged by, the RE falls within the class of donees of a benefit who are covered by the related party provisions, even if that person is not otherwise related to the RE. This class of regulated donees would include an independent custodian.

CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently. The presence of the RE in the scheme structure is a relevant difference that requires some modification of the related party transaction provisions for schemes. However, there is no apparent reason why an agent of, or person engaged by, the RE should be a related party in connection with a scheme when a person in an equivalent position in relation to a company would not be a related party of the company.

Adoption of the SLE Proposal would not make any difference to this issue, as the MIS would not have any directors, officers or employees, which would be provided by the RE, as under the current law.

495 HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.508].
496 s 228.

The responsible entity and others involved in the operation of a scheme

Consequences of breach

There are compelling reasons for treating schemes differently from companies in relation to the consequences of breach of the related party transaction provisions.

The corporate related party provisions prohibit the giving of benefits by the company unless the stipulated procedures are followed. The aim is to preserve company property for the benefit of the company itself. There is therefore no need to prohibit the giving of benefits to the company. By contrast, a managed investment scheme is not a separate legal entity. The aim of the related party provisions for schemes is to preserve scheme property for the benefit of scheme members. The related party provisions for schemes therefore prohibit the giving of benefits to the RE as well as by the RE unless the stipulated procedures are followed.

The liability regime for breach of the related party transaction provisions seems not to recognise this difference between companies and schemes. It appears to be inappropriate to give the RE the same exemption from criminal liability and liability to a civil penalty that applies to companies. The RE holds scheme property on trust for scheme members497 and might reasonably be held liable, both criminally and civilly, for misuse of that property.

One commentary has observed, in relation to the imposition of criminal liability:

There is no sound policy reason for excluding criminal liability in this context. Section 209(1)(b), as it applies to registered schemes, is inappropriate. The reason why sec 209(1)(b), as it applies to public companies, excludes criminal liability for the company itself is that the company is seen as the victim of the contravention. The financial benefit, in the context of companies, operates to reduce the resources of the public company in favour of the recipient of the benefit and to the detriment of the public company’s shareholders. Imposing liability on the company itself would twice punish the shareholders. This argument has no application in the context of registered schemes. Punishing the wrongdoing responsible entity (or other person conferring the
benefit) would not harm the interests of the members of the scheme.498

It may also be worth reassessing the application to REs of the provision preserving the validity of any contract or transaction connected with the giving of benefit.499 One possibility is to make such a contract or transaction void (or at least voidable) against the RE, but preserve its validity for third parties.

If the SLE Proposal were adopted, the MIS, like a company, would not be a related party. The RE would continue to be a related party for the purpose of the related party transaction provisions.

Question 7.5.1. Do the related party provisions for schemes need to differ from those for companies and, if so, in what respects and why?

Question 7.5.2. Should the RE be subject to criminal liability and/or civil penalties for breach of the related party provisions?

Question 7.5.3. Where an RE has given a benefit in contravention of the related party provisions, what should be the effect on the validity of the contract or transaction?

497 s 601FC(2).
498 CCH Managed Investments Law and Practice (looseleaf) at ¶54-700.
499 s 209(1)(a).

The responsible entity and others involved in the operation of a scheme

7.6 Change of responsible entity

The issues

There are several circumstances in which the requirement to hold a meeting to change the RE of a scheme might reasonably be dispensed with. However, a change of RE cannot be effected without a meeting of members, unless ASIC grants relief. It may be worth considering whether it would be possible to devise a legislative amendment that could avoid the need to convene a meeting of members to change an RE in appropriate circumstances.

Current position

Corporations Act

An RE of a scheme can retire from that position if a meeting of members chooses another eligible entity to become the new RE.500 The members may also take action to require the calling of a meeting501 to consider and vote on a resolution that the current RE be removed and a resolution to choose a new RE.502

The RE of a listed scheme may be replaced by two ordinary resolutions of scheme members (one to remove the current RE and another to choose a new RE), being a simple majority of votes cast by members entitled to vote on the resolutions.503 The RE and its associates may vote any interests they hold as members on those resolutions.504

More stringent requirements apply to unlisted schemes. The replacement of an RE of an unlisted scheme requires two ‘extraordinary resolutions’ of scheme members, being the approval of at least 50% of the total votes that can be cast by members entitled to vote, whether or not cast.505 Also, the RE and its associates are ineligible to vote on the removal and replacement resolution.506

In the 2012 CAMAC report, CAMAC (following on from a recommendation of the Turnbull Report507) recommended that the current ‘extraordinary resolution’ voting requirements for unlisted schemes be replaced with a requirement for simple majorities of the votes of scheme members cast at the meeting (in person or otherwise), provided that the total votes cast (for and against) on each of the resolutions constitute at least 25% of the total votes of scheme members (excluding votes that are ineligible to be voted on the resolution).508

500 s 601FL.
501 Part 2G.4 Div 1.
502 s 601FM.
503 ss 601FM(1), 252L(1B)(c).
504 Where a scheme is listed, the RE and its associates are entitled to vote their interests on resolutions to remove the RE and to choose a new RE: s 253E. This provision is discussed in Section 8.4 of this paper.
505 s 601FM and the definition of ‘extraordinary resolution’ in s 9.
506 For an unlisted scheme, the RE and its associates are not entitled to vote their interests on resolutions to remove the RE and choose a new RE, as they would have an interest in those resolutions: s 253E. That provision specifically allows the RE and its associates to vote on those resolutions where the scheme is listed.
507 rec 2.
508 Section 5.4.3.

The responsible entity and others involved in the operation of a scheme

ASIC relief

ASIC grants relief on a case by case basis to permit a change of RE of a registered scheme without the need for a meeting of members in the following circumstances:

• the RE and the proposed replacement RE are members of the same corporate group and there is no significant change to the underlying operation of the scheme. This relief requires the RE to advise members of its intention to resign and the intended appointment of the replacement RE. If a sufficient number of members believe a vote should occur on the resolution to choose a new RE and advise the current RE of this, the RE is required to arrange for a postal vote or convene a meeting to allow members to vote on the resolution to appoint the replacement RE, or

• there is a very small number of members in the scheme (for instance, less than six) and either:

– all those members would be prevented from voting by having an interest in the resolution other than as a member509 and had provided their written consent,510 or

– those members were wholesale clients and had provided written consent to the change of RE.

Analysis and discussion

It is desirable that the procedures in the Corporations Act be as simple as possible, while protecting the rights of interested parties.

If the circumstances in which ASIC has granted an exemption from the requirement to hold a meeting can be effectively incorporated into the Corporations Act, it would relieve the administrative burden on ASIC and reduce costs for involved parties.

A contrary view is that it may be too difficult for a law of general application to ensure that all parties are protected and the involvement of ASIC in each instance is necessary to take account of the circumstances of each particular case.

Question 7.6.1. Should the Corporations Act allow for the possibility of a change of RE
without a meeting of members:

• in the types of circumstances where ASIC has given relief
• in any other circumstances and, if so, what circumstances and what procedural safeguards should apply?

7.7 Scheme custodians

The issues

Should scheme custodians be subject to the licensing regime, so that ASIC can supervise and regulate their activities directly?

509 s 253E.
510 See ASIC Regulatory Guide 136 at RG 136.5.

The responsible entity and others involved in the operation of a scheme

Should the basis on which a custodian holds property on behalf of an RE be clarified?

Should custodians be allowed to hold money to acquire interests in a scheme on behalf of the RE?

Current position

Place of custodians in the regulatory framework

Before the introduction of the managed investment scheme provisions in Chapter 5C, managed investment schemes were regulated as ‘prescribed interests’,511 which had a dual structure consisting of a trustee and a management company.

With the introduction of Chapter 5C by the Managed Investments Act 1998, this dual structure was replaced by a single responsible entity, which was required to hold an Australian financial services licence (AFSL).512

Unless ASIC grants relief, the RE has an obligation to ensure that scheme property is clearly identified as such and held separately from property of the RE and property of any other scheme.513 Also, where the RE holds scheme property, the property is held on trust for scheme members.514

In practice, however, many REs use a custodian to hold scheme property.515 The PJC Trio report described the role of a custodian as follows:

A custodian is responsible for the safekeeping of the assets of a third party client such as a managed investment scheme. It holds legal title to the assets of the client. However, as ASIC noted in its submission, ‘the custodian only acts on properly authorised instructions from its direct client or authorised agent’ and that prime responsibility rests with the RE. Further, custodians are not required to verify underlying assets in managed investment schemes, only the units in these schemes.516

The amount of net tangible assets (NTA) that ASIC requires an RE to hold under its licensing conditions is less if the RE uses a custodian that satisfies specified NTA

511 Former Part 7.12 Div 5.
512 s 601FA, definitions of ‘financial service’ and ‘financial services business’ in s 761A, ss 766A(1)(d), 911A.
513 s 601FC(1)(i). For ASIC relief from this requirement, see Regulatory Guide 133 Managed investments and custodial or depository services: Holding assets at RG 133.149, ASIC class order [CO 13/1409].
The IOSCO Objectives and Principles of Securities Regulation (June 2010) provide that the ‘regulatory system
should provide for rules governing … the segregation and protection of client assets’ (Principle 25).
514 s 601FC(2).
515 The RE may appoint an agent to do anything that it is authorised to do in connection with the scheme: s 601FB(2). ASIC does not consider that the use of custodians is inconsistent with the single responsible entity principle, as responsibility rests solely with the RE under s 601FB(2): ASIC Report 291 Custodial and depository services in Australia (July 2012), para 38.
The ALRC/CASAC report noted that, in the light of its proposed reforms, it could be left to scheme operators to decide whether to involve a second party in the running of a scheme (para 3.20). The Explanatory Memorandum to the Bill for the Managed Investments Act 1998 also recognised that the RE may choose to engage a custodian
to hold the scheme property (paras 5.1, 8.5, 8.13).
The original draft Collective Investments Bill, released in 1995, proposed that the legislation require an independent custodian to act as trustee to ensure that the assets of the fund were segregated from the assets of the RE, but without giving the custodian any responsibility for the conduct of the scheme. The Managed Investments Act 1998 did not include this proposal. See further HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.470.9].
Details about the Australian custodian industry can be found in ASIC Report 291 Custodial and depository services in Australia (July 2012), para 1. REs are one of the main users of custodial services in Australia (ASIC Report 291, para 26).
516 para 5.56. See also paras 5.61-5.64 for discussion of the limited role of the custodian.

The responsible entity and others involved in the operation of a scheme

requirements.517 Custodians are also seen as providing benefits through independent safekeeping of assets and the use of sophisticated and professional systems.518

The Corporations Act specifically exempts custodians of assets of registered schemes (scheme custodians) from the requirement to hold an AFSL.519 Given this, custodians are not subject to the statutory obligations regarding the holding of client money and property that apply to financial services licensees,520 in particular that:

• client money be held on trust in a dedicated account for client money521

• (subject to the regulations) other client property only be dealt with in accordance with the original terms and conditions on which it was given to the licensee and any subsequent instructions given by the client.522

The Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act
2001 contains the following rationale for the exemption of scheme custodians from the licensing provisions:

Custodial and depository services have been included in the new regime to ensure that consumers of these services receive sufficient disclosure to make informed decisions about whether to use the services, and can be confident that service providers are competent, and have adequate compensation arrangements … and provide access to dispute resolution procedure for retail clients. Custodial and depository services have also been included for market integrity reasons, to ensure that service providers have appropriate risk management procedures.

However, there are many circumstances in which client assets are entrusted to third parties where this level of regulation would not be justifiable … where a person merely holds the assets of a managed investment scheme this level of regulation is not justified since the person holding the assets is acting under the direction of the responsible entity of the scheme. The definition therefore only covers situations where a service provider both possesses or controls client assets and provides administrative functions in relation to those assets.523

Given that there are no direct licensing controls over scheme custodians, ASIC seeks to exercise a measure of indirect control over those custodians through the licensing requirements for REs. ASIC Regulatory Guide 133 Managed investments and custodial or depository services: Holding assets (RG 133),524 released in November 2013, requires REs that choose to engage another party as the holder of scheme property 525 to impose minimum standards on that party and ensure that the party meets those minimum standards.526 Those standards require:

517 RG 166 Licensing: Financial requirements (November 2013), paras RG 166.209-RG 166.218 (with Table 9).
See also ASIC Report 291 Custodial and depository services in Australia (July 2012), para 35.
518 ASIC Report 291 Custodial and depository services in Australia (July 2012), para 37.
519 While those who provide a custodial or depository service must be licensed (definitions of ‘financial service’ and ‘financial services business’ in s 761A, ss 766A(1)(e), 766E, 911A), ‘the holding of the assets of a registered scheme’ does not constitute providing a custodial or depository service (s 766E(3)(b)).
520 Part 7.8 Divs 2 and 3.
521 ss 981B, 981H.
522 s 984B.
523 paras 6.110-6.111.
524 This Regulatory Guide followed on from ASIC Report 291 Custodial and depository services in Australia
(July 2012) and Consultation Paper 197 Holding scheme property and other assets (December 2012).
525 An RE must have a written procedure for determining whether it should itself hold scheme property or, if it is to engage another party to hold that property, for determining which other person and on what terms (RG 133.24). Selection of a person to hold property is discussed at RG 133.71-133.74.
526 RG 133.17, RG 133.20, RG 133.59, RG 133.65-RG 133.79.

The responsible entity and others involved in the operation of a scheme

• an adequate organizational structure (being one that supports separation of assets and segregation of staff to minimise conflicts of interest)527

• adequate staffing capabilities528

• adequate capacity and resources to perform core administrative activities529

• assets being held on trust for the client.530

The agreement between the RE and a holder of scheme property must require that property holder to maintain adequate arrangements for reporting breaches of the RE’s obligations to ASIC.531

Basis on which property is held

A custodian is widely viewed as holding assets as bare trustee on behalf and on the instruction of the RE, though the precise relationship between the custodian and the RE depends on the terms of the relevant custodial agreement.532

Also, an RE, in its capacity as an entity that issues a financial product (being interests in the scheme), must hold money from persons applying for interests in the scheme in a separate designated account.533 The money is taken to be held in trust by the RE for the benefit of the person who paid the money.534 The relevant provision does not allow for the fact that an RE might use a custodian to hold this application money.

Other legislation

There is limited regulation of scheme custodians in other legislation. For instance, custodians of property of unregistered, but not registered, schemes have obligations to report to AUSTRAC about certain suspicious matters, certain threshold transactions and international funds transfer instructions under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.535 Custodians of unregistered schemes may also be required to give compliance reports to AUSTRAC.536

527 RG 133.25, RG 133.31-RG 133.36. There is an exception from the requirement for separation of assets in the case of omnibus accounts (see RG 133.31, Section F of RG 133).
528 RG 133.25, RG 133.37-RG 133.40. For the obligation of an RE to monitor ongoing compliance of the party engaged to hold scheme property, see RG 133.75-RG 133.79.
529 RG 133.25, RG 133.41-RG 133.44.
530 RG 133.25, RG 133.45-RG 133.48.
531 RG 133.100-133.105.
532 RG 133.46, PJC Trio report, paras 7.36-7.44, ASIC Report 291 Custodial and depository services in Australia
(July 2012), paras 44-47.
533 s 1017E(1), (2).
534 s 1017E(2A).
535 Definitions of ‘providing a custodial or depository service’, ‘reporting entity’ and ‘threshold transaction’ in
Anti-Money Laundering and Counter-Terrorism Financing Act 2006 s 5, s 6 (Item 46 in Table 1), Part 3
Divs 2-4. The definition of ‘providing a custodial or depository service’ in s 5 refers to, and is in line with, the definitions relating to the provision of custodial or depository services in the Corporations Act and therefore excludes custodians of registered schemes.
536 Anti-Money Laundering and Counter-Terrorism Financing Act 2006 s 5 (definitions of ‘providing a custodial or depository service’, ‘reporting entity’ and ‘threshold transaction’), s 6 (Item 46 in Table 1), Part 3 Div 5.

The responsible entity and others involved in the operation of a scheme

Analysis and discussion

Place of custodians in the regulatory framework

There are two alternative policy approaches for the treatment of custodians in the regulatory framework:

• Option 1: maintain the current indirect approach of exempting scheme custodians from the need to hold an AFSL and regulating them indirectly by the use of licensing conditions and requirements imposed on REs

• Option 2: require scheme custodians to be licensed.

The rationale for the licensing exemption for scheme custodians (Option 1) was that a scheme custodian acts under the direction of the RE.537 The implication was that the licensing of the RE would provide an adequate regulatory control over the activities of the custodian.

However, this indirect approach to the regulation of custodians has resulted in a level of regulatory complexity. For instance, as pointed out above, ASIC indirectly imposes financial requirements on scheme custodians by allowing REs to hold a lower amount of net tangible assets if they engage a custodian who satisfies a more substantial NTA requirement.538

The indirect approach has also left some regulatory gaps. The RE, as a financial services licensee, has an obligation to report to ASIC breaches that are significant having regard to various factors.539 However, a breach by a custodian, even though significant for the operations of the custodian, may not constitute a significant breach by the RE, in which case the RE would not report it. Similarly, a breach by a custodian that affects several schemes for which the custodian acts may not be significant for any of those schemes and will therefore not be reported by any of the REs, even though it may be significant from the custodian’s point of view.

Requiring custodians of managed investment schemes to be licensed (Option 2) would enable ASIC to identify more readily the organizations that are acting in that role, to carry out its surveillance activities more readily and to impose licence conditions to ensure that custodians provide their services in an appropriate way. These considerations need to be weighed against the additional cost and compliance requirements that scheme custodians would face if they were required to be licensed. However, it should be noted that custodians acting for REs of schemes are already likely to hold an AFSL that permits them to provide custodial and depository services, as their custody clients would typically include clients other than REs of managed investment schemes, such as broker-dealers and superannuation trustees.

Basis on which property is held

It might be appropriate to clarify that a custodian who holds scheme property on behalf of the RE holds it on bare trust for the RE. The RE would hold the beneficial interest on trust

537 Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 6.111.
538 RG 166 Licensing: Financial requirements (November 2013), paras RG 166.209-RG 166.218 (with Table 9).
539 s 912D.

The responsible entity and others involved in the operation of a scheme

for those members entitled to it under the scheme constitution.540 This would more clearly reflect existing arrangements.

It may be beneficial for the legislation to make special provision permitting the designated account that is required for application money to be an account of the custodian held on trust for the RE, which would hold the beneficial interest in the application money on trust for the applicant.

Question 7.7.1. Should custodians of scheme property be required to hold an Australian financial services licence?

Question 7.7.2. Are there any reasons why scheme custodians should not be required to be licensed?

Question 7.7.3. Should the Corporations Act be amended to clarify the basis on which custodians of scheme property hold that property on behalf of the RE and, if so, how?

Question 7.7.4. Should the Corporations Act be amended to allow for a custodian to operate a designated account for holding application money?

540 s 601FC(2).

Meetings of scheme members

8 Meetings of scheme members

This chapter discusses the thresholds for members to requisition a scheme meeting, the quorum requirements, the method for electing a chair and the finality of that person’s rulings, as well as the voting rules and the adjournment procedures for scheme meetings.

8.1 Requisitioning scheme meetings

The issue

There is uncertainty about how to count the number of members who are entitled to requisition a scheme meeting.

Current position

The RE must call a meeting of scheme members at the request of at least 100 members or members with at least 5% of the votes that may be cast on a resolution.541 The same test applies for members of a company who want to request a meeting.542

Analysis and discussion

There is uncertainty about how the number of members should be counted for the purpose of the 100 member test. For instance:

• where several members hold interests on behalf of the same beneficial owner:

– is each of those members to be counted separately, or

– are all such members to be counted together as one member

• conversely, where one member holds an interest on behalf of several beneficial owners:543

– is that member to be counted as one member, or

– is each of those beneficial owners to be counted separately?

The same questions arise in relation to companies, given that the tests for calling company meetings are the same as those for calling scheme meetings.

By contrast, for the purpose of determining whether a scheme has more than 20 members, and therefore has to be registered, the Corporations Act specifies that:

• joint holders of an interest in the scheme count as a single member, and

541 s 252B.
542 s 249D.
543 For example, an RE that is the responsible entity of two schemes might hold interests in a third scheme on behalf of each of those schemes in its capacity as RE of each scheme. The register of the third scheme will show the RE as holding the aggregate number of interests of the two schemes.

Meetings of scheme members

• an interest held on trust is taken to be held by the beneficiary (rather than the trustee)
if the beneficiary is:

– presently entitled to a share of the trust estate or of the income of the trust estate, or

– individually or together with other beneficiaries in a position to control the trustee.544

The report of the Companies and Securities Advisory Committee (now CAMAC) Shareholder Participation in the Modern Listed Public Company (2000) (the CASAC report) recommended that the 100 member test for companies be repealed and that only shareholders who, collectively, hold at least 5% of the votes that may be cast at a general meeting should have the power to requisition a general meeting of a listed public company.545

This recommendation is referred to, and the question of repeal of the 100 member test raised again, in CAMAC’s discussion paper The AGM and shareholder engagement.546

CAMAC adopts the principle that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently. A material difference between companies and schemes that may be relevant in deciding whether the regulatory regimes for companies and schemes should differ on this issue is that schemes do not have annual general meetings, while companies do. The 2012 CAMAC report recommended against requiring schemes to hold AGMs547 in light of its other recommendation to expand the power of scheme members to requisition a meeting. Currently, scheme members can only require the RE to call, or themselves call, a meeting of members to consider special or extraordinary resolutions.548
CAMAC recommended that the requisitioning power should also be available for scheme meetings to consider ordinary resolutions.549

If the 100 member test is retained and clarified, CAMAC’s view is that any clarification should be based on the principle that a sufficient number of informed holders representing discrete interests in the scheme should be required for a meeting to be requisitioned.

Question 8.1.1. Should the 100 member test for requisitioning scheme meetings be retained?

Question 8.1.2. If so, should the method for determining who is to be included as a member be clarified:
• by specifying how members who hold interests on behalf of the same beneficial owner are to be counted

544 s 601ED(4).
545 rec 2.
546 Sections 3.1.6, 3.4.
547 Section 8.2.3. The report also referred to submissions (including that of ASIC) that opposed scheme AGMs, pointing to costs and the fact that scheme members already receive product disclosure, continuous disclosure and periodic statements (Section 8.2.2). The Explanatory Memorandum to the Bill for the Company Law Review Act 1998 para 10.86 said that the absence of a requirement to hold an annual general meeting for schemes was
‘consistent with the usual character of collective investment schemes as passive investment vehicles’.
548 ss 252B-252D.
549 Section 8.2.3.

Meetings of scheme members

• by specifying how a member who holds an interest on behalf of several beneficial owners is to be counted

• in some other manner and, if so, how?

8.2 Meeting quorum requirements in scheme constitutions

The issue

The ability of a majority of scheme members to replace the RE is a fundamental principle. However, schemes can adopt provisions in their constitutions that replace the minimal legislative quorum requirements for the holding of scheme meetings with more restrictive requirements that may make it difficult to replace the RE.

Current position

The quorum for a meeting of a registered scheme’s members is two members unless the scheme’s constitution provides for a different quorum.550

The same rule applies to companies551 under a replaceable rule, which can be displaced or modified by a particular company constitution.552

Analysis and discussion

CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently. As indicated, the quorum requirements for schemes and companies are already aligned.

However, there may be a need for the quorum requirements for schemes to apply regardless of any contrary provision in a scheme constitution, in contrast with the approach for companies. The RE is the key administrative body involved in the operation of a scheme. It is essential that the RE remain accountable to scheme members for its conduct of the scheme. This accountability is lessened if an RE is entrenched through provisions in the scheme constitution that make it difficult to call a meeting to consider the RE’s removal. For instance, the constitution could be amended to stipulate a quorum that represents, say, 25% of the scheme’s members by number.

Question 8.2.1. How common is it for scheme constitutions to adopt restrictive quorum requirements?

Question 8.2.2. Should the Corporations Act be amended so that the statutory quorum requirements for scheme meetings cannot be overridden by a scheme constitution:
• in any circumstances or, alternatively
• only where the purpose of a meeting is to consider the replacement of the RE?

550 s 252R(1), (2). The absence of a quorum will not invalidate a meeting unless the court so orders (s 1322).
551 s 249T.
552 s 135.

Meetings of scheme members

8.3 The chair of a scheme meeting

The issue

Should the same rules apply for schemes and companies in relation to:

• the election of a chair by scheme members

• the finality of the chair’s decisions

• the voting rights of the chair?

Current position

Manner of election of the chair

Where the chair is to be elected by a resolution by members,553 the relevant resolution, like other ordinary resolutions, must be decided on a show of hands unless a poll is demanded.554 However, a registered scheme’s constitution may provide that a poll cannot be demanded on any resolution concerning the election of the chair of a meeting.555 The same rules for the election of the chair of a meeting apply to companies.556

Finality of chair’s rulings

The chair’s decisions are final in relation to:

• determining a challenge to a person’s right to vote at the meeting557

• making a conclusive declaration of the results of a vote on a show of hands558 (however, the members present may demand a poll even though the chair’s declaration of the voting results for the show of hands is conclusive559).

There is no provision for a scheme constitution to provide otherwise. By contrast, the equivalent provisions in relation to companies560 are replaceable rules.561

553 Members elect a member to be the chair of a meeting:
• where the RE calls the meeting, either of its own motion (s 252A) or at the request of at least 100 members or members with at least 5% of the votes that may be cast (s 252B), but either the RE fails to exercise its right to appoint the chair (s 252S(1)) or the appointed chair is not available or declines to act (s 252S(2)). The RE bears the expense of calling and holding the meeting with a right of indemnity out of scheme assets, not only when it acts of its own motion, but also when it calls the meeting at the request of members (s 252B(9))
• where they have themselves called the meeting, either because the RE has failed to do so at their request, in which case the RE bears the cost of the meeting out of its own funds (s 252C) or because members with
at least 5% of the votes that may be cast on a resolution call the meeting, in which case the members themselves pay the expense of calling and holding the meeting (s 252D) (s 252S(3))
• where the court orders the meeting (which it may do ‘if it is impracticable to call the meeting in any other way’ (s 252E)), unless the court has directed otherwise under s 1319 (s 252S(3)).
554 s 253J(2).
555 s 253K(2)(a).
556 s 250K(2)(a). The provision relating to the manner of election of the chair of company meetings and other rules relating to company meetings have a long pedigree, having been carried over into the replaceable rules from the previous Table A articles of association: Explanatory Memorandum to the Bill for the Company Law Review Act 1998 para 10.80.
557 s 253G. There is an equivalent provision for chairs of company meetings: s 250G.
A decision on entitlement to vote may be considered final even in the absence of an explicit provision to that effect: Selim v McGrath (2003) 47 ACSR 537 at [139], which commented on this question in the context of the powers of a chair of a meeting of creditors of a company in external administration.
558 s 253J(3). There is an equivalent provision for chairs of company meetings: s 250J(2) (a replaceable rule).
559 s 253L(3)(c).

Meetings of scheme members

Notwithstanding the statutory provision for finality of a chair’s decisions, those decisions will be subject to supervisory review by the courts under the general law if they are made in bad faith or the chair has made an error of law.562

Voting rights of the chair

The chair of a meeting of members of a company has a casting vote.563 If the chair is a member of the company, the chair also has his or her voting rights as a member.564 These rules apply unless the company’s constitution provides otherwise.565 There is no equivalent provision in relation to schemes.

Analysis and discussion

Manner of election of the chair

CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.

As indicated, the regimes are already aligned in relation to the potential for a constitution to exclude a poll on any resolution concerning the election of the chair of a meeting.

However, there is an issue whether there are compelling reasons for having different rules for schemes and companies in this area.

Scheme meetings are the mechanism by which the RE of a scheme can be replaced, as well as the forum for members to vote on amendments to the scheme constitution, certain related party transactions and the winding up of the scheme. Although company meetings are the forum for removing directors and appointing new directors, it is more common for individual directors to be replaced, rather than an entire board. By contrast, the RE is the sole governing body for a scheme and its removal and replacement go to the core of control of a scheme and the way it is operated.

Also, the remuneration arrangements for schemes differ from those for companies, with the RE’s fees being regulated by the scheme constitution and any increase in those fees requiring approval of an amendment to the constitution by a meeting of scheme members where the increased fees would exceed the maximum permitted under the constitution.566

In practice, replacement of the RE and amending the fees payable to the RE have proved to be contentious issues. In these circumstances, the influence that the person chosen to chair a meeting can have on the conduct and, potentially, on the outcome of the meeting567

560 ss 250G, 250J.
561 s 135.
562 Australian Olives Limited v Livadaras [2008] FCA 1407 at [70].
563 s 250E(3) (a replaceable rule).
564 ibid.
565 Section 250E is a replaceable rule (see s 135).
566 Changes to a scheme’s constitution must be decided by a meeting of the scheme’s members where the change would adversely affect members’ rights (s 601GC(1)). Members’ rights include a right to have the scheme operated and administered according to the scheme constitution as it stands (360 Capital Re Ltd (ACN 090 939
192) v Watts (as trustees for the Watts Family Superannuation Fund) [2012] VSCA 234, Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342 at [449], [658]-[659], [668]) and the fees that REs can charge are set out in the constitution.
567 Australian Olives Limited v Livadaras [2008] FCA 1407 at [67] states the role of the chair of a meeting as
follows:

Meetings of scheme members

may assume a particular significance for schemes. It may therefore be more important for schemes than for companies that there be no scope for the constitution to exclude the right of scheme members to call for a poll on the election of a chair.568 Scheme members may be disadvantaged by exclusion of this right if they appoint as their proxy a person who is also the appointee of a large number of other members, as that proxy holder would only have one vote on a show of hands. Unless the members are each able to appoint a different individual to act as proxy, they may feel compelled either to attend the meeting in person or, in effect, to waive their right to influence the election of the chair.

Finality of chair’s rulings

In relation to the finality of the chair’s decisions in the two identified areas, there are no apparent reasons why the approach for schemes (the constitution cannot alter the position) should differ from the approach for companies (the relevant provision is a replaceable rule, which means that the constitution can make other provision). The relevant Explanatory Memorandum does not give a reason for the different approaches. In fact, in relation to the finality of the chair’s decision on a challenge to a person’s right to vote,569 it evinces a general intention that the provision be the same as that for companies in material respects.570

Statement of reasons for decision

Members may be assisted in ascertaining whether they have grounds to exercise any rights to challenge decisions of the chair of a meeting by a requirement that chairs of meetings state the reasons for their decisions and include those reasons in the minutes of the meeting.571

A requirement of this nature applies to insolvency practitioners when exercising their casting vote in an external administration.572

The duty and function of the chair is to preserve order and take care that the proceedings are conducted in a proper manner and the sense of the meeting is properly ascertained with regard to any question properly before the meeting (National Dwellings Society v Sykes [1894] 3 Ch 159 per Chitty J at 162). Upon the chair rests the responsibility for making rulings as to the validity of matters. Some of those matters will be entirely procedural such as decisions concerning the putting of resolutions to the meeting. Others will involve determining an entitlement such as whether a member may vote by proxy having regard to a challenge to the validity of the proxy instrument, compliance with lodgement procedure or by reason of some other deficiency or restriction. The chair may foreshadow a ruling and entertain objections and discussion before deciding the question or invite discussion, then rule and note objections to the ruling.
The Corporations Act stipulates the following powers and functions of the chair of a scheme meeting:
• to vote proxies according to their terms (s 252Y(4)(c); for chairs of company meetings, see s 250BB(1)(c))
• to make a final decision on a challenge to a person’s right to vote at the meeting (s 253G; for chairs of company meetings, see s 250G) and a conclusive declaration of the results of a vote on a show of hands
(s 253J(3); for chairs of company meetings, see s 250J(2))
• to demand a poll (s 253L(1)(c); for chairs of company meetings, see s 250L(1)(c))
• to sign the minutes of the meeting within a reasonable time after the meeting (the RE has an obligation to ensure that this is done by the chair of that meeting or by the chair of the next meeting) (s 253M(2); for chairs of company meetings, see s 251A(2)).
568 s 253K(2)(a).
569 s 253G.
570 The Explanatory Memorandum to the Bill for the Company Law Review Act 1998 para 10.101 refers to various rules for meetings of members of schemes (including s 253G, relating to a challenge to the right to vote) that
‘mirror those applying to public companies’.
571 The Court in Link Agricultural Pty Ltd v Shanahan & Ors [1998] VSCA 3 had regard to the reasons given to a meeting of shareholders by the chairman in determining the purpose of the chairman’s ruling (see at [43]).
572 Corp Reg 5.6.21(4A). This requirement is reflected in the Code of Professional Practice for Insolvency Practitioners (third edition, effective 1 January 2014), published by the Australian Restructuring Insolvency & Turnaround Association (ARITA, formerly the Insolvency Practitioners Association), Section 24.7.4.

Meetings of scheme members

Voting rights of the chair

There is no apparent reason why the legislation should not provide for the chair of a scheme meeting to have a casting vote and any vote as a member, unless the scheme constitution provided otherwise.

Question 8.3.1. Should it be permissible for a scheme constitution to exclude the right to demand a poll on the election of a chair?

Question 8.3.2. Should it be permissible for a scheme constitution to vary the finality of a chair’s decision in relation to:
• determining a challenge to a person’s right to vote at the meeting
• making a conclusive declaration of the results of a vote on a show of hands?

Question 8.3.3. Should chairs of meetings be required to state the reasons for some or all of their decisions at the relevant meeting and include those reasons in the minutes? If such a requirement were to apply to some decisions only, to which types of decisions should it apply?

Question 8.3.4. Should the Corporations Act stipulate that the chair of a meeting of scheme members has a casting vote and, in addition, if the chair is a member of the scheme, any vote that the person may have in that capacity?

8.4 Voting restrictions on resolutions at members’ meetings

The issue

As a general proposition, the associates of an RE are prohibited from voting on resolutions at scheme meetings if they have an interest in the resolution or matter other than as a member. However, there is a lack of clarity about which definition of ‘associate’ applies for the purpose of this prohibition. Also, it is unclear why the law permits an RE and its associates to vote on a resolution to replace the RE when the scheme is listed.

Current position

The voting exclusion

The RE of a registered scheme and its associates are not entitled to vote on a resolution at a meeting of the scheme’s members if they have an interest in the resolution or matter other than as a member.573

Exceptions to the voting exclusion

However, there are two situations in which the voting exclusion does not apply:

• if the scheme is listed, the RE and its associates may vote their interest on resolutions to remove the RE and choose a new RE574

• the RE and its associates may vote as proxies for other members provided the instrument of appointment specifies how they are to vote and they vote that way.575

573 s 253E.
574 ibid.

Meetings of scheme members

Test of ‘associate’

Broadly speaking, the tests of ‘associate’ are:

• the general test, which covers:

– ‘automatic associateship’, where the associates are connected with a body corporate576

– ‘associates on the facts’, a broad category applicable outside the takeover context and intended to cover persons who are associated in any way577

• the takeovers test,578 applicable in relation to takeovers (Chapters 6 and 6B of the Corporations Act), compulsory acquisitions and buyouts (Chapters 6A and 6B), ownership of companies and schemes (Chapter 6C) and related areas involving voting power or control.579

There is some uncertainty about whether the takeovers test or the general test applies to the voting exclusion for associates of REs.580

The general test
Under the ‘automatic associateship’ limb of the general test, the associates of a designated body (which can include a managed investment scheme581) are:

• a director or secretary

• a related body corporate

• a director or secretary of a related body corporate.582

The ‘association on the facts’ limb of the general test applies to any entity, whether or not a body corporate, and is based on:

• acting in concert

• actual or proposed formal or informal association, and

• actual or potential transactions, acts or things intended to result in an association.583

The takeovers test
Under this test, the associates of a body corporate are:

• another body corporate that the body corporate controls

575 s 253A(2).
576 s 11. See HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [23.250].
577 s 15. See HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths,
looseleaf) at [23.250].
578 s 12.
579 s 12(1).
580 Australian Olives Limited v Livadaras [2008] FCA 1407 refers to the takeovers test (see at [4]–[5], [7]). C & C Fisher Pty Ltd v Livadaras [2010] FCA 11 at [8] refers to the general test in s 15.
581 s 12(5)(b).
582 s 11.
583 s 15. There is also provision for the regulations to stipulate a test of association: s 15(1)(b). There are no relevant regulations.

Meetings of scheme members

• another body corporate that controls the body corporate

• another body corporate that is controlled by an entity that controls the body corporate584

while the associates of any person, whether or not a body corporate, are determined on the basis of:

• existing or proposed agreements for the purpose of controlling or influencing the composition of a body’s board or the conduct of its affairs585

• actual or proposed actions in concert in relation to the body’s affairs.586

Analysis and discussion

The policy rationale for the restriction on voting by an RE and its associates is to remove the potential for a conflict of interest to arise.587 However, the current provision raises the following areas of uncertainty:588

• which associates are excluded from voting: the possible alternatives are:

– only the particular members of the ‘associate group’ who themselves have an interest, or

– all members of the ‘associate group’ where any of them has an interest

• whether an interest as a fiduciary constitutes a disqualifying ‘interest’: it is unclear whether interests held by an associate of an RE in a fiduciary capacity exclude the associate from voting and whether the nature of the fiduciary relationship or the nature of the beneficiary affect the decision on this matter

• who are the ‘associates’ of the RE: it is unclear whether this is determined under:

– the general test of association,589 or

– the takeovers test of association,590 or

– either the general test or the takeovers test, depending on the nature of the resolution being put to members (with the takeovers test applying if the resolution relates to voting power or control in relation to the scheme and the general test applying in other circumstances).

This question is relevant in the case of directors and secretaries of the RE (and of related bodies corporate of the RE), who would be associates under the general test,

584 s 12(2)(a).
585 s 12(2)(b).
586 s 12(2)(c). In relation to the takeovers test, Australian Olives Limited v Livadaras [2008] FCA 1407 at [7] said that whether parties were acting in concert was a question of fact and described ‘acting in concert’ as ‘pursuing a common purpose’ (see also at [58] for the application of the concept of ‘acting in concert’ to particular facts).
587 Southern Wine Corporation Pty Ltd (In Liq) v Perera [2006] WASCA 275 at [21], C & C Fisher Pty Ltd v
Livadaras [2010] FCA 11 at [7].
588 These were pointed out in the submission from Freehills (now Herbert Smith Freehills) at Stage 1 of the
CAMAC review.
589 ss 11, 13-17.
590 s 12.

Meetings of scheme members

and thereby automatically precluded from voting, but not under the takeovers definition.

In CAMAC’s view, the takeovers test is the more appropriate criterion for determining who are an RE’s associates for the purpose of the prohibition on voting.

A further issue is why REs and their associates are not subject to the voting exclusion when the scheme is listed and the matter for decision is the replacement of the RE. The right to replace the RE is a fundamental right of scheme members, given that they do not have day-to-day control over the operation of the scheme. It is unclear why listing of a scheme obviates the need for the voting exclusion to protect this right from self–interested voting by the RE or its associates.

Question 8.4.1. Should the restriction on the entitlement of an RE and its associates to vote be clarified and, if so, in what respects and in what way? In particular, should it be made clear that the takeovers test applies when determining the meaning of ‘associate’ for the purpose of this voting exclusion?

Question 8.4.2. Should the current voting exclusion be amended so that it applies regardless of whether the scheme is listed or unlisted?

8.5 Proxy voting

The issue

Should the scheme provisions relating to proxy voting be the same as those that apply to companies?

Current position

The Corporations Act contains rules relating to proxy voting at scheme meetings.591 For the most part, these are similar to the corresponding provisions for meetings of companies.592

However, the following provisions for meetings of companies have no equivalent for schemes:

• the person appointed as the proxy of a member of a company may be an individual or a body corporate593

• authentication of proxy appointments for voting at company meetings can be done electronically as well as by signing594

• a company can receive proxies through electronic means other than at an electronic address595 (both companies and schemes can receive proxies at a specified electronic address596)

591 Part 2G.4 Div 5.
592 Part 2G.2 Div 6.
593 s 249X(1A).
594 s 250A(1A), Corp Reg 2G.2.01.

Meetings of scheme members

• a proxy who votes must vote in accordance with instructions (the proxy must vote if the proxy is the chair and a proxy with conflicting instructions must abstain on a show of hands)597

• the chair must vote if a non-chair proxy does not attend the meeting or does not vote598

• a member of the key management personnel or a closely related party (other than a chair who has specific authority to vote) must not vote on a resolution concerning the remuneration of a member of the key management personnel.599

Also, the provision governing appointment of proxies for company meetings is a replaceable rule,600 but the equivalent provision for schemes601 cannot be varied by a scheme’s constitution.

Analysis and discussion

CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.

There appear to be no reasons for the differences identified above between the proxy voting provisions that apply to schemes and those that apply to companies.

Question 8.5.1. In what respects should the provisions relating to proxy voting for schemes be further aligned with those relating to companies?

8.6 Procedures relating to adjournment of meetings

The issues

The law on adjournment of scheme meetings, as currently interpreted, requires that a new notice of meeting be given for any adjourned meeting that takes place one month or more after the original meeting, even if the gap between two consecutive adjourned scheme meetings is less than one month.

There is no guidance on what information should be included in any new notice.

Adjourned scheme meetings, unlike adjourned company meetings, are prohibited from considering new business.

The members of a scheme, unlike the members of a company, have no power to direct that the chair of a scheme meeting adjourn the meeting.

596 ss 250B(3)(a)(iii), 250BA(1)(b) (companies), 252Z(3A)(c) (schemes).
597 s 250BB.
598 s 250BC.
599 s 250BD.
600 s 249X
601 s 252V.

Meetings of scheme members

Current position

When a meeting of a scheme is adjourned for one month or more, new notice of the adjourned meeting must be given.602 The equivalent rule for companies contains the same notice requirement,603 but is a replaceable rule and can therefore be displaced or modified by the company’s constitution.604 The scheme requirement and that applicable to companies both override the common law, under which, in the absence of contrary provision in the relevant rules, it is not necessary to give notice of the adjourned meeting where the date, time and place were fixed at the meeting when it was adjourned.605

If notice of a scheme meeting is required, the notice period is at least 21 days unless the scheme’s constitution specifies a longer minimum period.606

There is only one decision on how the requirement for notice of an adjourned scheme meeting applies where there are multiple adjournments, Re Colonial First State Trust Group.607 The Takeovers Panel in that case suggested that the period of one month, after which notice of the adjourned meeting is required, refers to the period between the original meeting and the relevant adjourned meeting. Fresh notice would be required even if the period between two consecutive adjourned meetings is less than the stipulated one month period. The Panel said:608

The unitholders’ Meetings had already been adjourned from 3 September until Monday 30 September. If the meeting was to be adjourned for 1 month or more in total, then section 252K of the Corporations Act (Act) required that new notice must be given to the unitholders. This means that the last possible date for the Meetings to be held under the current notices of meeting was Wednesday 2 October.

The same reasoning would apply where the replaceable rule for companies has not been displaced or modified.

The Corporations Act gives no details about what information a notice of adjourned meeting should contain.

Only unfinished business may be transacted at a scheme meeting resumed after an adjournment.609 The equivalent rule for companies, which also stipulates that only unfinished business may be transacted at an adjourned meeting,610 is a replaceable rule and can therefore be displaced or modified by the company’s constitution.611 At common law, new business is permitted to be transacted at an adjourned meeting if notice is given to members.612

The chair of a meeting of the members of a company must adjourn the meeting if the members present with a majority of votes at the meeting agree or direct that the chair must do so.613 There is no equivalent provision for schemes.

602 s 252K.
603 s 249M.
604 s 135(2).
605 AD Lang, Horsley’s Meetings: Procedure, Law and Practice (6th edition), Section 4.20.
606 s 252F. Cf ss 249H, 249HA for companies.
607 [2002] ATP 16.
608 at [17].
609 s 252U(2).
610 s 249W.
611 s 135(2).
612 AD Lang, Horsley’s Meetings: Procedure, Law and Practice (6th edition), Section 13.14.

Meetings of scheme members

Analysis and discussion

CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.

It is not clear why the Corporations Act does not permit the scheme provisions to override the provisions relating to notice of adjourned meetings and the business that can be considered at those meetings, as is the case with the provisions applicable to companies. At least in relation to the requirement for giving notice, the difference in approach may be a legislative oversight, as the relevant Explanatory Memorandum states that ‘the rules on giving notice [for schemes] … are consistent with those for companies’.614

The flexibility to consider new business may assist in conducting scheme business, particularly where the meeting concerns the restructuring of a scheme. Members should, however, receive adequate notice of any new business to be considered at an adjourned meeting.

Also, it is not clear why scheme members should not have the power to direct the chair to adjourn the meeting.

Question 8.6.1. Should a scheme constitution be permitted to vary the current requirement for giving notice of an adjourned scheme meeting?

Question 8.6.2. Should a scheme constitution be permitted to vary the statutory rule prohibiting an adjourned scheme meeting from considering new business?

Question 8.6.3. What details should be given in any notice of an adjourned meeting?

Question 8.6.4. Should the rules relating to adjourned meetings for schemes be aligned with those for companies?

Question 8.6.5. Should the members of a scheme have the power to direct the chair of a meeting of scheme members to adjourn the meeting?

8.7 Other alignment issues

Areas not otherwise identified in this chapter where the provisions governing meetings of scheme members differ from those governing meetings of company members are:

• time for determining the percentage of votes held by members: this time is close of business on the day before the poll is demanded in the case of schemes,615 but the midnight before the poll is demanded in the case of companies616

• timing and manner of poll: for companies, there is a legislative requirement that, unless the company’s constitution provides otherwise:617

– a poll demanded on a matter other than the election of a chair or an adjournment be taken when and in the manner the chair directs

614 Explanatory Memorandum to the Bill for the Company Law Review Act 1998 para 10.95.
615 s 253L(4).
616 s 250L(4).
617 The provision is a replaceable rule (s 135).

Meetings of scheme members

– a poll on the election of a chair or on the question of an adjournment be taken immediately.618

There is no equivalent provision for schemes.

Question 8.7.1. Should the law applicable to scheme meetings be brought into line with that applicable to company meetings in relation to:
• the time for determining the percentage of votes held by members
• the timing and manner of a poll?

618 s 250M.

Other matters relating to scheme members

9 Other matters relating to scheme members

This chapter discusses the rights of members to have access to the scheme register. It also discusses various means by which members might exit from a scheme and how to identify the point at which a person ceases to be a member.

9.1 Access to scheme registers

The issues

Actions of the RE that prevent members’ timely access to the register of members may adversely affect the ability of those members to exercise their rights. The question is what remedies should members have in those circumstances.

A related question is whether persons with a right of access to the register should be entitled to receive access only to the information required by statute to be on the register or whether that right should extend to any additional information that may have been entered on the register.

Current position

Register of members

A registered scheme must set up and maintain a register of members.619

The register of members must contain the following information:

• the name and address of each member

• the date on which the entry of each member’s name in the register is made

• if the scheme has more than 50 members – an up-to-date and readily usable index of members’ names (which need not be separate if the register itself is kept in a form that operates effectively as an index)

• the date on which every issue of interests takes place

• the number of interests in each issue

• the interests held by each member

• the class of interests

• the amount paid, or agreed to be considered as paid, on the interests

• the name and details of each person who stopped being a member of the scheme within the last 7 years and the date on which the person stopped being a member.620

619 s 168(1)(a).
620 s 169(1), (2), (6A), (7).

Other matters relating to scheme members

Register of option holders

A registered scheme must set up and maintain a register of any holders of options over unissued interests and keep with the register copies of documents that grant an option over unissued interests in the scheme.621

The register of option holders must contain:

• the names and addresses of option holders and the dates on which their names were entered in the register

• the date of grant of the options

• the number and description of the interests over which the options were granted

• either the period during which the options may be exercised or the time at which the options may be exercised

• any event that must happen before the options can be exercised

• any consideration for the grant of the options

• any consideration for the exercise of the options or the method by which that consideration is to be determined.622

Information about the grant of an option must be entered in the register within 14 days after the grant and the register must be updated whenever options are exercised or expire.623

Form of registers

The registers may be kept on computer as well as in a bound or looseleaf book.624

Access to registers

A registered scheme, through its RE, must allow anyone to inspect the register.625 If the register is not kept on a computer, the person inspects the register itself.626 If the register is kept on a computer, the person inspects the register by computer.627

Members may inspect the register without charge.628 Other people may inspect the register on payment of any fee (up to the prescribed amount) required by the scheme.629

621 ss 167A(1)(b), 168(1)(b), 170.
622 s 170(1).
623 s 170(1), (2).
624 s 1306, Note 2 to s 168. A ‘book’ required by the Corporations Act may be kept ‘by recording or storing the matters concerned by means of a mechanical, electronic or other device’ (s 1306(1)(b)). ‘Book’ includes a
register (paragraph (a) of the definition of ‘books’ in s 9).
625 ss 167A(2)(a), 173(1). Other provisions that are relevant to the inspection of registers are ss 1300 (place and times for inspection), 1301 (the location of documents that are kept on computers), 1303 (court power to compel compliance with inspection obligation) and 1306 (form and evidentiary value).
626 s 173(1).
627 ibid.
628 s 173(2).
629 s 173(2), Corp Reg 1.1.01. The prescribed amount is set out in Item 1 of Schedule 4 to the Corporations
Regulations.

Other matters relating to scheme members

A registered scheme, through its RE, also has an obligation to give a person a copy of the register (or a part of the register) within 7 days on payment of a fee, provided that the person is not a stockbroker or a sharebroker and does not want the copy of the register for one or more of a number of ‘prescribed purposes’, including making an unsolicited offer or invitation to purchase interests off-market.630

ASIC may allow a longer period to comply with the request.631 If the register is kept on a computer, the company or registered scheme must give the copy to the person in the prescribed form.632

There is also a separate legislative provision obliging the RE not to disclose information on the register if the RE knows that the person receiving the information is likely to use it to contact, or send material to, the scheme member.633 There is an exception where the intended conduct of the recipient is relevant to the holding of the interests or the exercise of the rights attaching to them.634 However, this exception does not permit disclosure related to the making of certain unsolicited offers or invitations to purchase interests off-market.635

The court has powers to make orders compelling compliance with the obligations to grant inspection, or provide copies, of the register.636

Analysis and discussion

Supporting exercise of the right of access

The rights of scheme members to inspect and obtain copies of the register of members can be important in enabling them to exercise their rights of collective action (particularly the right to replace the RE) by consulting with each other. It appears that there have been cases where scheme members who wanted to replace the RE have experienced difficulties in obtaining access to the register of members due to delay or resistance by the RE.637

It is important that the right of access to scheme registers be readily exercisable in practice. Under the current law, a failure to comply with the access obligations is an offence of strict liability638 and the court has the power to make an order compelling compliance.639 These provisions may be considered adequate protection against delay. Also, persistent refusal by an RE to allow inspection of the scheme’s register may be a breach of its licensing obligation ‘to ensure that the financial services covered by the

630 s 173(3), (3A) Corp Reg 2C.1.03. For unsolicited offers or invitations to purchase interests off-market, see s 1019D(1)(a)-(d).
Subsection 173(3A) requires that an application state the purpose for which the person is accessing a copy. The application must also include the name and address of the applicant (Corp Reg 2C.1.04).
For the fee payable to receive a copy of the register, see Item 1AA of Schedule 4 to the Corporations
Regulations.
631 s 173(3).
632 Corp Reg 2C.1.02, enacted pursuant to s 173(3), sets out the form in which computer registers are to be provided.
633 s 177. The relationship between ss 173 and 177 was considered in Direct Share Purchasing Corporation Pty Ltd
v LM Investment Management Ltd [2011] FCA 165.
634 s 177(1A).
635 s 177(1AA).
636 s 1303. This section refers to inspection of a ‘book’. ‘Book’ includes a register (paragraph (a) of the definition of ‘books’ in s 9). The court can also grant an injunction under s 1324.
637 Clarendon Lawyers submission at Stage 1 of the CAMAC review.
638 s 173(9A).
639 s 1303. A member might also seek an injunction under s 1324 for a contravention of s 173, which imposes the obligation to allow inspection of a register.

Other matters relating to scheme members

licence are provided efficiently, honestly and fairly’.640 Possible disadvantages of having to rely on a court order are the cost of funding a court action (though the court may award costs to a successful applicant member) and the delay involved in having to take such action.

Alternative possible approaches to ensuring access to scheme registers include:

• Option 1: duty to ensure compliance. The Corporations Act could impose a duty on the officers of the RE to take the degree of care and diligence that a reasonable person would take to ensure compliance with the provisions for access to registers. As under the current law, a member would face the cost and delay involved in taking action against recalcitrant officers of the RE. However, the potential penalties for breach of the duty might provide an incentive for the officers to ensure compliance

• Option 2: liability for non-compliance. The Corporations Act could make the RE and its officers liable for damages for any loss suffered as a result of non-compliance with the provisions requiring access to the scheme’s register. As under the current law, a member would face the cost and delay involved in taking action against the RE and/or its officers. However, as with Option 1, the potential liability for non-compliance may provide an incentive to ensure compliance

• Option 3: obligation to lodge scheme register with ASIC. The RE could be required to lodge a copy of the scheme’s register with ASIC at certain specified periods (for instance, monthly or quarterly). A requirement of this nature would avoid the potential difficulties where an RE refuses access to the register. However, this option may impose an undue administrative burden on ASIC

• Option 4: a combination of two or more of the above.

Form of the register

Some registers contain information in addition to that required by the Corporations Act (for instance, the email addresses of scheme members and the name and email address of their financial advisers).641 It appears that there have been instances where registers have been edited to exclude information that is not statutorily required before access has been granted.

The question is whether, in principle, a member’s inspection right should provide access to:

• anything that happens to be recorded on a scheme register, or alternatively
• only the information that the Corporations Act requires to be included on that register. The latter approach would give REs greater freedom to use the register as a centralised
source of information without any concern that the information may become generally available. However, if REs are permitted to remove non-statutory information from registers before making them available, there is a further question whether the Corporations Act should require that the register include additional mandatory items, such

640 s 912A(1)(a): see CCH Managed Investments Law and Practice (looseleaf) at ¶55-300. Breach of a licensing obligation can result in cancellation or suspension of the licence (s 915C) or a banning order (Part 7.6 Div 8
Subdiv A).
641 Clarendon Lawyers submission at Stage 1 of the CAMAC review.

Other matters relating to scheme members

as the members’ email address and the name and email address of their financial advisers
(if the RE knows those details).

Question 9.1.1. Are there legal or practical difficulties in the members of a scheme obtaining access to the scheme register?

Question 9.1.2. If so, should the current requirement for the RE to allow access to the register be supplemented by:
• a duty for the officers of the RE to take the degree of care and diligence that a reasonable person would take to ensure that the RE complies with the access requirement (Option 1)

• liability of the RE and its officers for damages for any loss arising from non-compliance with the access requirement (Option 2)

• a requirement for the RE to lodge a copy of the scheme’s register with ASIC regularly and, if so, how often (for instance, monthly or quarterly) (Option 3)
• a combination of two or more of these measures (Option 4)
• some other measure and, if so, what?

Question 9.1.3. Should the right of inspection and the right to obtain copies relate to:

• anything that happens to be recorded on the scheme register, or alternatively
• only the information that the Corporations Act requires to be included on that register?

Question 9.1.4. Should the Corporations Act require any additional information to be included on the register and, if so, what?

9.2 Exit from a scheme

Members may exit from a managed investment scheme by choosing to exercise their rights under any withdrawal procedures, as discussed in Section 9.3. Members of a listed scheme, or an unlisted scheme admitted to the AQUA market operated by the ASX,642 can exit from the scheme by selling their interests in the scheme on-market, rather than pursuant to a withdrawal procedure in the scheme’s constitution.643

Members might also exit from a scheme if they accept a buy-back offer from the RE. There is currently no statutory buy-back procedure for schemes, though the ASX listing rules and ASIC relief have facilitated on-market buy-backs for listed schemes. The

642 The AQUA market was created by the ASX for the quotation and trading of interests in unlisted managed funds (as well as exchange traded funds (ETFs) and structured products): ASIC Regulatory Guide 198 Unlisted disclosing entities: Continuous disclosure obligations at 17, ASIC Consultation Paper 196 Periodic statements for quoted and listed managed investment products and relief for AQUA products (December 2012) para 4. See also ASIC Report 282 Regulation of exchange traded funds.
To gain admission to Trading Status on the AQUA market, a scheme must be ‘an open ended scheme, being a scheme which continuously issues and redeems Financial Products based on the net asset value of the Managed Fund’ (ASX Operating Rules Schedule 10A clause 10A.3.4(a)) and must be liquid (ASX Operating Rules Schedule 10A clause 10A.3.6). Schemes that cannot be admitted to the AQUA market include property trusts and infrastructure funds, as they are non-liquid schemes for the purposes of Part 5C.6 of the Corporations Act because of the nature of the assets they hold (ASX Operating Rules Schedule 10A clause 10A.3.3(d)(ii), (iii), ASIC Regulatory Guide 134 Managed investments: Constitutions at RG 134.51).
Members of schemes admitted to the AQUA market may exit by using the withdrawal procedures for liquid schemes, as discussed in Section 9.3. Participants in the AQUA market are generally wholesale participants.
643 ASX Listing Rule 1.1 Condition 5.

Other matters relating to scheme members

possible development of a statutory buy-back procedure for schemes is discussed in
Section 9.4.

Scheme members may also withdraw from a scheme under a scheme reorganization. Scheme reorganizations are discussed in Section 11.2 of this paper.644

The identification of the point at which a person who is exiting from a scheme ceases to be a scheme member is discussed in Section 9.5.

9.3 Scheme liquidity and the procedure for withdrawal

The issues

The definition of liquid assets645 may adversely affect investors by enabling the RE of a scheme to market the scheme as liquid, notwithstanding the potential for a significant proportion of the assets not to be readily realisable within the period that investors may expect to be able to withdraw.

Are there any procedural difficulties that impede the operation of the withdrawal provisions of the Corporations Act?

Current position

It is not necessary for the members of a scheme to have a right to withdraw from the scheme,646 but, if they are to have such a right, it must be set out in the scheme’s constitution and the requirements in the constitution must be satisfied.647 The right to withdraw, and any provisions in the constitution setting out procedures for making and dealing with withdrawal requests, must be fair to all members.648 ASIC has provided guidance on aspects of the withdrawal procedure that should be covered in a scheme’s constitution (as discussed below).

If a scheme is non-liquid, there are statutory procedures (discussed below) that must be satisfied for withdrawal from the scheme in addition to any procedures specific to the scheme.649 These statutory procedures must also be reflected in the scheme’s constitution.650

The withdrawal procedures are based on recommendations in the ALRC/CASAC report.651 Those procedures replaced the requirement, applicable to unlisted schemes operating under the prescribed interest provisions that preceded Chapter 5C,652 for a

644 An additional means for investors to exit from a scheme would be to terminate the scheme and liquidate its assets. This mechanism would only be used in extraordinary circumstances: see ALRC/CASAC report vol 1, para 7.2.
645 s 601KA(5), (6).
646 Regulatory Guide 134 Managed investments: Constitutions at RG 134.148.
647 ss 601GA(4)(a), 601KA(1)-(3). In ASIC’s view, provisions that allow a member to cease to be a member on request can confer a ‘right to withdraw’: if the RE has a discretion about whether to act on the request, the member’s right would generally arise on the exercise of the discretion to allow withdrawal or at a later point before the withdrawal is effected (RG 134.150). The right need not be an automatic or unconditional right (RG 134.151).
648 s 601GA(4).
649 ss 601KA(3), 601KB-KE.
650 s 601KA(2).
651 paras 7.15-7.21.
652 Former Part 7.12 Div 5.

Other matters relating to scheme members

covenant by the manager to make and maintain adequate buy-back arrangements,653 so that investors could realise their investment by selling it back via the manager.654

Withdrawal from a liquid scheme

If members are to have a withdrawal right while the scheme is liquid,655 the constitution must specify that right and set out adequate procedures for making and dealing with withdrawal requests.656

A registered scheme is liquid if liquid assets account for at least 80% of the value of scheme property.657 The following are liquid assets unless it is proved that the RE cannot reasonably expect to realise them within the period specified in the constitution:

• money in an account or on deposit with a bank

• bank accepted bills

• marketable securities.658

Any other property is a liquid asset if the RE reasonably expects that the property can be realised for its market value within the period specified in the constitution for satisfying withdrawal requests while the scheme is liquid (the reasonable expectation test).659

Withdrawal from a non-liquid scheme

If a withdrawal right is to be exercisable while the scheme is not liquid:

• the constitution must:

– provide for the right to be exercised in accordance with the relevant Corporations
Act requirements (Part 5C.6)

– set out any other adequate procedures for making and dealing with withdrawal requests

• the constitutional and statutory requirements must be satisfied.660

The statutory requirements are:

• the RE may offer members an opportunity to withdraw, wholly or partly, from the scheme to the extent that particular assets are available and able to be converted to

653 Corporations Law s 1069(1)(d).
654 Under this requirement, the manager had to buy, or find a buyer for, a unitholder’s units at a price determined in accordance with the deed, though ASIC granted many exemptions: HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.485.12].
655 The meaning of a ‘liquid scheme’ (which in turn depends on the meaning of ‘liquid assets’) is explained in s 601KA(4)-(6). Similarly, liquidity criteria are used in identifying those schemes for which shorter Product Disclosure Statements can be used: see the definition of ‘simple managed investment scheme’ in
Corp Reg 1.0.02.
656 s 601GA(4)(b).
657 s 601KA(4).
658 s 601KA(5). The term ‘marketable securities’ is defined in s 9.
Property of a prescribed kind may also satisfy the definition of ‘liquid assets’ (s 601KA(5)(d)). However, there are no relevant regulations.
659 s 601KA(6). HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.507] states that ‘it is important that the constitution should not specify too short a time for satisfying withdrawal requests, and that a proper assessment of liquidity be made and maintained’.
660 ss 601GA(4)(c), 601KA(2), (3)(b).

Other matters relating to scheme members

money in time to satisfy withdrawal requests that members may make in response to the offer.661 Though the RE decides when members should have a withdrawal opportunity, the initiative to withdraw comes from the members themselves

• a withdrawal offer must be in writing and must be made in accordance with any procedures in the scheme’s constitution or, if there are no such procedures, by giving a copy of the offer to all members of the scheme (or to all members of a particular class)662

• the offer must specify:

– the period during which it will remain open (at least 21 days)

– the assets that will be used to satisfy withdrawal requests

– the amount expected to be available when those assets are converted to money

– the method for dealing with withdrawal requests if the money available is insufficient to satisfy all requests. That method must comply with the statutory procedure for making payments in satisfaction of withdrawal requests663

• the RE must ensure compliance with that statutory procedure, under which:

– withdrawal requests must be satisfied within 21 days after the offer closes

– no request should be satisfied while the offer is still open

– the requests must be satisfied proportionately if an insufficient amount of money is available from the assets specified in the offer to satisfy all requests664

• only one withdrawal offer may be open at any time in relation to a particular interest.665

The RE may cancel a withdrawal offer in relation to a non-liquid scheme before it closes if it contains a material error and must cancel the offer if it is in the best interests of members to do so.666

A withdrawal offer may relate to a particular class of interests in the scheme only. In that case, the above procedures would apply to withdrawal from that class.

ASIC guidance

ASIC Regulatory Guide 134 Managed investments: Constitutions provides the following guidance on the nature and content of any withdrawal procedures in a scheme’s constitution:

• what constitute ‘adequate procedures’ for making and dealing with withdrawal requests will depend on the circumstances of the scheme667

661 s 601KB(1).
662 s 601KB(2).
663 s 601KB(3).
664 s 601KD. This pro rata sharing requirement was part of the withdrawal procedure recommended in
ALRC/CASAC report and designed to ensure that investors are treated equally (para 7.21).
665 s 601KC.
666 s 601KE.

Other matters relating to scheme members

• the constitution need not set out every aspect of the withdrawal procedures, but should set out key rights, so that members can determine their right to withdraw and be protected against adverse changes other than by special resolution668

• the constitution should provide sufficient information to enable the determination of how a member may trigger the right to withdraw and what (if any) preconditions apply (for instance, that the interests have been held for a minimum time)669

• the constitution should contain provisions about:

– the price that will apply to the interests that are the subject of a withdrawal request

– when the amount is to be paid to members and the maximum period for payment after withdrawal

– the nature of the amount that members will receive and how non-monetary assets will be valued670

• the constitution should describe any circumstances in which a member’s right to withdraw is restricted and set out any discretion that the RE has to restrict withdrawal671

• the constitution should only permit members’ interests to be redeemed in accordance with the procedures for liquid schemes if the scheme is liquid when the scheme property is valued for the purposes of calculating the withdrawal price. If a scheme becomes non-liquid after a member’s request to withdraw but before the property is valued for the purpose of determining the withdrawal price, the withdrawal procedure for non-liquid schemes should be followed672

• the constitution must not allow a member to exercise a right to withdraw from a non-liquid scheme other than in response to a current withdrawal offer673

• the provisions that affect the price that members will receive on withdrawal, and the procedures for satisfying withdrawal requests, must be fair to all members674

• withdrawal prices, including where the consideration is to be paid in specie, should be based on valuations that are consistent with the range of ordinary commercial practice

667 RG 134.153.
668 RG 134.154-RG 134.155.
669 RG 134.158. A provision that allows the RE to determine any pre-conditions from time to time or at its own discretion would not satisfy this criterion (RG 134.159).
670 RG 134.160, RG 134.170.
671 RG 134.162. Examples of restrictions that should be described in the constitution include:
• circumstances in which an RE may suspend and resume withdrawals
• any right to impose minimum and maximum limits on the number or value of interests that may be withdrawn by a member
• the ability to satisfy requests on a partial or staggered basis (RG 134.163).
ASIC expects that any discretion would be exercised consistently with the RE’s duties under s 601FC and that,
generally, any suspension that is material in duration would be disclosed to members under s 675 if the scheme is a disclosing entity (RG 134.164).
672 RG 134.172.
673 RG 134.173. For instance, a scheme constitution should not allow a member to make a withdrawal request
‘from time to time’ rather than in response to an offer by the RE.
674 RG 134.174. This requirement follows from the statutory requirement that the right to withdraw, and any procedural provisions in the constitution for making and dealing with withdrawal requests, must be fair to all members (s 601GA(4)).

Other matters relating to scheme members

for valuing assets of that type and be reasonably current, as the valuations affect the amount to which a member is entitled on withdrawal and the value of the remaining assets675

• withdrawal offers should be made in such a way as to ensure that all members to whom the offer is made have access to a copy of the offer676

• if the constitution includes a discretion for the RE to suspend a right to withdraw, it should set out the circumstances in which the RE can exercise that discretion.677

Analysis and discussion

Definition of liquid assets

The reasonable expectation test in the definition of liquid assets has resulted in investors being unable to withdraw their funds when property classified as liquid under that test later proved not to be as readily realisable as had originally been expected by REs and investors in schemes. This occurred, for instance, during the global financial crisis in relation to pooled mortgage funds and direct property funds.

The reasonable expectation test for determining whether property is a liquid asset:

• is imprecise

• is difficult to verify independently (particularly for investors who do not have access to all the information available to REs), as it relies on the RE’s own assessment, which may in some instances be affected by conflicts of interest

• permits instability by enabling a managed fund to be classified as liquid or non-liquid depending on whether the RE reasonably expects that the asset can be realised in the timeframe specified in the scheme’s constitution. There is no limit on the realisation period the RE can set in the constitution.

Investors’ ability to withdraw from a managed fund marketed as liquid may be adversely affected by the RE’s honest but mistaken belief that a class of asset can be realised in a specified time period, even where that belief was formed on reasonable grounds.

It may be useful to introduce a clearer or more objective test of liquidity. For instance, the definition of ‘liquid assets’ could refer to items such as:

• money in an account or money on deposit with a bank, available for withdrawal immediately or on maturity of a fixed term not exceeding three months during normal bank business hours, or

675 RG 134.175-RG 134.176, RG 134.178. RG 134 also states that, where consideration may be paid in specie or in more than one form, the RE should consider the rights and interests of all members when deciding:
• the nature of the consideration
• who bears liability for any transaction costs associated with the transfer of assets, and
• whether the consent of the withdrawing member is required
given the RE’s duties to act in the best interests of members (s 601FC(1)(c)) and to treat members of the same
class equally and of different classes fairly (s 601FC(1)(d)) and its fiduciary relationship with members (at
RG 134.161; see also RG 134.179).
676 RG 134.177. This paragraph of RG 134 advises REs to consider whether an offer made only via the Internet or another form of public communication (such as a newspaper) would be ‘fair’ and consistent with the RE’s duties under s 601FC(1)(d).
677 RG 134.180. There could be a limited range of circumstances or the RE might have the discretion to suspend whenever it thinks fit (RG 134.181).

Other matters relating to scheme members

• a bank accepted bill with a maturity date not exceeding three months, or

• an asset that can reasonably be expected to be realised for its book value within
7 business days.678 The brevity of this timeframe may reduce the risk that the RE’s reasonable expectations may not be realised and the risk that a scheme will change
character from being a liquid scheme to a non-liquid scheme.

A more stringent test would reduce the risk that members’ expectations about withdrawal timeframes will not be satisfied. However, it would increase the likelihood of REs having to rely on withdrawal procedures for non-liquid schemes, which can be restrictive and costly.

Procedures for withdrawal

REs currently have limited means to manage the capital of the schemes that they operate. Consideration might be given to whether the statutory withdrawal procedure might be made more flexible, particularly in relation to the requirement for proportionate sharing where available funds are not sufficient to meet all withdrawal requests from members in response to an offer by the RE. Section 9.4 considers the possibility of enhancing the ability of REs to manage capital by providing a statutory buy-back procedure for schemes.

Another possible change that may provide for more effective regulatory supervision and greater investor protection may be to provide ASIC with a power to stop a withdrawal offer from proceeding.

Question 9.3.1. Is the definition of liquid assets appropriate? If not, how should liquid assets be defined?

Question 9.3.2. Should the requirement for pro rata sharing of available funds in relation to withdrawal from a non-liquid scheme be modified and, if so, how and why?

Question 9.3.3. Should the procedure for withdrawal from a scheme be modified in any other way and, if so, how and why?

Question 9.3.4. Should ASIC be given any administrative powers in relation to withdrawal, for instance a power to stop a withdrawal offer?

9.4 Possible buy‐back procedure for scheme interests

The issue

Should a statutory buy-back procedure similar to that available for companies be available in relation to managed investment schemes?

Current position

There is a prohibition on making unsolicited offers to purchase scheme interests off-market.679 This prohibition prevents schemes from implementing an off-market buy-back procedure. The prohibition does not affect members’ withdrawal rights under the scheme provisions (discussed in Section 9.3),680 as those provisions do not involve the RE

678 cf the tests in the definition of ‘simple managed investment scheme’ in Corp Reg 1.0.02.
679 Part 7.9 Div 5A.
680 Part 5C.6.

Other matters relating to scheme members

making an offer to purchase members’ interests, but rather provide an opportunity for members to withdraw.

Although the Corporations Act does not contain any specific prohibition that prevents on-market buy-backs by REs of registered schemes, it presents various practical impediments:681

• any right of members to withdraw from a scheme must be specified in the scheme’s constitution, which must also set out adequate procedures for withdrawal in a way that is fair to all members.682 However, a right to withdraw in an on-market buy-back arises under a market contract, rather than being specified in the scheme’s constitution683

• if a scheme is non-liquid, a scheme constitution must provide for the right of withdrawal to be exercised in accordance with the statutory provisions for withdrawal from non-liquid schemes (Part 5C.6).684 A payment to members by an RE out of scheme property may be a withdrawal, and many ASX-listed schemes (such as property trusts and infrastructure funds) may be classified as non-liquid, for the purposes of Part 5C.6.685 However, the statutory provisions for withdrawal include a requirement that withdrawal requests are to be satisfied proportionately if there is insufficient money to satisfy them in full.686 This requirement cannot operate consistently with the ASX Operating Rules, which require that offers to sell be filled on the basis of price and time priority,687 rather than proportionately688

• a buy-back could increase the voting power of a person in scheme interests beyond the limit that is permissible without a takeover offer.689

Nevertheless, the ASX Listing Rules contemplate on-market buy-backs of interests in listed schemes. Those rules require a listed scheme to consult the ASX before embarking on any on-market buy-back and to comply with any requirements that the ASX sets, for instance, a requirement to comply with:

• the Corporations Act as if it were a company, or

• the listing rules relating to on-market buy-backs by companies with any appropriate adaptations.690

681 See the Explanatory Statement to ASIC Class Order [CO 07/422] and ASIC Regulatory Guide 101 On-market buy-backs by ASX-listed schemes (RG 101) at RG 101.2, RG 101.7.
682 s 601GA(4).
683 RG 101.9.
684 s 601GA(4)(c).
685 RG 101.12-RG 101.13.
686 s 601KD.
687 ASX Operating Rule [4030]. See also RG 101.29.
688 RG 101.14.
689 s 606. See RG 101.17. There is an exception from the takeover provisions for acquisitions that result from a company buy-back (s 611 Item 19).
690 ASX Listing Rule 7.36.

Other matters relating to scheme members

ASIC has given relief to permit on-market buy-backs by ASX-listed schemes that have no more than one class of interest691 on the following conditions:

• the scheme’s constitution confers this power on the RE692

• the buy-back does not materially prejudice the RE’s ability to pay scheme creditors693

• the buy-back is carried out in the ordinary course of trading on the financial market of the ASX694 and the purchase price is paid from scheme property

• the RE complies with the Listing Rules in relation to the buy-back as if the scheme were a listed company (including the requirement that the buy-back price not be more than 5% above the average of the market price for interests in the scheme695)696

• the RE immediately cancels the interests bought back697

• the buy-back receives the approval of scheme members if it exceeds the 10/12 limit (being 10% of the smallest number, at any time during the previous 12 months, of interests in the scheme)698

• the buy-back is disclosed to the ASX if it is within the 10/12 limit699

• any discretions in relation to the setting of the buy-back price must be exercised reasonably and the exercise of any discretion must be documented.700

The ASIC relief makes it clear that the provisions relating to scheme constitutions, withdrawal from non-liquid schemes and takeovers discussed above do not apply to a buy-back that satisfies the stipulated conditions.

ASIC has also been prepared to grant relief to facilitate an off-market scheme buy-back where the scheme was part of a stapled structure, in which investors hold shares in a company (which usually takes the active role of operating the enterprise) and interests in a scheme (through which the property of the enterprise is held) and the company shares and scheme interests can only be purchased and sold together.701

Analysis and discussion

The provision of a statutory buy-back procedure for schemes along the lines of that available for companies would be consistent with CAMAC’s general approach that the

691 ASIC Class Order [CO 07/422]. See also the Explanatory Statement to the class order and ASIC Regulatory Guide 101 On-market buy-backs by ASX-listed schemes (RG 101). The class order applies only to schemes that have no more than one class of interests due to the ‘risk that on-market buy-backs by schemes with more than one class of interests might dilute the value of holdings of members of another class and might not be fair to all members’: see RG 101.4, RG 101.21-RG 101.22.
692 RG 101.25-RG 101.26.
693 RG 101.27.
694 RG 101.28-RG 101.30.
695 ASX Listing Rule 7.33.
696 RG 101.31-RG 101.34.
697 RG 101.35-RG 101.36.
698 RG 101.37-RG 101.49.
699 RG 101.50-RG 101.57.
700 RG 101.58-RG 101.60.
701 ASIC Gazette No. ASIC 22/09, Notice 09-00173 in relation to the Macquarie Media Group. The relief in relation to the scheme component of the stapled structure was given pursuant to s 601QA.

Other matters relating to scheme members

regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.702

The ALRC/CASAC report recommended specific procedures for the buy-back of scheme interests.703 The procedures it recommended were in many respects the same as those that it recommended for the redemption of scheme interests704 and that have now become the withdrawal provisions in Part 5C.6 (discussed in Section 9.3 of this paper). The report did not consider the option of adopting buy-back provisions for schemes modelled on those for companies.

A statutory buy-back procedure for schemes may enhance the ability of REs to manage scheme capital by providing a capital management mechanism that is more flexible than the current statutory withdrawal procedure. The withdrawal procedure protects the interests of investors by enshrining an equal opportunity principle whereby all members wanting to withdraw have the opportunity to do so and the funds available to pay them are shared among them proportionately if there are insufficient funds to pay them in full.705 By contrast, a statutory buy-back procedure could give REs a range of capital management options that provide alternative investor protection safeguards. The corporate buy-back procedure,706 on which the schemes procedure could be modelled, provides for:

• an equal access scheme buy-back707

• a minimum holding buy-back (applicable to listed companies)708

• an on-market buy-back709

• an employee share scheme buy-back710

• a selective buy-back.711

The policy underlying the equal access scheme buy-back for companies reflects that underlying the managed investment scheme withdrawal provisions, namely providing investors with an equal opportunity to share in benefits. An equal access scheme buy-back for a company requires no shareholder approval if it is within the 10/12 limit712 (being

702 Similarly, ASIC has observed that the relief granted in its Class Order [CO 07/422] was intended to ‘avoid placing listed schemes at a regulatory disadvantage to listed companies in relation to capital management techniques where there is no regulatory reason for different treatment of listed schemes and listed companies’ (RG 101.5).
703 para 7.12.
704 para 7.21.
705 A withdrawal offer can also be made to specific classes of members. In this respect, the RE is under a duty to treat members who hold interests of different classes fairly (s 601FC(1)(d)).
706 The regime governing company buy-backs is in Part 2J Div 2. ASIC Regulatory Guide 110 Share buy-backs (RG110) provides guidance for companies on compliance with the share buy-back provisions, including when ASIC may grant relief from those provisions.
707 Under this type of buy-back, offers are made to buy back the same percentage of shares from every person who holds ordinary shares (definition of ‘equal access scheme’ in s 9, s 257B(2), (3)).
708 This is a buy-back of all of a holder’s shares in a listed corporation if the shares are less than a marketable
parcel (definition of ‘minimum holding buy-back’ in s 9).
709 This is a buy-back by a listed corporation on a prescribed financial market in the ordinary course of trading on that market (definition of ‘on-market buy-back’ in s 9).
710 This involves a scheme whose purpose is the acquisition of shares by or on behalf of employees or salaried directors of the company or a related body corporate and that has been approved by the company in general meeting (definition of ‘employee share scheme buy-back’ in s 9).
711 This is any buy-back that is not an equal access buy-back or one of the other specific types of buy-back
(definition of ‘selective buy-back’ in s 9).
712 s 257B(1).

Other matters relating to scheme members

10% of the smallest number, at any time during the previous 12 months, of votes attaching to the voting shares in the company713). A requirement for shareholder approval by ordinary resolution of shareholders applies to equal access scheme buy-backs that exceed the 10/12 limit,714 as well as on-market buy-backs and employee share scheme buy-backs.715

A different investor protection mechanism applies to selective buy-backs of company shares, which require approval by:

• a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person whose shares are proposed to be bought back or by their associates, or

• a resolution agreed to unanimously by all ordinary shareholders at a general meeting.716

This range of buy-back options, which could be available to REs if buy-back provisions for schemes were introduced, would give REs a wider range of capital management techniques than the current withdrawal mechanism, which requires an RE to make the same offer to all members and satisfy their withdrawal requests proportionately if there are insufficient funds to satisfy demand.

A statutory buy-back procedure for schemes would also allow for greater uniformity of approach to corporate and scheme buy-backs, which would be particularly useful where the buy-back involves a stapled enterprise structure. For some types of corporate buy-back (including an on-market buy-back over the 10/12 limit), a company buy-back involves the lodgement with ASIC of notices of meeting and other documents relating to the buy-back.717 By contrast, the ASIC relief facilitating on-market buy-backs of scheme interests does not require lodgement of documents with ASIC. After the completion of an on-market buy-back for a stapled enterprise structure, the relevant ASIC form for the cancellation of company shares following a buy-back718 is attached to the company’s announcement to the ASX. However, that announcement does not give a balanced or comprehensive view of the buy-back, as it does not include information about the change to the scheme interests.

A buy-back of scheme interests might be used as part of a broader reorganization of a scheme’s affairs. Scheme reorganizations are discussed in Section 11.2 of this paper.

Question 9.4.1. Should there be a buy-back procedure for interests in managed investment schemes?

Question 9.4.2. If so, should it be based on that provided for companies or take some other form?

713 s 257B(4).
714 s 257C.
715 s 257B(1). In relation to on-market buy-backs, ASIC considers that:
buying back interests in the ordinary course of trading on ASX is a fair procedure because trades on ASX’s trading system operate according to price–time priority. This results in the better-priced orders taking priority and if there is more than one order at the same price, the order that was placed first takes priority (RG 101.29).
716 s 257D.
717 ss 257C(3), 257D(3), 257E, 257F(2).
718 Form 484 (see Section C1 Cancellation of shares).

Other matters relating to scheme members

Question 9.4.3. How should any buy-back procedure for schemes relate to the withdrawal procedure for schemes (either as currently set out in Part 5C.6 or as amended (see Questions 9.3.1-9.3.4))?

9.5 Ceasing to be a scheme member

The issue

It may be difficult to determine when a person ceases to hold an interest in a scheme and hence ceases to be a member.

Current position

Section 9 defines a ‘member’ in relation to a managed investment scheme as ‘a person who holds an interest in the scheme’.719 Consequently, a person ceases to be a member when the person ceases to hold an interest in the scheme. As discussed in Section 3.2 of this paper, the definitions of ‘interest’ and ‘member’ are very broad and lack clarity: in contrast with companies,720 ‘whether a person is a member of a scheme does not depend on whether the person appears in the register of members’.721

Analysis and discussion

Some guidance on when a person ceases to be a member of a scheme is found in Basis
Capital Funds Management Ltd v BT Portfolio Services Ltd,722 where the Court said:723

As with the issue of units, the redemption of units in a registered scheme is an event that does not occur automatically, absent some special provision in the constitution of the scheme … . Redemption occurs when a unitholder’s redemption request is accepted by the responsible entity, or a person with the authority of the responsible entity, and the unitholder’s holding in the unit register is adjusted to cancel the redeemed units … Once redemption has taken place, the position of the former unitholder is ‘transmuted’ from unitholder to creditor, if the redemption price is unpaid.

Under this judicial test, therefore:

• a member ceases to be a member once redemption has taken place (and, if paid, will have no further interest in the scheme or, if unpaid, will be a creditor of the scheme)

• redemption, in turn, occurs once the following two steps have both been completed:

– the member’s redemption request is accepted by the RE (or a person with the authority of the RE), and

– the member’s holding in the unit register is adjusted to cancel the redeemed units.

719 The definition of ‘member’ of a scheme is discussed in Section 3.2 of this paper.
720 s 231.
721 CCH Managed Investments Law and Practice (looseleaf) at ¶65-200.
722 [2008] NSWSC 766.
723 at [142].

Other matters relating to scheme members

Despite this guidance from the case law, there may still be doubt about precisely when the first of these steps in the redemption process (acceptance of the redemption request by the RE) has been completed.

There would also be a particular problem if the value of a person’s interest had not been calculated when the person ceased to be a member.

This issue may be important where a person has not received payment after withdrawal from a scheme. If the person is no longer a scheme member, the person would not have access to the range of remedies available to members in a dispute with the RE.724

One option is for the Corporations Act to clarify at what point between the time when an RE decides to act on a withdrawal request and the time of payout the member ceases to have an interest.

An alternative option would be for the Corporations Act to stipulate that a person continues to be a member until the person has been paid or provided with any amount due on withdrawal from the scheme.

This issue would be resolved if the Corporations Act were amended to provide that a person is only a member of a scheme if the person is on the register of members (see the discussion in Section 3.2 of this paper): the person would cease to be a member when he or she was removed from the register. A change to this effect would align the law for schemes with that for companies, in accordance with CAMAC’s general approach that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.

Question 9.5.1. Should the Corporations Act clarify when a withdrawing member ceases to be a member of a scheme and, if so, how?

724 For instance, s 601MA. On the other hand, in some circumstances there can be advantages in a person no longer being a member. For instance, in Basis Capital Funds Management Ltd v BT Portfolio Services Ltd [2008] NSWSC 766, it was pointed out (at [162]) that a former member can assert a right as creditor to payment of a redemption price even if payment of the redemption price has been deferred under the provisions of the scheme’s constitution.

Disclosure

10 Disclosure

This chapter considers whether the current disclosure requirements provide the most appropriate disclosure framework for interests in managed investment schemes. It also raises for consideration whether there is a need for any additional specific disclosures and examines possible means of making required disclosures.

10.1 Overview of the chapter

Disclosure requirements play an important part in the investor protection framework. Section 10.2 discusses the role that disclosure plays in the conduct of managed investment schemes.

Section 10.3 identifies the three broad types of disclosure to scheme investors.

Section 10.4 looks at the initial disclosure regimes for securities and scheme interests, including how those regimes have diverged. It examines the policy considerations underlying the changes to the respective regimes and raises for consideration whether initial disclosure for schemes should be more closely aligned with that for companies and whether there is a need for any additional specific types of disclosure.

Section 10.5 deals with continuous disclosure and significant event reporting, while
Section 10.6 deals with periodic disclosure.

Section 10.7 evaluates the appropriateness of alternative vehicles for initial disclosure, as well as the best way of disseminating any type of disclosed material.

10.2 Role of disclosure

The ALRC/CASAC report accepted that mandatory disclosure rules for managed investment schemes are essential on efficiency and equity grounds.725 It saw mandatory disclosure as having an important role for commercial enterprises that are characterized by a separation of ownership and control (including schemes). Mandatory disclosure for schemes can:

• increase the accountability of scheme operators to investors by reducing the information gap between those parties

• alert existing and potential investors to significant developments in the performance of the scheme and, possibly, to inefficiency or misconduct on the part of the RE

• help individuals decide whether investment in a particular scheme is advantageous in light of the rest of their personal asset holdings

725 para 5.3.

Disclosure

• reduce significantly the costs associated with schemes, including by:

– providing common disclosure rules (thereby obviating the need to develop rules for each scheme, the cost of which would flow on to investors), and

– reducing the duplication of search and research costs by investors and the uncertainty in assessing the risks and benefits of different schemes

• reduce the information gap between different classes of investors

• increase the accuracy of prices of scheme interests and thereby improve the efficiency with which the capital market allocates financial resources among competing investment opportunities.726

10.3 Types of disclosure

Investors in managed investment schemes receive:

• initial disclosure (or fundraising disclosure), which applies to initial issues of financial products to an investor727 as well as to a limited range of secondary sales728 (discussed in Section 10.4)

• continuous disclosure, which is primarily aimed at ensuring an informed secondary market for financial products that are subject to the continuous disclosure regime729 (discussed in Section 10.5) (significant event reporting plays the same role in relation to financial products that are not subject to continuous disclosure: this type of reporting is also discussed in Section 10.5)

• periodic disclosure (discussed in Section 10.6).

10.4 Initial disclosure

10.4.1 Historical overview

Before the introduction of the managed investment scheme provisions in Chapter 5C, managed investment schemes were regulated as ‘prescribed interests’,730 which came within the definition of ‘securities’.731 The disclosure document for prescribed interests was a prospectus. The discussion of disclosure in the ALRC/CASAC report was premised on the disclosure document for scheme interests being a prospectus.732

When the managed investment provisions in Chapter 5C were introduced into the Corporations Act by the Managed Investments Act 1998, interests in managed investment schemes (like prescribed interests) were classified as securities and the disclosure

726 paras 5.2-5.3. Corporate Law Economic Reform Program, Proposals for Reform: Paper No. 6, Financial Markets and Investment Products: Promoting competition, financial innovation and investment (1997) at 105 highlighted the role of disclosure regulation in assisting the price formation process and informed decision-making by investors.
727 CLERP 9 paper Corporate disclosure: Strengthening the financial reporting framework (2002), Section 8.5.6.
728 The disclosure requirements for certain secondary sales apply for anti-avoidance purposes. See Appendix 1 to this paper under The disclosure test.
729 CLERP 9 paper Corporate disclosure: Strengthening the financial reporting framework (2002), Section 8.5.6.
730 Former Part 7.12 Div 5.
731 Former s 92.
732 paras 5.9-5.21.

Disclosure

document for those interests was therefore a prospectus.733 The disclosure provisions for securities were subsequently amended by the Corporate Law Economic Reform Program Act 1999. The shorter forms of disclosure introduced by the amendments applied to interests in managed investment schemes, which continued to be classified as securities.

The prospectus requirements, and the various shorter disclosure regimes for securities, are discussed in Section 10.4.2.

In 2002, the Product Disclosure Statement requirements, introduced by the Financial Services Reform Act 2001 (FSRA), replaced the prospectus requirements as the disclosure regime for scheme interests.734 In 2005, a shorter PDS regime was introduced as an optional alternative to the full PDS requirements. In 2012, another shorter PDS regime was introduced as the mandatory disclosure regime for certain schemes. The PDS requirements, including the shorter PDS regimes, are discussed in Section 10.4.3.

The scheme constitution also contains information that may be relevant to scheme investors. The contents of scheme constitutions are discussed in Sections 5.2.2 and 6.1, while Section 10.7.1 discusses disclosure issues associated with matters contained in scheme constitutions.

10.4.2 Disclosure requirements for securities

Overview

The legislation governing prospectuses originally contained detailed prescription of the content requirements for prospectuses.735 With the introduction of the Corporations Law in
1991, this ‘checklist’ approach was replaced with a general disclosure requirement that prospectuses:

… contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of:

(a) the assets and liabilities, financial position, profits and losses, and prospects of the corporation; and

(b) the rights attaching to the securities.736

In essence, this remains the disclosure test for prospectuses.737

733 Explanatory Memorandum to the Bill for the Managed Investments Act 1998, para 5.2.
734 Interests in managed investment schemes ceased to be included in the definition of ‘securities’ that applies to the fundraising provisions: s 92(4) definition of ‘securities’, s 700(1), s 761A definition of ‘security’. The various definitions of ‘securities’ and the extent to which they apply to interests in managed investment schemes
are discussed in Section 16.3 of this paper.
735 See, for instance, s 98 of the various State and Territory Companies Codes, which came into force in July 1981 in the Australian Capital Territory and the States and in July 1986 in the Northern Territory.
736 Former s 1022(1) of the Corporations Law. HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of
Corporations Law (LexisNexis Butterworths, looseleaf) at [22.211] observed that:
Experience has suggested that checklists (especially when designed without adequate knowledge of the issuer’s business) tended to emphasise the mechanical “ticking off” of items of investigation, in an unreflective exercise that ran the risk of overlooking matters of more material concern.
The same commentary also said (at [22.310]), in relation to the checklist approach:
the courts did not develop any general duty to disclose all material relevant to the investment decision, and it was generally thought that the adequacy of disclosure was beyond challenge if all of the detailed prescriptions had been satisfied.
The Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999 said (at para 2.16) that the general disclosure test was preferable to the checklist approach, which ‘was easily circumvented by fundraisers and led to less meaningful disclosures to investors’.

Disclosure

Over the course of the 1990s, however, prospectus length and complexity proved to be a concern for retail investors and resulted in high costs for fundraisers.738 These factors led to the introduction of shorter disclosure regimes for securities by the Corporate Law Economic Reform Program Act 1999, being:

• short form prospectuses739

• profile statements740

• offer information statements.741

In addition to these shorter disclosure regimes, a lower disclosure standard for prospectuses was introduced for offers that relate to continuously quoted securities.742

Prospectuses

General requirements
Chapter 6D requires that prospectuses satisfy a ‘due diligence’ standard by containing ‘all the information that investors and their professional advisers would reasonably require to make an informed assessment’ of:

• ‘the rights and liabilities attaching to the securities’, and

• ‘the assets and liabilities, financial position and performance, profits and losses and prospects of the body’ issuing the securities

but only:

• to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus, and

• if various persons involved in the offer actually knew the information or in the circumstances ought reasonably to have obtained the information by making enquiries (the due diligence requirement).743

In addition to this general due diligence disclosure requirement, a prospectus must contain the following specific information:744

• the terms and conditions of the offer

• details about certain interests, fees or benefits of any directors or proposed directors of the company, persons acting in a professional, advisory or other capacity in connection with the preparation or distribution of the prospectus, promoters,

737 s 710.
738 See, for instance, Financial System Inquiry Final Report (1997) (the Wallis report) at 271, Explanatory
Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999, paras 2.14, 2.16.
739 s 712.
740 s 714.
741 s 715.
742 s 713.
743 s 710.
744 s 711. A prospectus must also set out the information required by the regulations: s 711(8). There are no relevant regulations.
Also, since 30 September 2009, a prospectus issued by an unlisted disclosing entity should describe how it will comply with its continuous disclosure obligations: see Regulatory Guide 198 Unlisted disclosing entities: Continuous disclosure obligations at RG 198.15, RG 198.44.

Disclosure

underwriters (but not sub-underwriters) or financial services licensees involved in the fundraising

• a statement of what has been done about the admission to quotation of securities if the prospectus states or implies that they will be able to be traded on an Australian or overseas financial market

• a statement that no securities will be issued on the basis of the prospectus after the specified expiry date, which must not be later than 13 months after the date of the prospectus745

• a statement that a copy of the prospectus has been lodged with ASIC and ASIC takes no responsibility for the content of the prospectus.

The prospectus disclosure requirements in Chapter 6D continued to apply to shares and debentures after the FSRA came into effect.746

Transaction-specific prospectuses for continuously quoted securities
Prospectuses are subject to reduced disclosure requirements where they relate to continuously quoted securities.747 As with prospectuses generally, these transaction-specific prospectuses must contain information to enable an informed assessment of the rights and liabilities attaching to the securities offered. However, they need only provide information about ‘the assets and liabilities, financial position and performance, profits and losses and prospects of the body’ if information falling into that category has been exempted from the continuous disclosure requirements. If there is no such information, the prospectus need only disclose information about ‘the effect of the offer on the body’. The prospectus must also:

• state that, as a disclosing entity, the body is subject to regular reporting and disclosure obligations and that copies of documents lodged with ASIC may be obtained from, or inspected at, an ASIC office

• either:

– inform people of their right to obtain a free copy of the most recent annual report, any subsequent half-year financial report and any subsequent continuous disclosure notices, or

– include, or be accompanied by, a copy of the documents.

ASIC can prevent a body from using a transaction-specific prospectus if certain disclosure-related contraventions have occurred in relation to the body in the previous
12 months.

745 The 13-month life for a prospectus was introduced by the Corporate Law Economic Reform Program Act 1999, to facilitate issuers rolling over prospectuses annually. The ALRC/CASAC report also recommended (at para 5.21) a 13 month, rather than a 12 month, life, as a prospectus issuer must otherwise issue a new prospectus slightly before the expiration of the 12 month period, to ensure there is always a current prospectus, with the result that the issue dates for prospectuses will become slightly earlier each year.
746 Chapter 6D applies to offers of ‘securities’. The meaning of securities for this purpose is determined by the s 92(4) definition of ‘securities’, s 700(1) and the s 761A definition of ‘security’ and covers shares and debentures. See also the Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act
2001 paras 14.4, 14.8, 14.18.
747 s 713 (prospectuses), definition of ‘continuously quoted securities’ in s 9. Section 713 also makes specific provision for options to acquire continuously quoted securities.

Disclosure

Short form prospectuses

The short form prospectus regime permits a prospectus simply to refer to a document that has been lodged with ASIC, rather than setting out the information that it contains.748
Documents incorporated in this way are treated as being included in the prospectus, thus ensuring that they are subject to the content and liability rules for prospectuses.749

A short form prospectus must inform investors of their right to obtain a copy of any document lodged with ASIC and provide sufficient information for an investor to obtain a copy, which must be provided free of charge. A person may lodge a document with ASIC for the specific purpose of incorporating it into a prospectus: it is not necessary that the Corporations Act require the document to be lodged.

If the information is of interest to professional analysts or advisers or investors with similar specialist information needs, the short form prospectus must describe the contents of the document to which the prospectus refers and indicate that such information is of interest to those people.

Profile statements

The Corporations Act provides for the making of particular types of offers using a profile statement instead of a prospectus if ASIC so permits.750 However, the obligation to prepare a prospectus remains.751

It was intended that industry specific profile statements would give investors the ability to make comparisons between similar products.752 Before the exclusion of interests in a managed investment scheme from the securities fundraising provisions, ASIC approved the use of profile statements for many kinds of unlisted managed investment schemes.

A profile statement sets out limited key information about the company and the offer, being:

• the identity of the issuer

• the nature of the securities

• the nature of the risks involved in investing in the securities

• all amounts payable in respect of the securities (including fees and commissions)

• the expiry date, being no more than 13 months from the date of the prospectus

• a statement that no securities will be issued on the basis of the statement after the expiry date.753

748 s 712.
749 s 712(3), Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999 para 8.8.
750 s 709(2). Profile statements were recommended by the Financial System Inquiry Final Report (1997) (the
Wallis report) at 274-275.
751 s 709(2), (3).
752 Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999 at para 8.11.
753 s 714. A profile statement must also contain any other information required by the regulations or by ASIC as a condition of approval. There are no relevant regulations and ASIC has not given any approvals.

Disclosure

As for a prospectus, a profile statement must indicate that a copy has been lodged with
ASIC and that no responsibility is taken by ASIC for the content.

The disclosure standard for a profile statement is lower than for a prospectus, as lack of knowledge about a relevant matter is a defence to liability for a misleading or deceptive statement or an omission.754

Offer information statements

A body offering to issue securities may use an offer information statement instead of a prospectus if the total of all amounts raised by the body or specified related entities is
$10 million or less.755 The offer information statement is primarily intended to be a
fundraising mechanism for small and medium sized enterprises, though it is not limited to those enterprises.756

An offer information statement should highlight that it is not a prospectus and has a lower level of disclosure than a prospectus and that investors should obtain professional investment advice before accepting the offer.757 In addition, it must:

• identify the body

• identify the nature of the securities

• describe the business

• describe the proposed use of the funds raised

• state the nature of the risks involved in investing in the securities

• give details of all amounts payable in respect of the securities (including fees and commissions)

• state that:

– a copy of the statement has been lodged with ASIC and ASIC takes no responsibility for the content of the statement

– no securities will be issued on the basis of the statement after the specified expiry date, which must be no more than 13 months from the date of the statement

• include a recent audited financial report prepared in accordance with the accounting standards.758 This requirement may have limited the utility of the offer information statement for small to medium-sized enterprises.759

754 s 732.
755 s 709(4).
756 Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999 at paras 2.33,
8.55 and 8.58.
757 s 715(1)(g), (h). Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act
1999 at para 8.57.
758 s 715. An offer information statement must also contain any other information required by the regulations.
There are no relevant regulations.
759 HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.300] observed that:

Disclosure

It was not expected that the preparation of an offer information statement would involve external inquiries to ascertain information about matters on which disclosure is required.760

The disclosure standard for an offer information statement is lower than for a prospectus, as lack of knowledge about a relevant matter is a defence to liability for a misleading or deceptive statement or an omission.761

Supplementary disclosure for securities

There is a requirement for supplementary or replacement documents that correct or supplement information provided in prospectuses (including short form prospectuses), profile statements and offer information statements where:

• the relevant document contains a misleading or deceptive statement or an omission or where a new circumstance that would have required disclosure has arisen since the original document, and

• the statement, omission or circumstance is materially adverse from the point of view of an investor.762

A supplementary or replacement document can also be issued for other reasons763 (for instance, if the person making the offer becomes aware that information in the disclosure document is not worded and presented in a clear, concise and effective manner764).

The subsequent document must be dated and state that it is a supplementary or replacement document, as the case may be, and identify the original document.765

10.4.3 Disclosure requirements for interests in schemes

Overview

The Product Disclosure Statement requirements for financial products (including interests in managed investment schemes) came into effect in 2002.

Subsequently, two new regimes providing for abbreviated Product Disclosure Statements for schemes were introduced, one in 2005 and the other in 2012.

The Short-Form PDS regime766 was introduced for all managed investment schemes in
2005, to provide an optional alternative to giving the full PDS (which still had to be

Many of these bodies are not required to have their financial statements audited, and the appointment of an auditor only for the purposes of the offer information statement is likely to be disproportionately expensive. ASIC has discussed the circumstances in which it is prepared to modify the requirement, in RG 157
Financial reports for offer information statements, from which it appears that a modification will be available only in very limited circumstances.
760 Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999 at para 8.56.
761 s 732.
762 s 719. That section says that a person ‘may’ lodge a supplementary or replacement document with ASIC, but Note 1 to the section points out that it is ‘an offence to continue making offers after the person has become aware of a misleading or deceptive statement, omission or new circumstance that is materially adverse from the point of view of an investor unless the deficiency is corrected’ (s 728).
763 Note 3 to s 719.
764 s 719(1A).
765 s 719(2). A supplementary document must also identify any other supplementary documents and state that it is to be read together with all previous documents.
766 Part 7.9 Div 3A (containing ss 1017H-1017K), as inserted by Corp Regs 7.9.61AA, Schedule 10BA Part 3
Item 3.1.

Disclosure

available to those investors who requested it). The Explanatory Statement to the regulations that introduced that regime767 stated that:

PDSs have as a rule turned out to be complex and lengthy documents. Consumer feedback suggests that the average retail investor finds it difficult to absorb the large volume of information in some PDSs, and is therefore deterred from using the information to make investment decisions.

In June 2012, a different shorter PDS regime, applicable to most simple managed investment schemes (‘simple schemes’),768 commenced.769 It is compulsory for those schemes.

ASIC has issued guidance on the disclosure to be included in disclosure documents for certain types of managed investment scheme.770

Full Product Disclosure Statements

General requirements
The PDS requirements in Part 7.9 Div 2 are based on a ‘directed disclosure’ approach, which:

• involves ‘a list of topics under which information, if relevant to a particular financial product, must be included in the Product Disclosure Statement … supplemented by a requirement to include any other material information actually known to the product issuer’771

• seeks to balance the need for the purchaser to have sufficient information to make an informed decision and compare products against the concern that they may be provided with more information than they can comprehend.772

A Product Disclosure Statement must include the following statements, and such of the following information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product:773

767 Corporations Amendment Regulations 2005 (No. 5).
768 ‘Simple managed investment scheme’ is defined in Corp Reg 1.0.02.
769 Corporations Amendment Regulations 2010 (No. 5), as amended by Corporations Legislation Amendment
Regulations 2011 (No. 2).
Paragraph 1020G(1)(c) confers the power to enact regulations varying the operation of the disclosure provisions in Part 7.9. In reliance on this power, Corp Reg 7.9.11V modifies Part 7.9 in the manner set out in Part 5C of Schedule 10A to the Corporations Regulations. Item 5C.2 in Schedule 10A replaces s 1013C(1) as enacted with a new s 1013C(1)-(1F). The replacement s 1013C(1)(a), (b) confers the power to enact regulations governing the statements and information to be contained in, and the form of, a simple scheme PDS. In reliance on this power, Corp Reg 7.9.11W prescribes the information, statements and form contained in Schedule 10E.
The shorter PDS requirements for simple managed investment schemes do not apply where the interests in the scheme are traded on a financial market or are stapled securities, or the scheme allows the investor to direct how money invested in the scheme is to be invested (Corp Reg 7.9.11S(2)-(4)).
For ASIC interim relief exempting various funds, including multifunds and hedge funds, from the shorter PDS
regime, see ASIC Class Orders [CO 12/749], [CO 12/1592], [CO 13/632], [CO 13/1128] and [CO 14/23].
770 Regulatory Guide 45 Mortgage schemes: Improving disclosure for retail investors, Regulatory Guide 46
Unlisted property schemes: Improving disclosure for retail investors, Regulatory Guide 231 Infrastructure entities: Improving disclosure for retail investors, Regulatory Guide 232 Agribusiness managed investment schemes: Improving disclosure for retail investors, Regulatory Guide 240 Hedge funds: Improving disclosure.
771 Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 paras 4.35, 14.21.
772 Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 14.71.
773 ss 1013C, 1013D. The factors in s 1013D are discussed in the Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 paras 14.75-14.92. Corp Reg 7.9.14C contains more detail about the information about labour standards or environmental, social or ethical considerations that a PDS must contain.

Disclosure

• a statement setting out the name and contact details of the issuer and, where relevant, the seller of the financial product774

• the benefits of the product

• significant risks associated with the product775

• the cost of the product

• the quantum and date for payment of any amounts that will or may be payable after acquisition

• any expenses or charges deductible from a common fund

• any commission, or other similar payments, that may affect the return to the product holder776

• any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product

• the dispute resolution system

• general information about significant taxation implications

• any cooling-off regime applicable to acquisitions of the product

• a statement of how any other information provided may be accessed

• the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment.

A PDS must also contain any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product.777

A Product Disclosure Statement must also contain any other statements or information required by the regulations: s 1013D(1)(k). There are no regulations relevant to managed investment schemes. The ALRC/CASAC report advocated ‘rules to ensure that the operator of the scheme gives investors all the information relevant to the assessment of risk that the operator has available to it’ (para 2.10).
Also, since 30 September 2009, a PDS issued by an unlisted disclosing entity should describe how it will comply with its continuous disclosure obligations: see Regulatory Guide 198 Unlisted disclosing entities: Continuous disclosure obligations at RG 198.15, RG 198.44.
Where a financial product (which could include an interest in a managed investment scheme) is offered or issued by a discretionary mutual fund, a Product Disclosure Statement must also be given to a wholesale client: Corp Reg 7.9.07A.
774 The ALRC/CASAC report recommended that a scheme disclosure document identify the RE (para 5.8).
775 In Woodcroft-Brown v Timbercorp Securities Limited (in liq) [2011] VSC 427, the Court said (at [126]):
s 1013D does not require disclosure of information concerning any and all possible risks. Had that been so, the section would have so stated. Instead, only risks which are relevant to the product, significant and which one would reasonably expect to see disclosed in the Product Disclosure Statement need be included.
This passage was quoted in a statement of principles by the Court in Almonds Investors Ltd v Emanouel [2012] VSC 413 at [38].
776 The Financial System Inquiry Final Report (1997) (the Wallis report) at 271 said that ‘consumers need information about fees, commissions (including trailing commissions) and the remuneration paid to their financial advisers or brokers so that they can determine whether a recommendation is skewed in favour of a particular product’.
777 ss 1013C, 1013E. This may include, for instance, identification of the scheme’s custodian and a description of its role: ASIC Report 291 Custodial and depository services in Australia (July 2012), para 18.

Disclosure

The information to be included in a PDS for interests in a managed investment scheme is only information actually known to the RE and various other persons involved in an issue (or certain sales) of the interests.778 Also, information is not required to be included in a PDS ‘if it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the information in the Statement’.779

Transaction-specific PDSs for continuously quoted securities
PDSs are subject to reduced disclosure requirements where they relate to continuously quoted securities.780 These transaction-specific PDSs need not contain any information included in an annual or a half-year financial report lodged with ASIC or in a continuous disclosure notice. A transaction-specific PDS must:

• state that, as a disclosing entity, the issuer of the product is subject to regular reporting and disclosure obligations and that copies of documents lodged with ASIC may be obtained from, or inspected at, an ASIC office

• inform people of their right to obtain a free copy of the relevant financial report or continuous disclosure notice.781

778 Under s 1013C(2), information required by ss 1013D and 1013E need only be included in a PDS to the extent to which it is actually known to the ‘responsible person’ and various other persons.
The responsible person is the person who, or on whose behalf, a PDS for a financial product is required to be prepared (definition of ‘responsible person’ in s 1011B, s 1013A(3)).
In the case of an issue of interests in a registered scheme, the responsible person is the RE, given that:
• the obligation falls on the ‘issuer’ (s 1013A(1))
• the issuer is ‘the person responsible for the obligations owed, under the terms of the facility that is the product’ (s 761E(4), following on from the definition of ‘issuer’ in s 761A)
• that person is the RE of a registered scheme, which is to operate the scheme and perform the functions conferred on it by the scheme’s constitution and the Corporations Act (s 601FB(1); see CCH Managed Investments Law and Practice (looseleaf) at [¶62-240]).
In the case of a sale of interests in a registered scheme that constitutes an off-market sale by the controller, the responsible person is the person who controls the RE, given that:
• the obligation falls on the ‘the person making the offer to sell’ the interest in the scheme (s 1013A(2))
• the person making the offer to sell is a person who controls the issuer (s 1012C(5); see s 50AA for the definition of ‘controls’), which, as noted in the previous paragraph of this footnote, is the RE (see CCH Managed Investments Law and Practice (looseleaf) at [¶62-260]).
The other persons whose knowledge is relevant to the content of a PDS are underwriters, persons who participated in the preparation of the PDS, persons who consented to a statement of theirs being included in the PDS (see s 1013K), persons who have performed a professional or advisory function and, if any of those
persons is a body corporate, any director of that body corporate (s 1013C; cf s 711 for prospectuses). For a sale
that amounts to an indirect issue, the knowledge of the issuer is also relevant.
779 s 1013F.
780 s 1013FA. See also the definition of ‘continuously quoted securities’ in s 9. Section 1013FA was introduced by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 to permit transaction-specific PDSs (see the Explanatory Memorandum to the Bill for the 2004 Act, paras 5.528-5.529). This section implemented Proposal 28 in the CLERP 9 paper Corporate disclosure: Strengthening the financial reporting framework (2002), which was aimed at ensuring that the provision for transaction-specific PDSs was in line with that for transaction-specific prospectuses (see the discussion in that paper at pp 154-156).
It appears that s 1013I, which was introduced with the FSRA amendments in 2002, was intended to permit transaction-specific PDSs (see the Explanatory Memorandum to the Bill for the Financial Services Reform Act
2001 para 18.10). However, instead of permitting transaction-specific PDSs that may exclude the specified categories of previously disclosed information, s 1013I merely requires that PDSs include statements that draw attention to previously disclosed information and the means by which investors can obtain it. The resulting gap was filled by s 1013FA.
781 There is no option for a transaction-specific PDS to include, or be accompanied by, a copy of the document
instead of informing people of their right to obtain the document. By contrast, s 713 (the securities provision allowing transaction-specific prospectuses) provides that a prospectus can either inform people of their right to a free copy of the relevant document (alternative 1) or include, or be accompanied by, a copy of the document (alternative 2) (s 713(4)(b)).

Disclosure

ASIC can prevent a body from using a transaction-specific prospectus if certain disclosure-related contraventions have occurred in relation to the body in the previous
12 months.

Incorporation by reference
In 2007, an incorporation by reference regime was introduced to provide an alternative means of satisfying certain content requirements for full PDSs.782 The prerequisites for use of this regime are:

• the incorporated material must be in writing and publicly available in a document other than the PDS (public availability might be through electronic sources such as the Internet783)

• the incorporated material must not be in a Short-Form PDS, which is already an abbreviated document

• the PDS must give sufficient information to enable a person to identify the incorporated material and decide whether or not to obtain and read it

• the PDS must state that the incorporated material is available on request at no charge. Incorporated material is taken to be included in the PDS.784
The following core information must be included in the PDS itself, not incorporated by reference:

• a summary description of the purpose and key features of the product

• a summary description of the key risks of the product

• the name and contact details of the issuer or seller785

• certain information about fees and costs

• a Consumer Advisory Warning

• the dispute resolution system and how that system may be accessed

• any cooling-off regime.786

In relation to PDSs, s 1013I contains elements similar to those found in s 713 and therefore contains both alternatives. However, s 1013I does not permit transaction-specific PDSs, as explained in the previous footnote. Section 1013FA, which permits transaction-specific PDSs, provides only for alternative 1.
782 Corp Reg 7.9.15DA. This regulation was introduced by the Corporations Amendment Regulations 2007 (No. 10). See also the commentary on this regulation in the Explanatory Statement to the Corporations
Amendment Regulations 2007 (No. 10).
There is a separate incorporation by reference regime for simple managed investment schemes: see the discussion later in this section under the heading Product Disclosure Statements for simple schemes.
783 Explanatory Statement to the Corporations Amendment Regulations 2007 (No. 10), commentary on Item [4] – Regulations 7.9.15DA, 7.9.15DB and 7.9.15DC.
784 Corp Reg 7.9.15DA(3).
785 For the circumstances in which a seller is required to give a PDS, see Appendix 1 to this paper under The disclosure test.
786 Corp Reg 7.9.15DA(4).

Disclosure

Other content provisions
In addition to the required information, a Product Disclosure Statement may:

• include other information, or

• refer to other information that is set out in another document787 (this discretionary additional information is distinct from information included by reference in satisfaction of a statutory disclosure requirement).

Supplementary PDSs
There is provision for Supplementary Product Disclosure Statements, to correct misleading or deceptive statements in, or omissions from, a PDS and to update or add to information in a PDS.788

Supplementary PDSs are the principal method for these purposes. A replacement PDS regime was added by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007789 to allow for the situation where the scheme interests are part of a stapled securities structure: a stapled entity can issue a replacement PDS for the scheme interests when it issues a replacement prospectus for the company securities.

ASIC Good Disclosure Principles
ASIC has set out Good Disclosure Principles for Product Disclosure Statements ‘to help product issuers comply with the disclosure requirements and also promote good disclosure outcomes for consumers’.790 These principles are that disclosure should:

• be timely791

• be relevant and complete792

• promote product understanding793

• promote product comparison794

• highlight important information795

• have regard to consumers’ needs.796

Short-Form Product Disclosure Statements

A person who is required to provide a PDS (including the issuer of an interest in a scheme797) may instead provide a Short-Form PDS.798 However, the need to prepare a

787 s 1013C(1)(b).
788 Part 7.9 Div 2 Subdiv D.
789 Part 7.9 Div 2 Subdiv DA, Explanatory Memorandum to the Bill for the Corporations Legislation Amendment
(Simpler Regulatory System) Act 2007 para 5.27.
790 Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) at
RG 168.2.
791 RG 168.4, RG 168.60-RG 168.63.
792 RG 168.4, RG 168.64-RG 168.70.
793 RG 168.4, RG 168.71-RG 168.86.
794 RG 168.4, RG 168.87-RG 168.89.
795 RG 168.4, RG 168.90-RG 168.96.
796 RG 168.4, RG 168.97-RG 168.104.
797 Parties other than the issuer of a scheme interest may also have an obligation to give a PDS: see the definition of
‘regulated person’ in s 1011B.
798 s 1017H(1).

Disclosure

full PDS, as well as the Short-Form PDS, remains, given that the full PDS must be provided to investors on request.799

The Short-Form PDS regime facilitates the provision of a more succinct disclosure document in two ways.

First, a Short-Form PDS need only contain summaries800 of statements and information contained in the full PDS801 (but must also contain information about obtaining a copy of the full PDS802). These summaries cover most of the items to be contained in a full PDS.803
This information was regarded as ‘sufficient to give retail clients a reasonable understanding of the key features of the product, including what costs they will incur in acquiring the product’.804

Secondly, the Short-Form PDS may incorporate by reference other information that is set out in the full PDS or in the Financial Services Guide (FSG).805 The reference must identify the relevant PDS or FSG or the part that contains the information.806

A Short-Form PDS may also include other information.807

There is provision for Supplementary Short-Form PDSs.808

The Short-Form PDS regime is intended:

to give financial product providers the flexibility to create a document that is not only shorter, but also more tailored to the individual product, and that is written in a manner that is more appealing and informative for the retail client.809

It also provides the opportunity for issuers to save printing and dissemination costs. However, there are no savings in preparation costs, given that both the full and the Short-Form PDS must be prepared.

799 s 1017H(2).
800 The Explanatory Statement to the Corporations Amendment Regulations 2005 (No. 5) said that:
The term ‘summary’ in this context is intended to mean a condensed and straightforward account of certain key content items that are required (among others) to be included in the PDS.
801 s 1017I(1)(a). In addition to the cost-related information (including fees) required in the summary of the relevant information from the full PDS, see also s 1017I(2) (as inserted by Corp Regs Schedule 10BA Part 3
Item 3.1), Part 2 of Schedule 10 of the Corporations Regulations, s 1013D(4)(c), Corp Reg 7.9.16L, s 1015C(5)(b), Corp Reg 7.9.16N). The question of fees disclosure is discussed in Section 10.4.6 of this paper.
802 s 1017I(1)(b).
803 A Short-Form PDS does not have to summarise:
• general information about significant taxation implications (s 1013D(1)(h)), or
• the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment (s 1013D(1)(l)).
804 Explanatory Statement to the Corporations Amendment Regulations 2005 (No. 5).
805 s 1017I(3)(b)-(6). The FSG provides general information about a service provider. The FSG requirements, contained in Part 7.7 Div 2, were introduced by the FSRA at the same time as the PDS requirements, as were the requirements relating to the statement of advice (Part 7.7 Div 3), which provides a written record of personal financial advice and discloses information relevant to such advice.
806 s 1017I(4).
807 s 1017I(3)(a).
808 Part 7.9 Div 3B (containing ss 1017L-1017Q), as inserted by Corp Regs 7.9.61AA, Schedule 10BA Part 3
Item 3.1.
809 Explanatory Statement to the Corporations Amendment Regulations 2005 (No. 5), under the heading
Schedule 3 – Proposal 3.

Disclosure

Shorter Product Disclosure Statements for simple schemes

Definition of simple managed investment scheme
Simple schemes are those schemes at least 80% of whose assets are:

• invested with a bank and available either immediately during normal business hours or at the end of a fixed term not exceeding three months, or

• invested in such a way that the RE can reasonably expect to realise the investment at market value within 10 days.810

Form and content requirements
The PDS for a simple scheme (other than a scheme that is excluded such as a listed scheme or a platform), like the PDS for any other scheme, must be worded and presented in a clear, concise and effective manner.811 It must also be entitled ‘Product Disclosure Statement’812 and dated.813

However, the shorter PDS regime for simple schemes imposes strict requirements concerning form and content that substitute for the full PDS requirements.814 The key requirements for these shorter PDSs are:

• each PDS must relate to only one simple managed investment scheme815

• the PDS must satisfy maximum length and minimum font size criteria816

• the PDS must include sections that:

– contain specified information about each of eight stipulated matters (the RE, how the scheme works, benefits of the scheme, risks of schemes, how money is invested, fees and costs, how schemes are taxed and how to invest in the scheme, the cooling-off period and the procedure for making complaints)

– are identified by stipulated numbered headings, which must be set out in a table of contents.817

The prescribed section headings are intended to make it easier for consumers to find important information in the PDS and compare products, while the content requirements

810 Definition of ‘simple managed investment scheme’ in reg 1.0.02. Cash deposits, term deposits, government bonds and high grade commercial paper would ordinarily satisfy the liquidity and capital certainty threshold required by this definition. Managed investment schemes that invest in less liquid assets, such as schemes investing directly in real estate or mortgages, are not simple schemes: Explanatory Statement to the Corporations Amendment Regulations 2010 (No. 5).
811 s 1013C(3). In addition, a person required to a give a PDS to a vision-impaired person must comply with the
Disability Discrimination Act 1992.
812 s 1013B.
813 s 1013G.
814 Modified s 1013C(1), as inserted by Corp Reg 7.9.11V together with Schedule 10A Item 5C.2 and
Corp Reg 7.9.11W together with Schedule 10E.
815 Modified s 1013C(1)(c), as inserted by Corp Reg 7.9.11V together with Schedule 10A Item 5C.2.
816 Schedule 10E Item 1. For instance, the maximum page length is 8 pages if the PDS is printed on A4 pages.
Given the objective of making PDSs user friendly and easy to read, ASIC interprets this requirement as meaning
8 single-sided pages or 4 double-sided pages: Information Sheet 155 Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes (June 2012).
817 Schedule 10E Items 2-10. There must also be a table of contents using the specified titles: Item 2.

Disclosure

ensure that consumers have the key information they need to make an investment decision.818

A simple scheme PDS is not subject to the requirement applicable to full PDSs that the PDS ‘contain any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product’.819

Incorporation by reference
The shorter PDS provisions contain an incorporation by reference regime.820

The matter incorporated must be in writing, clearly distinguishable from matters that are not incorporated and publicly available.821 The person who has responsibility for the PDS must identify the incorporated matter (including each version of the matter, if relevant) and ensure that each person relying on the PDS can have access to the matter (including each version, if relevant) reasonably easily and reasonably quickly.822

The PDS must advise investors to read the incorporated matter before making a decision and point out that the incorporated material may change between the time the PDS is read and the time the product is acquired. The PDS and the document containing the incorporated matter must each identify the other document.

Material incorporated by reference is deemed to be part of the shorter PDS and the full range of liability and enforcement provisions of the law apply to it.823

The regulation that creates the incorporation by reference regime provides that the regime is only available if the regulations require or permit its use.824 There are regulations that permit incorporation by reference for various matters (either as a way of satisfying a

818 ASIC Information Sheet 133 Shorter PDS regime: Superannuation, managed investment schemes and margin lending at 2, Information Sheet 155 Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes at 4.
819 s 1013E. This section is omitted from the PDS regime for simple schemes by Schedule 10A Item 5C.2, which modifies the law as authorised by Corp Reg 7.9.11V (enacted pursuant to s 1020G(1)(c)). This paper at Section 14.2 Item 4 raises for consideration whether the disclosure obligation in s 1013E should be extended to simple managed investment schemes.
820 s 1013C(1B) as inserted by Corp Reg 7.9.11V together with Schedule 10A Item 5C.2, Corp Reg 7.9.11X.
821 Corp Reg 7.9.11X. Incorporated information needs to be distinguished from non-incorporated information, as the two are subject to different liability and enforcement regimes: Explanatory Statement to the Corporations Amendment Regulations 2010 (No. 5), commentary on Corp Reg 7.9.11X.
822 The ability to request and receive a hard copy of the PDS and incorporated material (Corp Reg 7.9.11Z) satisfies
the requirements for incorporated matter to be publicly available and easily and quickly accessible: Explanatory Statement to the Corporations Amendment Regulations 2010 (No. 5), commentary on Corp Reg 7.9.11X. The Explanatory Statement also states:
It is also expected that the incorporated material is, to the extent practical, consistent with the PDS in terms of its headings and content for comparability and ease of reading. This will at the same time reduce the risk of claims of misleading or deceptive conduct based on variations in content between the shorter PDS and incorporated information.
If a website link is provided, this should link to the material with as few steps as possible. For example, linking directly to the material, or via a prominent link on a splash page is one way to achieve this and
would be seen to be reasonably accessible. If a website link leads only to the home page of a provider’s website, and a person needs to navigate a number of links on the site to locate the material, this is not
considered to be reasonably quickly and easily accessible.
823 s 1013C(1C) as inserted by Corp Reg 7.9.11V together with Schedule 10A Item 5C.2, ASIC Information Sheet 155 Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes at 5.
824 Corp Reg 7.9.11X(2).

Disclosure

requirement or as a means of supplying further information about matters dealt with in the
PDS).825 Currently, no regulations require the use of incorporation by reference.

Unlike the provision for incorporation by reference that applies to PDSs other than shorter PDSs, a matter may be incorporated by reference into a shorter PDS in the form that it takes from time to time.826

Other content provisions
In addition to material incorporated by reference (which is part of the PDS), the shorter PDS may refer to other information that is set out in another document827 (which does not form part of the shorter PDS, although it is still subject to certain requirements under the Corporations Act and Corporations Regulations, such as the prohibition on misleading or deceptive conduct828).

A simple scheme PDS may also include additional sections and information after the mandated sections, provided that the PDS does not thereby exceed the maximum page length.829

No Supplementary PDS for simple schemes
The Supplementary PDS regime is not available for simple schemes.830 Instead, any inadequacies in a simple scheme PDS must be rectified by the preparation of a new PDS, given that a PDS for a simple scheme:

• is a very short document

• allows information that changes frequently or regularly to be incorporated by reference

• only has to be amended rarely and only if there are major changes to the scheme.831

10.4.4 Analysis and discussion

CAMAC’s general approach to the regulation of managed investment schemes is that the regulatory regime for schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently, given that these two types of

825 The items in Schedule 10E that permit incorporation by reference as a way of satisfying a requirement are:
• describing a particular investment manager, if there is more than one (Item 3(2))
• providing certain information about investment options and the fees and costs of those options (Items 7(6), (7), 8(10)).
The items in Schedule 10E that permit incorporation by reference as a means of supplying further information about matters dealt with in the PDS relate to:
• the acquisition and disposal of interests (Item 4(3))
• features and benefits of the particular scheme or simple schemes generally (Item 5(2))
• significant risks of schemes (Item 6(4))
• fees and costs (Item 8(10))
• taxation matters relating to the particular scheme and to schemes generally (Item 9(3))
• cooling-off periods, complaints and dispute resolution (Item 10(2)).
826 s 1013C(1B), as inserted by Corp Reg 7.9.11V together with Schedule 10A Item 5C.2. See also Explanatory
Statement to the Corporations Amendment Regulations 2010 (No. 5), commentary on Corp Reg 7.9.11U.
827 s 1013C(1E), as inserted by Corp Reg 7.9.11V together with Schedule 10A Item 5C.2.
828 s 1013C(1F) and the Note to that provision, as inserted by Corp Reg 7.9.11V together with Schedule 10A Item 5C.2, s 1041H.
829 Schedule 10E subclause 2(4). The maximum length is set out in subclause 1(1).
830 Corp Reg 7.9.11U(1). There was a continuing role for Supplementary PDSs for simple schemes in the transitional period, which ended in June 2012: Corp Reg 7.9.11U(2).
831 Explanatory Statement to the Corporations Amendment Regulations 2010 (No. 5), commentary on
Corp Reg 7.9.11U.

Disclosure

commercial enterprise are sometimes available in the same markets and perform similar functions.

The Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act
2001 gave the following explanation of the policy underlying the Product Disclosure
Statement disclosure requirements for financial products other than shares and debentures:

The provisions … seek to achieve regulatory neutrality as between the competing investment vehicles of managed investments, superannuation and the investment components of life insurance. This is achieved by taking managed investments out of the fundraising provisions of the existing Corporations Act and subjecting them to the same directed disclosure requirements as superannuation and the investment components of life insurance.832

The CLERP 9 paper Corporate disclosure: Strengthening the financial reporting framework (2002) noted that the principal reason for not extending the harmonized disclosure arrangements for financial products introduced by the FSRA to shares and debentures was that the Corporate Law Economic Reform Program Act 1999 had only recently amended the Chapter 6D fundraising requirements for securities.833 That paper suggested that:

Potential harmonisation and other general improvements may lead to more effectively targeted disclosure regimes.834

Since the introduction of the FSRA, managed investment schemes have grown in size and complexity, with income from distributions on their scheme holdings and capital gains on those holdings performing a similar economic function to dividends and capital gains on company securities. Investment portfolios now generally include both types of investments (as well as banking, insurance and superannuation products).

It may therefore be timely to compare and contrast the various disclosure standards that now apply to the different types of financial product, identify some of the themes arising from developments in disclosure regimes since the managed investment provisions in Chapter 5C were introduced in 1998 and assess whether the corporate and scheme disclosure regimes might be more closely aligned, in accordance with CAMAC’s general approach.

The disclosure standard

The prospectus disclosure requirement is a general disclosure obligation, supplemented by a small number of specific disclosure requirements. By contrast, the PDS requirements take a directed disclosure approach involving a list of items that must be disclosed, supplemented by a limited general disclosure obligation.835 The shorter PDS regime for

832 para 14.21.
833 Section 9.1.
834 ibid.
835 The directed disclosure approach adopted for PDSs in relation to financial products other than shares and debentures was seen as a middle ground between the due diligence approach in the prospectus provisions and a
‘Key Features Statement’ approach requiring disclosure under specific headings that was used for superannuation products before the FSRA came into effect: Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 paras 14.19-14.20. The Key Features Statement approach adopted in relation to superannuation was reflected in a determination under s 153 of the Superannuation Industry (Supervision) Act 1993. That provision was repealed by the Financial Services Reform (Consequential Provisions) Act 2001, in view of the introduction of the PDS requirements in Part 7.9 of the Corporations Act: Explanatory Memorandum to the Bill for the Financial Services Reform (Consequential Provisions) Act 2001 para 5.3.

Disclosure

simple managed investment schemes represents an even stronger application of the directed disclosure approach, given that it contains a more detailed list of disclosure requirements, more specific direction about how information is to be presented and no general disclosure obligation.

The limited general disclosure obligation applicable to PDSs836 (other than shorter PDSs837) requires disclosure of ‘any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product’. While this appears similar to the general disclosure obligation applicable to prospectuses, it only requires disclosure of information actually known to the persons who have responsibility for the PDS.838 It ‘is not intended to require product issuers to undertake a due diligence exercise to discover all material information’.839 By contrast, the prospectus requirements impose a due diligence requirement to disclose information that in all the circumstances the issuer ought reasonably to have obtained by making inquiries.840

Another matter that is relevant to those who prepare disclosure documents is that the preparer of a PDS must take into account only the information requirements of retail clients, whereas the preparer of a prospectus must take into account the information requirements of investors and their professional advisers.841

There is a lower disclosure standard for some of the shorter securities disclosure documents. Profile statements and offer information statements need only contain information actually known to the preparer of the document.842

Past consultations and reviews provide various views on whether it is appropriate for scheme interests to be governed by the prospectus regime.

Submissions to the Collective Investments Review conducted by the Australian Law Reform Commission and the Companies and Securities Advisory Committee (CAMAC’s predecessor) indicated support for applying the general disclosure obligation for prospectuses to scheme interests.843 However, the ALRC/CASAC report also recommended that the prospectus requirement should be modified for schemes to require prospectus issuers to provide information relevant to the nature of, as well as the extent of, the risks of participating in a scheme.844 This type of information is covered by the current PDS requirements. That report also indicated that holders of scheme interests may have a greater need for information than many company shareholders, given that schemes are

The various approaches were said to reflect ‘tensions between the desire to give consumers all the information they require to make a decision and the need to ensure that consumers can, and do, read and understand the information given to them’: Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 14.19.
836 s 1013E.
837 Pursuant to Corp Reg 7.9.11V together with Schedule 10A Item 5C.3, s 1013E does not apply to shorter PDSs for simple managed investment schemes. This paper at Section 14.2 Item 4 raises for consideration whether this disclosure obligation should be extended to simple managed investment schemes.
838 s 1013C(2).
839 Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 14.20. See also para 14.74.
840 s 710.
841 Compare s 710 (prospectuses) with ss 1012A, 1012B, 1013C (PDSs). See Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 paras 14.74, 14.94.
842 Lack of knowledge about a relevant matter is a defence to liability for a misleading or deceptive statement or an omission: s 732.
843 ALRC/CASAC report para 5.11.
844 ibid. Footnote 28 noted that the relevant provision at that time, reg 7.12.12, referred ‘only to the extent of risks involved in scheme participation’.

Disclosure

typically characterized by a more significant separation of ownership and control than trading corporations.845

On the other hand, some public submissions during the development of the FSRA, while supportive of harmonized and consistent disclosure obligations, considered that it would be undesirable to introduce prospectus type requirements to products that do not warrant that level of disclosure (though managed investment products were not specifically identified in this context).846

A final matter is that the current bifurcation between the disclosure regime for interests in managed investment schemes and that for company securities appears to have resulted in investors who acquire an indirect interest in securities under a custodial arrangement847 having no right to either a prospectus or a PDS in certain circumstances.848 Ensuring that these investors receive disclosure, with a disclosure standard appropriate to that form of investment, should be part of any reassessment of the disclosure requirements, even if the current separate regimes for company shares and scheme interests are retained.

Comparability

Comparability of financial products is an important factor in determining disclosure standards. It was a consideration in the development of the shorter securities regimes,849 the FSRA reforms850 and the shorter PDS regime for simple managed investment schemes.851

Shorter disclosure documents

The legislation provides for different types of shorter disclosure document (short form prospectuses, profile statements, offer information statements, Short-Form PDSs and shorter PDSs for simple managed investment schemes).

The regimes differ in relation to whether the shorter disclosure document is:

• an additional document that can be distributed to investors who do not require the full document (as with profile statements, which do not remove the requirement to prepare

845 id at para 5.2.
846 CLERP 9 paper Corporate disclosure: Strengthening the financial reporting framework (2002) Section 9.2.2.
847 A ‘custodial arrangement’ is defined (s 1012IA(1)) as having the following elements:
• the client gives an instruction to acquire a particular financial product
• the provider or a person with whom the provider has an arrangement acquires, or arranges the acquisition of, the financial product
• either the financial product is held on trust for the client or a nominated person or the client or a person nominated by the client has an interest in, or benefits from, the product.
848 The Corporations Act requires that a person receive a Product Disclosure Statement when the person is to obtain an indirect interest in a financial product under a custodial arrangement if the person would have received a
PDS for a direct acquisition (s 1012IA). While the definition of ‘financial product’ in Chapter 7 generally covers securities (definition of ‘financial product’ in s 761A, s 764A(1)(a)), securities (other than warrants) are excluded from the Product Disclosure Statement requirements in Part 7.9 (s 1010A, Corp Reg 7.9.07A), given the alternative disclosure regime for securities in Chapter 6D. However, the prospectus disclosure requirements of Chapter 6D do not cover the acquisition of an indirect interest in securities under a custodial arrangement unless the client acquires a legal or equitable interest in the securities which is itself a security (ss 92(4), 761A). ASIC has established a disclosure obligation for certain types of custodial arrangement by modifications under ASIC Class Orders [CO 13/763] and [CO 13/760].
849 Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999 para 2.17.
850 Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 14.30, Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 2.38. See also Corporate Law Economic Reform Program, Proposals for Reform: Paper No. 6, Financial Markets and Investment
Products: Promoting competition, financial innovation and investment (1997) Proposal No. 7 ⎯ Disclosure,
Financial System Inquiry Final Report (1997) (the Wallis report) rec 8.
851 Explanatory Statement to the Corporations Amendment Regulations 2010 (No. 5).

Disclosure

a full prospectus, and Short-Form PDSs, where the full PDS must be available for investors who request it) (Option 1), or alternatively

• an alternative to the full disclosure document (as with short form prospectuses) or a shorter disclosure document in its own right (as with transaction-specific prospectuses and PDSs and shorter PDSs for simple managed investment schemes) (Option 2).

The benefits of Option 1 are:

• a reduction in the burden of information for investors who do not want to read the full range of material available

• a saving in distribution costs for those required to prepare the document.852

The potential for a saving in distribution costs may become progressively less significant as electronic distribution becomes more common, especially with the increasing use of tablet devices to read documents without having to print them.

Option 2 would have the same benefits as Option 1 and, in addition, a saving in preparation costs for those required to prepare the document. Preparation costs may often be the most significant costs involved in preparing a disclosure document.

In some cases, the legislation promotes shorter disclosure documents by permitting incorporation by reference, which reduces the length of the documents, while ensuring that investors have access to relevant information.853

The various incorporation by reference regimes differ in relation to what information should be permitted to be incorporated. Short form prospectuses can incorporate documents that have been lodged with ASIC. PDSs can incorporate any written publicly available material (though certain key matters must be dealt with in the PDS itself). Short-Form PDSs can only incorporate material from the full PDS or the Financial Services Guide. A shorter PDS for simple schemes may only satisfy disclosure obligations through incorporation by reference when specifically permitted to do so by the regulations.

One commentary has expressed reservations about incorporation by reference:

… extensive use of incorporation by reference may well be antithetical to a clear, concise and effective presentation. If the information is not material to the investment decision, it need not be disclosed anywhere. If material information is incorporated by reference, investors who read the prospectus are required to make a choice as to whether to expend the effort and possible cost of chasing up the reference, or run the risk of not receiving material information that might have influenced their decision. In many circumstances the likelihood that a prospectus presents information in a clear, concise and effective manner will be enhanced by having the information in a single
document which the investor can read through without the distraction of references.854

Also, different investors may have different information needs and may reasonably regard different information as relevant to them. They may also have different levels of willingness to seek additional information.

852 Cost savings were emphasised in the Explanatory Memorandum to the Bill for the Corporate Law Economic
Reform Program Act 1999 (para 2.17).
853 ASIC Information Sheet 155 Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes (at 4).
854 HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [22.251].

Disclosure

A contrary view might be that, provided the core PDS contains the key information and is short and easy to read, it does not matter how much additional information is available for those who want it. Also, those investors who rely on professional advisers even in relation to simple schemes would benefit by those advisers having ready access to additional and more detailed information.

Supplementary/replacement disclosure

Most disclosure documents can be corrected or updated by a supplementary or replacement document. However, the Supplementary PDS regime is not available for shorter PDSs, on the basis that it is easier to issue a new PDS than prepare a supplementary document.855 Another reason for not permitting supplementary disclosure documents is that they can make disclosure more difficult to understand and increase the risk of important information being overlooked.

Life of disclosure document

Another key difference between the prospectus and PDS regimes concerns the life of the documents. The expiry date of a prospectus must not be later than 13 months after the date of the prospectus.856 By contrast, there is no limit on the time a PDS can remain current (though information in a PDS must be up to date when it is given,857 where necessary through the giving of a supplementary PDS858).859

10.4.5 Requirements for scheme constitutions

Matters covered by a scheme constitution include the respective rights of the RE and the scheme members. A scheme constitution, as well as being a source of rights for members, provides them with important information about those rights.

As discussed in Section 5.2.2, the constitution must contain information about the consideration to be paid to acquire an interest in the scheme, the powers of the RE to deal with scheme property, the method for dealing with complaints by scheme members, and the winding up of the scheme.860 Various other rights or powers, including the right of the RE to be paid for operating the scheme and the power for the RE to borrow or raise money, can only be exercised if included in the scheme constitution.861

However, the scheme constitution is primarily a governance document. Section 10.7.1 discusses the extent to which matters that are currently dealt with in the constitution should be:

• contained in a disclosure document (whether a PDS, as at present, or a prospectus, if disclosure for schemes is more closely aligned with that for companies) instead of the scheme constitution, or alternatively

• conveyed to investors by providing them with a copy of the constitution and/or by summarising those matters in the disclosure document.

855 Commentary on Corp Reg 7.9.11U in the Explanatory Statement to Corporations Amendment Regulations 2010 (No. 5).
856 s 711(6). This document life also applies to a profile statement (s 714(2)).
857 s 1012J.
858 s 1014D.
859 Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 14.107.
860 s 601GA(1). Regulatory Guide 134 Managed investments: Constitutions (February 2014) gives ASIC’s view on what is necessary to comply with ss 601GA and 601GB.
861 s 601GA(2)-(4).

Disclosure

10.4.6 Specific initial disclosure items

There is a question whether there is any need to:

• add to the list of specific matters that must be disclosed to prospective investors in schemes, or

• modify any of the current items.

This issue would arise if PDSs, with their directed disclosure approach involving a list of specific matters to be disclosed, continue to be the initial disclosure document for schemes. However, if schemes disclosure is more closely aligned with companies disclosure, some additional disclosure items might also be specified, in the same way as the current general disclosure requirement for prospectuses is supplemented by a requirement to disclose certain specific categories of information.862

Potential additional, or amended, disclosure items, as explained below, include:

• powers of investors

• the identification of scheme property and the nature of investor rights with respect to that property

• the nature and extent of the RE’s indemnity from scheme assets

• the powers of the RE

• the level of anticipated borrowings by the RE

• any security that is provided in connection with those borrowings

• the priority between that security and investor interests

• the risk management system adopted by the RE for the scheme

• fee and cost disclosure.863

CAMAC notes the recommendation of the PJC Trio report that the Government release a consultation paper to investigate the best mechanism for an RE of a registered scheme to disclose its scheme assets at the asset level, to give scheme members the legal right to require specific information on the portfolio holdings of the registered schemes in which they have invested.864

Powers of investors

Prospective investors could be made aware that, as scheme members, they would have power at a general meeting of members to replace the RE,865 to alter the scheme

862 As discussed in Section 10.4.2 of this paper, these categories are the terms and conditions of the offer, fees and other payments to key parties involved in the offer and statements about three matters, being the quotation of the securities offered (if applicable), the time limit for issuing them and lodgement of the prospectus with ASIC.
863 Other possible disclosure items are discussed in Section 14.2 of this paper, which discusses whether certain IOSCO principles should be adopted into Australian law. Also, Section 12.3 raises a possible disclosure issue in relation to disclaimer of leases by the liquidator of a lessor RE.
864 Inquiry into the collapse of Trio Capital (May 2012), p xxiv, paras 7.49-7.56, 9.24-9.25, rec 9.
865 s 601FM.

Disclosure

constitution,866 to approve various related party financial benefits867 and to direct that the scheme be wound up.868

Given that investors in companies have similar or analogous powers, there may be a question why this specific disclosure requirement should apply to schemes and not to companies.

Scheme property

Investors should be aware of what constitutes scheme property and the nature of the rights that they have as investors with respect to that property. The definition of ‘scheme property’ is discussed in Section 3.3 of this paper.

The structural differences between schemes and companies would justify requiring this disclosure for schemes, but not for companies, under the current law. If the SLE Proposal is adopted, scheme property would no longer be held on trust for scheme members, who would hold residual rights to that property in the event that the scheme is wound up. The position of scheme members under the SLE Proposal would therefore be similar to that of shareholders and there would be no need for this additional disclosure item.

The RE’s indemnity from scheme assets

Given the structure of schemes and the role that the RE’s indemnity from scheme assets plays in the way a scheme operates, it may be considered important for prospective investors to have clear information about the nature and extent of that indemnity. There is no equivalent of the RE’s indemnity for companies. The content of this possible disclosure item would change if the SLE Proposal were adopted. Creditors would have rights directly against scheme property: they would no longer have to rely on subrogation to the RE’s indemnity rights or recovery from the RE, which would then rely on those indemnity rights. The indemnity rights of the RE under the SLE Proposal would be limited to its remuneration and expenses for acting as manager and agent.

Powers of the RE and the level of borrowings

Possible additional disclosure items may include the RE’s power to borrow money (or the equivalent power of the MIS if the SLE Proposal is adopted), any limitations on such a power and the power to grant security for the purposes of the scheme.

Information about the potential impact that the obtaining of debt finance might have on the value of interests in a scheme may enhance the ability of investors to assess the level of risk associated with their investment.

Other disclosure items that may serve this purpose could include:

• the level of anticipated borrowings by the RE (or by the MIS if the SLE Proposal is adopted)

• any security that is provided in connection with those borrowings. In determining whether this disclosure item is necessary, it would be relevant to consider whether sufficient information is already contained in the various registers that record interests

866 s 601GC(1)(a).
867 The related party provisions in Chapter 2E of the Corporations Act are applied, with modifications, to schemes by s 601LA. See Part 5C.7.
868 s 601NB.

Disclosure

in State and Territory real property and the Personal Property Securities Register (PPSR),869 together with various Corporations Act disclosure requirements. For instance, the PPSR has provision for indicating when a security interest is granted by an entity as an RE of a registered scheme or as a trustee, so anyone searching the PPSR can see that the RE has granted the security interest as RE of the particular scheme.870 An argument for having a specific disclosure item rather than relying on these registers is that, for various reasons, including that searches of these registers involve the payment of a fee, most retail clients are unlikely to conduct such searches in making investment decisions871

• the priority between that security and investor interests.

Some of the problems that have arisen in relation to schemes have arisen from unfounded expectations or misunderstandings about these matters on the part of investors. For instance, some agribusiness schemes borrowed to finance their operations and gave security over scheme property, such as the trees. Investors who were under the impression that their investment in the schemes would give them title to the trees found that secured lenders took priority over them when the schemes were wound up.

A similar disclosure item would not be necessary for companies. The RE (or the MIS if the SLE Proposal is adopted) only has the powers specifically conferred on it, typically by the scheme’s constitution.872 By contrast, a company has the legal capacity and powers of an individual.873

Risk management system used by the RE in the conduct of the scheme

It may be beneficial for investors to have information about the risk management system that the RE uses in the conduct of the scheme. There is currently no requirement for Product Disclosure Statements to contain this information.

Fee and cost disclosure

There are detailed requirements for the information that Product Disclosure Statements must include in relation to fees and costs.874 The provisions leave open the possibility that some fees or costs will not be covered by the requirements and therefore not have to be disclosed. For instance, there is a detailed definition of ‘management costs’,875 which may not cover all matters that constitute a cost to the acquirer of an interest in a scheme.

An alternative approach is to have a general disclosure item that covers all fees and costs involved in a scheme, for instance disclosure of any amount by which any net payment to members is likely to be reduced because of any cost relating to investment or administration in relation to the scheme. A requirement along these lines might cover such matters as costs that are incorporated in the price of a financial product or asset (such as the costs implicit in a swap agreement).

869 The PPSR was established under the Personal Property Securities Act 2009 (PPSA): Chapter 5 of the Personal
Property Securities Act 2009.
870 Personal Property Securities Regulations 2010 Schedule 1, Items 1.3, 1.5.
871 For the PPSR, see Personal Property Securities Act 2009 s 190, Personal Property Securities (Fees) Determination 2011 Section 4, Items 9-15.
872 The role of the constitution as a vehicle for initial disclosure is discussed in Section 10.4.5.
873 s 124.
874 s 1013D(4)(c), Corp Regs 7.9.16L, Schedule 10 Part 2. There is an exception in the case of a PDS for a simple managed investment scheme to which Corp Regs Part 7.9 Div 4 Subdiv 4.2C applies.
875 Corporations Regulations Schedule 10 Item 102.

Disclosure

The purchase of shares in a company does not involve the same ongoing management costs as for a scheme. There may therefore not be the need for companies to have the same level of fee and cost disclosure as schemes.

If the SLE proposal were adopted, disclosure of the services to be provided by the RE as manager and the fees paid for such services would still be necessary.

Question 10.4.1. What is the appropriate disclosure standard for the issue of interests in managed investment schemes? Should that standard vary depending on the type of scheme (including a simple managed investment scheme), the type of investor in the scheme, the amount invested in the scheme or some other factor (and, if the latter, what)?

Question 10.4.2. Are there any reasons why prospectuses (including a due diligence requirement) should not be required for the issue of interests in managed investment schemes?

Question 10.4.3. What disclosure requirements should there be for indirect acquisitions of securities pursuant to a custodial arrangement?

Question 10.4.4. To what extent is it desirable and possible to devise disclosure documents that allow comparability between various financial products?

Question 10.4.5. How might shorter disclosure documents best be achieved?

Question 10.4.6. Where shorter disclosure documents are permissible, should they:

• be in addition to the full disclosure document
• be an alternative to the full disclosure document?

Question 10.4.7. Alternatively, should any existing disclosure requirements be replaced with shorter disclosure requirements and, if so, what requirements should be replaced and with what?

Question 10.4.8. Should ‘incorporation by reference’ be permitted and, if so, in what form? In particular, what documents should be allowed to be incorporated?

Question 10.4.9. What rules should there be for supplementary disclosure documents?

Question 10.4.10. What is the appropriate life for a disclosure document relating to scheme interests?

Question 10.4.11. Should specific disclosure of any of the following items be required, and why:
• powers of investors
• what is scheme property and the nature of investor rights with respect to that property
• the nature and extent of the RE’s indemnity from scheme assets
• the powers of the RE
• the level of anticipated borrowings by the RE
• any security that is provided in connection with those borrowings
• the priority between that security and investor interests
• the risk management system used by the RE in the conduct of the scheme
• fees and costs
• any other matters?

Would these items be covered by a general prospectus disclosure requirement?

Disclosure

10.5 Continuous disclosure and significant event reporting

The continuous disclosure requirements are the same for shares in a company and interests in a scheme where the shares or interests are ED securities876 and the entities to which those securities relate are disclosing entities.877 In that case, the relevant companies and schemes are subject to the continuous disclosure requirements in Chapter 6CA of the Corporations Act.

Listed disclosing entities must notify their market operator of continuous disclosure information if the listing market’s rules so require.878 In the case of the ASX, this notification must occur ‘immediately’.879 Where the listed disclosing entity ‘is an undertaking to which interests in a registered scheme relate’, the RE has this disclosure obligation.880 The legislation states that this notification is ‘for the purpose of the operator making that information available to participants in the market’.881 A continuous disclosure notice lodged with the operator of an exchange market is accessible through the exchange website.

A disclosing entity that is not listed, or that is listed but whose listing market rules do not require continuous disclosure, must lodge its continuous disclosure notices with ASIC as soon as practicable882 (but see Section 10.7.2 for a discussion of the circumstances in which ASIC will allow website disclosure as an alternative to lodgement). As with listed disclosing entities, the RE has the disclosure obligation where a registered scheme is involved.883 A continuous disclosure notice lodged with ASIC is accessible by searching ASIC’s database and obtaining a copy of the notice.

There is also a requirement for ongoing disclosure of material changes and significant events for scheme interests that are not ED securities.884 This disclosure must take place
30 days before the change takes effect if it concerns fees or, in any other case, as soon as practicable, but not more than three months after the change or event.885

Question 10.5.1. Are any changes needed to the application of the continuous disclosure obligations to interests in managed investment schemes that are ED securities and, if so, what?

Question 10.5.2. Are any changes needed to the application of the material changes and significant events disclosure requirements to interests in managed investment schemes that are not ED securities and, if so, what?

876 The expression ‘ED securities’ is short for ‘enhanced disclosure securities’ (s 111AD(1)) and denotes securities that are subject to the continuous disclosure requirements in Chapter 6CA of the Corporations Act.
877 s 111AC. The ALRC/CASAC report recommended (at para 5.35) that the continuous disclosure requirements apply to listed and unlisted schemes.
878 s 674.
879 ASX Listing Rule 3.1.
880 s 674(3). In some cases, the RE as well as the scheme of which it is RE may be a disclosing entity.
881 ibid.
882 s 675.
883 s 675(3).
884 s 1017B. The Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 gave the following rationale for applying the continuous disclosure requirements, rather than the material changes and significant events disclosure requirements, to schemes involving ED securities (para 14.134):
This was done on the basis that the continuous disclosure provisions were better able to address ongoing disclosure obligations in relation to listed managed investments and having regard to the fact that the rules of financial markets would impose continuous disclosure obligations for such products in any case.
885 s 1017B(5).

Disclosure

10.6 Periodic disclosure

The RE of a scheme must give a member who acquired an interest in the scheme a periodic statement at least once a year.886 The periodic statement must contain information that holders of those interests need to understand their investment, including, where relevant:

• opening and closing balances for the reporting period

• the termination value of the investment at the end of the reporting period (to the extent to which it is reasonably practicable to calculate that value)

• details of transactions in relation to the product during the reporting period

• any increases in contributions by the holder or another person during the reporting period

• return on investment during the reporting period (on an individual basis if reasonably practicable)

• details of any change in circumstances affecting the investment that has not been notified since the previous periodic statement.

ASIC has given class order relief to assist issuers of interests in registered schemes that are quoted AQUA products or quoted ED securities to prepare compliant periodic statements, in particular by:

• taking account of the fact that issuers may not know the price at which interests have been traded

• requiring reporting on an aggregated basis where the interests are stapled with another financial product.887

In addition to this periodic reporting requirement, registered schemes, like companies, must each year make available to their members a financial report, a directors’ report and an auditor’s report or a concise version of those reports.888 If a scheme is also a disclosing entity, it must lodge with ASIC a half–year financial report.889

Question 10.6.1. Are any changes needed to the periodic disclosure obligations for interests in managed investment schemes and, if so, what?

886 s 1017D. This obligation applies to all financial products that have an investment component, including managed investment schemes. It applies to an ‘issuer’, which, in the case of schemes, would be the RE: see footnote 778. The periodic statement need not be given if the issuer has already given the holder all the information that would be included in the periodic statement if it were to be given (s 1017D(7)).
887 ASIC Class Order [CO 13/1200]. The AQUA market was created by the ASX for the quotation and trading of interests in unlisted managed funds (as well as exchange traded funds (ETFs) and structured products): ASIC Regulatory Guide 198 (RG 198) Unlisted disclosing entities: Continuous disclosure obligations at 17, ASIC Consultation Paper 196 Periodic statements for quoted and listed managed investment products and relief for AQUA products (December 2012) para 4. See also ASIC Report 282 Regulation of exchange traded funds.
888 s 314. This requirement applies to registered schemes, as well as disclosing entities and companies. The only unregistered schemes that are subject to this requirement are certain recognised New Zealand schemes that are disclosing entities (see Section 14.1).
889 s 302.

Disclosure

10.7 Means of disclosure

10.7.1 PDS and constitution as vehicles for initial disclosure

As outlined in this chapter, the Product Disclosure Statement890 and the scheme constitution both contain information of relevance to investors. However, the PDS is the primary means of conveying information to prospective investors about a financial product so that consumers have ‘sufficient information to make informed decisions in relation to the acquisition of financial products, including the ability to compare a range of products’.891 As discussed in Section 5.2.2, the scheme constitution is primarily a governance document.

Given this functional division between the PDS (as an initial disclosure document) and the scheme constitution (as primarily a governance document), it is necessary to assess:

• whether any of the matters currently contained in the scheme constitution might be better treated as items to be contained in a disclosure document

• whether any matters to be covered in a scheme constitution should also be disclosed in a disclosure document.

Inclusion in disclosure document only

There is an issue whether the current requirement that scheme constitutions make adequate provision for the consideration that is to be paid to acquire an interest in the scheme892 may be better dealt with as a matter of disclosure in the PDS. An argument for continuing to require that the scheme constitution deal with this matter is that scheme members should not run the risk of being diluted by new members who acquire their interests at a lower price without a change to the scheme’s constitution. An argument for requiring disclosure only is that this approach would allow for more flexibility in the pricing mechanism. The PDS could inform investors that the price of interests in the scheme may be determined by the RE from time to time (ASIC has given relief to enable REs to exercise this discretion893). Investors could then choose whether or not to acquire interests in the scheme on that basis. This type of question does not arise in the case of companies since the abolition of par value for shares in 1998.894

Inclusion in disclosure document as well as scheme constitution

Some of the possible additional disclosure items discussed in Section 10.4.6 (powers of investors, what is scheme property and the nature of investor rights with respect to that property, the nature and extent of the RE’s indemnity from scheme assets and the powers for the RE) relate to governance and would be included in the scheme constitution.

An issue in relation to these, and other matters that are contained in the scheme constitution, is whether they should also be summarised in the PDS. On one view, governance matters may be relevant to a prospective investor in deciding whether to participate in a scheme and should therefore be disclosed in the PDS. This view may

890 For convenience, the discussion in this section refers to the PDS as the initial disclosure document. The same considerations would apply if prospectuses were restored as the vehicles for initial disclosure in relation to schemes.
891 Revised Explanatory Memorandum to the Bill for the Financial Services Reform Act 2001 para 14.18.
892 s 601GA(1)(a).
893 ASIC Class Orders [CO 05/26] and [CO 13/655].
894 By the Company Law Review Act 1998, which came into effect on 1 July 1998.

Disclosure

particularly apply in the case of those schemes that operate in a similar way to companies, involving a greater degree of investor engagement, rather than merely as passive investment vehicles. On the other hand, in certain cases, the inclusion of mandatory additional disclosure of matters that investors do not appreciate to be important could lead to investors ignoring or failing to understand key information in the PDS.

A further issue is whether investors should be able to obtain, free of charge, a copy of the scheme constitution, regardless of whether the PDS summarises its main features.

10.7.2 Methods for making required disclosures

Current position

Corporations legislation
The Corporations Act and Regulations provide for various means for making the different types of required disclosure in relation to interests in schemes. The relevant disclosure document can be:

• given to the person895 or the person’s agent896

• sent to the person,897 or the person’s agent,898 at an address (including an electronic address)899 or fax number nominated by the person or the agent

• made available in a way that is agreed with the person900 or the person’s agent.901 This method allows for the statement to be provided in electronic form but, if it is provided in this form, it must be presented in a way that ‘will allow the person to whom it is given to keep a copy of it so that the person can have ready access to it in the future’ and that ‘clearly identifies the information that is part of the statement’.902

By contrast, with shares in companies, an offer of securities for which a prospectus is being used must be made in, or accompanied by, the prospectus, but there is no stipulation

895 ss 1015C(1)(a)(i) (PDSs), 1017B (material changes and significant events notification: this notification may be given to the holder of an interest in a managed investment scheme in writing or electronically: s 1017B(3)(a), (b)), 1017D (periodic statements). The PDS provisions relating to the methods for making required disclosures also apply to Short-Form PDSs and shorter PDSs for simple managed investment schemes.
896 s 1015C(1)(a)(i), (3) (PDSs).
897 s 1015C(1)(a)(ii) (PDSs).
898 s 1015C(1)(a)(ii), (3) (PDSs).
899 s 1015C(2) (PDSs).
900 Corp Regs 7.9.02A(1)(a) (PDSs), 7.9.75A(1)(a) (material changes and significant events notification),
7.9.75A(2)(a) (periodic statements). In the case of a PDS, the person obliged to give the statement must be satisfied, on reasonable grounds, that the recipient has received the Statement.
901 Corp Regs 7.9.02A(1)(b) (PDSs), 7.9.75A(1)(b) (material changes and significant events notification),
7.9.75A(2)(b) (periodic statements). In the case of a PDS, the person obliged to give the statement must be satisfied, on reasonable grounds, that the recipient has received the Statement.
902 Corp Regs 7.9.02B (PDSs), 7.9.75B (material changes and significant events notification and periodic statements). For disclosure in electronic form, see also s 1015C(1)(b) (PDSs), s 1017D(6) (periodic statements). ASIC regards ease of access to electronic documents as a principle of good practice governance: Regulatory Guide 107 Fundraising: Facilitating electronic offers of securities (March 2014) Principles 1 and 7 (Table 1 and RG 107.76-RG 107.79, RG 107.98-RG 107.101). See also RG 107.30.

Disclosure

of how the prospectus is to be given to the person to whom the offer is made. However, ASIC interprets the legislation as allowing the giving of a prospectus in electronic form.903

The continuous disclosure requirements apply equally to companies and schemes whose securities are ED securities. As mentioned in Section 10.5:

• a continuous disclosure notice lodged with the operator of an exchange market is accessible through the exchange website

• a continuous disclosure notice lodged with ASIC is accessible by searching ASIC’s database and obtaining a copy of the notice.

ASIC
ASIC has facilitated the use of websites for continuous disclosure by unlisted disclosing entities in Regulatory Guide 198 (RG 198) Unlisted disclosing entities: Continuous disclosure obligations (2009).

RG 198 recognises that publication on a website or in some other format does not relieve an unlisted disclosing entity from its obligation to lodge a continuous disclosure notice with ASIC.904 However, ASIC will not insist that an unlisted disclosing entity comply with the legislative requirement to lodge continuous disclosure notices with ASIC if the disclosing entity satisfies certain conditions,905 namely that it:

• is satisfied that most of its investors are likely to look for information of this kind on its website906

• notifies existing and new investors that it makes disclosure available in this way907

• discloses any material information on its website in a timely fashion908 in accordance with the good practice guidance set out in RG 198 (and regardless of whether it has also disclosed the information in some other public document, such as a new or

903 RG 107.7, RG 107.16. Consultation Paper 211 Facilitating electronic offers of securities: Update to RG 107 (June 2013) (CP 211), noted (at para 15) that ‘there is no requirement in Ch 6D for a disclosure document or application form used for an offer of securities to be in a prescribed form’. ASIC therefore concluded (at para 16) that ‘there is no requirement in Ch 6D for a disclosure document to be printed and provided on paper only’ and ‘the Ch 6D requirements may be satisfied by the distribution, using the internet or other electronic means, of a disclosure document to investors that is the same as the paper disclosure document lodged with ASIC’. See also Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act
1999 para 8.59.
904 RG 198.11, RG 198.37. While the continuous disclosure obligation does not apply to information that is
‘generally available’, publication on a website does not bring information within this category: information will only be ‘generally available’ if it ‘was generally available at the time the entity became aware of it’: RG 198.37.
905 RG 198.13.
906 If an entity routinely sends written information by post to most of its investors (for instance, because they are elderly and do not use Internet communications), it cannot take advantage of the approach in RG 198: note to RG 198.13(a).
907 In fact, RG 198 states ASIC’s view that unlisted disclosing entities should notify their existing and new investors, by normal investor communication channels such as their website or a regular investor update, how they intend to comply with the continuous disclosure regime (that is, whether they will follow ASIC’s good practice guidance or simply lodge continuous disclosure notices with ASIC): see RG 198.14, RG 198.42-RG 198.44. Also, since 30 September 2009, a prospectus or PDS issued by an unlisted disclosing entity should describe how it will comply with its continuous disclosure obligations: see RG 198.15, RG 198.44.
908 For the website as a timely and efficient means of disclosure, see also RG 198.22.

Disclosure

supplementary prospectus or PDS, a statutory report or accounts lodged with ASIC or an investor newsletter909).

In ASIC’s view:

website disclosure will often be the most effective means for unlisted disclosing entities to disclose new material information to their investors.910

Also:

information that is prominently disclosed on a website in a timely way will generally be more accessible to investors than information that is lodged with [ASIC].911

Even where disclosing entities decide that their investors are unlikely to make use of website disclosure, ASIC encourages them to contact it to ‘discuss whether there is an alternative to lodging information with ASIC that may be more effective for their investors’.912

The ASIC good practice guidance for website disclosure suggests that this disclosure have the following features:

• all material information is included on the website913

• investors are able to find material information easily and determine its significance for them914 (the information should be located in a single place on the website and the homepage should contain a prominent link to this location915)

• any new material information is included on the website as soon as practicable916

• information is kept on the website for as long as it is relevant, and appropriate records
(for instance, hard copy or an electronic form such as a CD ROM) are kept.917

ASIC encourages unlisted disclosing entities to consider giving their investors the option of receiving an email alert when material information is updated on the website.918

In addition to making material information available on their website, unlisted disclosing entities should also consider whether direct disclosure of the information to investors is

909 RG 198.16, RG 198.20, RG 198.24, RG 198.38, RG 198.41. This ASIC requirement is stricter than the requirement under the Corporations Act, which exempts unlisted disclosing entities from having to include in their continuous disclosure notices information required to be included in a supplementary or replacement prospectus or information included in a PDS, Supplementary PDS or Replacement PDS (s 675(2)(c)).
910 RG 198.2. See also RG 198.11.
911 RG 198.40.
912 RG 198.19.
913 RG 198.21, RG 198.22.
914 RG 198.21. ASIC discourages the publication of lengthy documents in which the material information is buried among information that is not material: RG 198.25. If an unlisted disclosing entity considers that an investor
may have difficulty readily identifying material information, it should consider separately highlighting that
information to investors: RG 198.26.
915 RG 198.23.
916 RG 198.21, RG 198.29-RG 198.31. The timing of the obligation to lodge continuous disclosure information as soon as practicable is not affected by the fact that the information also needs to be included in a document required under another section of the Corporations Act. For instance, if an entity becomes aware of material information while preparing a prospectus, it will need to lodge that information with ASIC as soon as practicable, even if the prospectus is incomplete: RG 198.39.
917 RG 198.21, RG 198.32-RG 198.33.
918 RG 198.28.

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