A new globally recognisable fund structure for Australia

In December 2017, the Government consulted on a draft bill in relation to the new tax framework for the proposed new corporate collective investment vehicle (CCIV). The intent is that the CCIV will be a new form of passive investment vehicle which broadly aligns with the attribution tax regime for managed investment trusts in Australia. The new CCIV will need to meet similar eligibility criteria as managed investment trusts, including being widely held and primarily engaging in passive investment.

This follows the earlier release by the Government of a draft bill and explanatory materials to establish the core framework for the CCIV. Further draft legislation for the CCIV following the period of consultation which closed last year is expected in the first half of 2018.

The CCIV is intended to facilitate Australia's participation in the Asia Region Funds Passport regime, for which a second draft bill and explanatory materials were released in December 2017. The introduction of the CCIV regime should enable Australian managers to market and offer passportable products and encourage foreign investment into Australia with a globally recognisable fund structure.

The proposed Australian CCIV uses a company limited by shares, modelled on the United Kingdom's Open-Ended Investment Companies (OEIC) regime, with the aim of the structure being recognisable to offshore investors and managers.

The proposed CCIV will be subject to the ordinary company rules, unless otherwise specified. In addition, it is proposed that certain features of the existing managed investment scheme (MIS) regime apply to CCIVs in an effort to achieve "regulatory parity" between the regimes. For example, the CCIV is to have a sole director which is a public company with an Australian financial services licence authorising it to operate a CCIV, similar to the responsible entity of a registered MIS.

The CCIV will need to be registered with the Australian Securities and Investments Commission (ASIC) and can be closed ended or open ended. The CCIV itself is a company with the ability to create sub-funds which are maintained in the records of the CCIV but which are not separate legal entities.

The CCIV will need a constitution and a retail CCIV's constitution will need to meet certain prescribed content requirements similar to those for a registered MIS. A retail CCIV will need a compliance plan. Although there is no need for a compliance committee, it is proposed that at least half the directors of the corporate director of a retail CCIV must be external directors.

A retail CCIV will also need to have a depositary, but this will be optional for wholesale CCIVs. Some CCIV features will apply regardless of whether the CCIV is retail or wholesale, such as the regime for changing the corporate director.

As the sole director, the single corporate director will be responsible for the governance and operation of the CCIV. The corporate director of a retail CCIV will owe specific statutory duties which are similar to the duties owed by the responsible entity of a registered scheme.

The corporate director will have a power of delegation and will be liable for the acts of its agents and sub-agents, similar to the liability regime for responsible entities.

The depositary is mandatory for retail CCIVs and optional for wholesale CCIVs. However, once a wholesale CCIV elects to have a depositary, that election will be irrevocable.

The depositary will need to hold an Australian financial services licence authorising it to act as a depositary. The depositary is primarily responsible for holding the assets of the CCIV (but may delegate the custody of assets to a third party), is required to execute instructions of the corporate director in dealing with those assets and has oversight functions in relation to activities such as issuing, redeeming and valuing of shares, allocating assets and liabilities of sub-funds and distributing income. A depositary will also need to meet a broad independence test in relation to the corporate director.

A CCIV will be required to have at least one sub-fund. The sub-fund regime recognises that fund managers typically offer investors a range of funds with different investment strategies and CCIV managers will be able to offer multiple investment strategies under a single corporate vehicle. This is intended to generate economies of scale and cost savings, by contrast with the existing MIS regime.

Some aspects of the proposed sub-fund regime may be problematic in practice. This includes the proposed restriction on cross investment by one sub-fund into another sub-fund.

As there will be a number of additional requirements applicable to retail CCIVs, it will be important to ensure there is an appropriate distinction between retail and wholesale CCIVs.

There are a number of difficulties with the proposed approach to the definition of retail CCIVs, namely the fact that one retail member makes a CCIV retail and it is proposed that where a CCIV is promoted by a person (or their associate) who is in the business of promoting CCIVs to retail clients, the CCIV would be deemed retail.

Wholesale unregistered MISs enjoy a light touch regulatory approach in Australia. A key benefit of the current approach to wholesale funds is that, unlike registered schemes, many aspects of the operation of a wholesale unregistered scheme can be determined by the manager and written into the trust deed. This includes matters such as pricing, redemption, change of trustee, unit holder voting, amendments to the trust deed and winding up and termination.

The proposed wholesale CCIV as outlined in the draft legislation is somewhat of a hybrid, adopting a number of aspects of the regulation of registered schemes under Chapter 5C of the Corporations Act (such as processes for changing the corporate director). Those aspects impose a greater regulatory oversight than the existing regime for wholesale MISs.

In April 2016, Australia signed the Memorandum of Cooperation on the Establishment and Implementation of the Asia Region Funds Passport (MOC). Japan, South Korea, New Zealand and Thailand are also members of the Passport and under the MOC, further economies may join the Passport at a later stage.

The Asia Region Funds Passport will provide a framework to allow eligible funds to be marketed across member countries, with limited additional regulatory requirements, and is intended to support an Asia-wide managed funds industry. Australian fund managers will be able to sell a single product across Passport countries in Asia and managers from other Passport countries will be able to sell their products in Australia. It is intended that the new CCIV will be used to export funds management, including through the Passport, using a structure familiar to offshore investors.

The home economy regulator will generally be responsible for supervision of requirements relating to fund operation, as set out in its laws and the Passport Rules, and the host economy regulator will generally be responsible for supervision of investor-facing requirements such as disclosure. A Passport economy is required to incorporate the Passport Rules into domestic law, which must be substantially the same as the Passport Rules under the MOC.

The draft legislation in relation to the Passport establishes a mechanism to incorporate the Passport Rules under the MOC into Australian law. It also sets out a process for Australian funds to be registered with ASIC as passport funds and for foreign passport funds to notify ASIC of the intention to offer interests in the fund to Australian investors.

The key to the success of the new CCIV will be to make it an attractive alternative to the existing MIS regime for Australian fund managers, from both a cost and a regulatory perspective. The new regime presents an opportunity to improve rather than simply replicate for CCIVs features of the MIS regime that do not work optimally and to ensure the light touch regulatory philosophy in respect of wholesale schemes is applied to wholesale CCIVs.