Australia's proposed new corporate collective investment vehicle (CCIV) is a step closer to becoming available, following the release of a further round of draft legislation in January 2019. The latest round of draft legislation marks a number of improvements in the design of the CCIV.
The introduction of a CCIV in Australia is intended to make available a fund vehicle which is a more globally recognisable structure than the Australian managed investment scheme (MIS) regime, which is based on a trust structure.
The proposed CCIV
The proposed Australian CCIV uses a company limited by shares, modelled on the United Kingdom's Open-Ended Investment Companies (OEIC) regime. The CCIV will need to be registered with the Australian Securities and Investments Commission (ASIC) and can be closed ended or open ended. Sub-funds of a CCIV are registered with ASIC but are not proposed to be separate legal entities. CCIVs will be classified as retail or wholesale, with retail CCIVs being subject to greater regulation.
Listing of a CCIV or the sub-fund of a CCIV on the official list of a financial market is not permitted. It is proposed that listing will be considered further once the CCIV regime is operating.
The CCIV will have a sole corporate director responsible for the governance and operation of the CCIV. The corporate director of a retail CCIV will owe specific statutory duties similar to those owed by the responsible entity of a registered MIS.
The corporate director will need to be a public company that holds an Australian financial services licence (AFSL) authorising it to operate a CCIV. It will have a power of delegation and the corporate director of a retail CCIV will be liable for the acts of its agents and sub-agents. A previous round of draft legislation required corporate directors of all CCIVs, whether wholesale or retail, to be liable for the acts of agents. The revised approach aligns with the approach under the existing MIS regime.
Changing the corporate director of a CCIV (requiring approval of at least 75 per cent of votes cast by members entitled to vote) may be simpler than changing the responsible entity of a registered MIS (requiring approval of at least 50 per cent of votes that may be cast by members entitled to vote).
A depositary is mandatory for retail CCIVs and optional for wholesale CCIVs. An improvement in the current draft legislation is that where a wholesale CCIV elects to have a depositary, the wholesale CCIV may subsequently opt out of having a depositary with a special resolution of the CCIV’s members.
The depositary will need to be a public company or registered foreign company and hold an AFSL authorising it to act as a depositary. The depositary provides custody functions but may delegate the custody of assets to a third party. The depositary also has oversight functions in relation to the issuing, redeeming and valuing of shares, allocating assets and liabilities of sub-funds and distributing income.
A depositary will also need to meet an independence test. The current draft legislation simplifies the previously proposed broad independence test and prevents a depositary from being an entity directing investment decisions for the CCIV. Further functional independence requirements are able to be set out in regulations.
A CCIV is required on registration with ASIC to have at least one sub-fund and further sub-funds are only established on registration with ASIC. The umbrella fund structure (which is not a feature of the existing MIS regime) allows CCIV managers to offer multiple investment strategies under a single corporate vehicle, which is intended to generate economies of scale and cost savings.
A sub-fund is not proposed to be a separate legal entity, but it is intended that investors will be protected by the segregation of the assets and liabilities of one sub-fund from those of other sub-funds of the CCIV.
Some aspects of sub-funds continue to be potentially problematic in practice. This includes the proposed restriction on cross investment by one sub-fund into another sub-fund, which is still a feature under the latest draft legislation.
Retail versus wholesale CCIVs
There will be additional regulation applicable to retail CCIVs, such as additional statutory duties for the corporate director, and requirements to have a depositary, for half of the corporate directors to be external directors, to have a compliance plan and to have a constitution meeting prescribed content requirements. Unlike MISs, where registration results in additional regulation, a CCIV will be subject to additional retail regulation if it meets the definition of a retail CCIV. A CCIV with one or more retail clients will generally be a retail CCIV.
Wholesale unregistered MISs enjoy a light touch regulatory approach in Australia. This approach affords flexibility and enables funds to be established quickly, compared to a CCIV or sub-fund of a CCIV which can only be established on registration with ASIC. The proposed wholesale CCIV is still somewhat of a hybrid, adopting a number of aspects of the regulation of registered MISs.
Overall, this imposes a greater regulatory oversight than the existing regime for wholesale unregistered MISs (e.g. requirement for the corporate director to be a public company and prescriptive rules for changes of corporate director). However, the imposition of liability for the acts of the corporate director’s agents no longer applies to wholesale CCIVs.
External administration for CCIVs (such as receivership and winding up) apply on a sub-fund by sub-fund basis. Unlike the company rules, voluntary administration does not apply to CCIVs, as a CCIV does not carry on an active business. Directors of the corporate director of a CCIV will have a duty to prevent insolvent trading, which is an additional potential liability under the CCIV regime compared to the existing MIS regime.
An important factor in the success of the new CCIV will be to make it an attractive alternative to the existing MIS regime for Australian fund managers in terms of operating costs and regulatory requirements. There have been a number of key changes in the design of the CCIV under the latest draft legislation but a number of key practical and regulatory issues remain to be considered further.