This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Passage History Purpose Background
Main Provisions Endnotes Contact Officer and
Managed Investments Bill 1997
House: House of Representatives
Commencement: The Act commences immediately
after all the items in Schedules 1 to 4 of the Company Law
Review Act 1997 have commenced. Those schedules of the
Company Law Review Act 1997 must commence within 6 months
of Royal Assent of that Act.
To change the
structure of managed investment schemes from one comprising two
tiers - a management company responsible for the day-to-day
operations and investment strategy of the scheme and a trustee
which distributes scheme income and ensures investments conform
with the trust deed - to one comprising only a single entity
responsible for the entirety of the scheme operation.
A managed investment scheme is any type of
scheme where an investor purchases an interest from a professional
manager who applies the funds received to produce a return.(1) A
common form of managed investment is the unit trust, but there are
The term 'managed investment scheme' is used
interchangeably with 'collective investment scheme'.
Whilst superannuation schemes technically
comprise a subset of managed investment schemes, superannuation
schemes are regulated specifically by the Superannuation
Industry (Supervision) Act 1993 (SIS Act) and references
throughout this Digest to managed investment scheme or
collective investment scheme should be taken to exclude
Regulation under the Existing
Under the existing law, the manager of a
collective investment scheme is subject to statutory performance
obligations, including an obligation 'to carry on and conduct its
business in a proper and efficient manner and to ensure that [the
scheme] is carried on and conducted in a proper and efficient
manner',(2) to exercise its powers and perform its functions
diligently,(3) and to perform its functions and exercise its power
under the deed in the best interests of the unit holders and not in
its own interests.(4)
The manager's compliance with those obligations,
and with the terms of the trust, is monitored on an ongoing basis
by an independent trustee who is licensed by the ASC and
remunerated from trust assets. The trustee:
- holds the legal title to trust assets as custodian;(5) (The
manager is not permitted to hold the assets of the scheme.)
- monitors compliance by the manager with the manager's
obligations under the trust deed and the Corporations Law;
- takes enforcement action on behalf of scheme members where the
manager breaches his obligations under the trust deed.
In discharging these functions, the trustee is
in a fiduciary relationship with members of the scheme and is
directly accountable to them.
Collective Investments Review
On 24 May 1991, the then Attorney-General, the
Hon. Michael Duffy referred two issues to the Law Reform
- Whether the present legal framework for collective investment
schemes provides for the most efficient and effective legal
framework for the operation of the various kinds of such schemes;
- Whether there is a proper level of regulation of the various
kinds of collective investment schemes.(6)
The report, entitled Collective Investments:
Other People's Money was tabled on 30 September 1993. The key
recommendation of the CIR was that for each scheme there should be
a single operator who should be responsible for the conduct of the
scheme and the Corporations Law should not require the
operator of a scheme to involve another entity in the operation of
The CIR found that the two party model tended to
lead to unnecessary confusion of roles of the manager and trustee
and that these should be clarified.(8)
Two approaches were identified.(9) The first
involved revising the role and functions of trustees and management
companies, within the existing regime of split responsibilities, by
identifying more precisely their respective powers, duties and
liabilities. The second focussed on a single scheme operator and
appropriate compliance measures. In response to submissions that
the existing arrangements should be improved and refined, rather
than replaced, the review group took the view that:
Any such reworking will not overcome
the inherent problems of divided powers and responsibilities in a
dual system, and the inevitable legal complexity and uncertainty
that this creates.
The Opposing View
The Trustee Corporations Association of
Australia commissioned Arthur Robinson & Hedderwicks to
undertake an analysis of and provide comment on the Managed
Investments Bill. The report that resulted from that analysis (ARH
Report) identified numerous concerns. (10)Some of the substantive
concerns identified are:
Collective action problems
Collective action problems arise where external
claimants, i.e. investors, appoint an agent who has incentives not
to act in the external claimants best interests. Individual
investors lack appropriate incentives to take action (e.g. suing
the responsible entity) because the individual investor derives
benefits from expenditure only rateably in proportion to their
interest in the fund.(11)
Under the existing method of regulation, the
trustee takes on the role of monitoring and enforcing the manager's
performance obligation. The trustee's fee and out of pocket
expenses are paid out of the trust fund. Consequently, monitoring
and enforcement costs are shared rateably among all current members
of the scheme.
Consistency with international best
The ARH report identifies that the 'single
responsible entity' structure is inconsistent with international
best practice and current principles established by the
International Organisation of Securities Commissions (IOSCO) for
the regulation of liquid collective investments.(12)
Principle 2.1 of the IOSCO principles
A custodian must be appointed to hold
the assets or be in a position to ensure their safekeeping...
Principle 2.3 provides:
A custodian should be functionally
independent of the operator of a collective investments scheme and
must always act in the best interests of investors.
The ARH report argued that:
A two-party structure for managed
funds is required in most major overseas jurisdictions. The reasons
put forward for abandoning that structure in Australia are neither
supported by evidence nor compelling.(13)
Lack of reasons for abandoning current
The ARH report disagrees with the CIR to the
extent that the CIR maintained that a workable two party system
could not be devised.(14) The ARH report recites that many overseas
jurisdictions require a two party structure and takes the view that
the obligations of managers and trustees can be codified.
Real time monitoring
Under the Managed Investments Bill, monitoring
takes places retrospectively and responsibility is split among a
number of people who may be less able to protect investors'
interests than an independent trustee.(15)
The ARH report maintains that many of a
trustee's day to day duties consist of determining whether
particular investments from the scheme assets are permitted under
the Corporations Law and the terms of the scheme's
constitution. Decisions of the trustee are taken before funds are
debited from the scheme.
New Part 5C.1
What is a managed investment scheme?
Item 16 of Schedule 2 inserts a
definition of 'managed investment scheme' into section 9 of the
Corporations Law. It is defined as a scheme with the
- people contribute money to acquire rights to benefits produced
by the scheme;
- any of the contributions are to be pooled to produce financial
or other benefits for the people who hold interests in the scheme;
- the members do not have any day-to-day control over the
operation of the scheme.
There are twelve specific exceptions. The
notable ones are franchises, regulated superannuation funds,
schemes operated by banks, and schemes declared by the regulations
not to be managed investment schemes.
Requirement to register schemes
A scheme must be registered with the Australian
Securities Commission (ASC) if it has more than 20 members or is
promoted by a person who is in the business of promoting managed
investment schemes (proposed new section
For the purpose of determining whether a scheme
must be registered, the ASC is empowered to aggregate the number of
scheme members where two or more schemes are determined to be
A person must not operate a scheme which is
required to be registered unless the scheme is registered. If a
person operates a scheme in contravention of this prohibition, the
scheme may be wound up by the Court on the application of the ASC,
a member of the scheme, or the person operating the scheme
(proposed new section 601EE). The penalty for
unlawfully operating an unregistered scheme is a $20,000 or
imprisonment for 5 years or both.
Applications for registration
The application for registration must be
- a copy of the scheme's constitution (see below);
- a copy of the scheme compliance plan (see below); and
- a statement by the directors of the proposed responsible entity
that the scheme constitution and compliance plan comply with the
requirements of the Corporations Law. (proposed
new section 601EA)
New Part 5C.2 - The Responsible
The responsible entity of a registered scheme
must be a public company that holds a dealers licence authorising
it to operate a managed investment scheme (proposed new
The licensing of responsible entities will be
administered by the ASC under existing Part 7.3 of the
Role of the responsible entity
The role of the responsible entity is to operate
the scheme and perform the functions conferred on it by the
scheme's constitution and the Corporations Law
(proposed new section 601FB). In effect, this
involves investing the scheme property to produce a return or (for
a non-investment scheme) managing the scheme property to the same
end. A responsible entity's investment or management expertise is
what distinguishes one scheme from another.
The responsible entity is empowered to appoint
agents and engage persons to do anything that it is authorised to
do in connection with the scheme, however, the acts of that agent
or person are taken to be the acts of the responsible entity for
the purpose of determining liability to members and whether the
responsible entity has properly performed its duties. As an
example, if the responsible entity were to engage a custodian to
hold the scheme property and the acts of that custodian (even if
those acts were fraudulent) resulted in the loss of scheme
property, the responsible entity would still be liable to members
for that loss.
Duties of the responsible entity, its officers and
These duties are set out in proposed new
sections 601FC, 601FD and 601FE
Each of the duties of the responsible entity can
be categorised as one of three types; trustee-like duties,
Corporations Law-like duties and responsible entity focussed
The trustee-like duties are drawn from the law
of trusts and reinforced by the Corporations Law. The SIS
Act has the same policy objective of giving specific, significant
trustee and fiduciary duties statutory backing. The SIS Act does
this by 'writing into' superannuation trust deeds and governing
rules a set of specific covenants, that can be enforced as
covenants under a deed. The Corporations Law presently
takes this approach for prescribed interest schemes. The Managed
Investments Bill takes a more 'direct' approach by prescribing
these duties as duties in the Corporations Law.
The ARH report is critical of the approach under
the Managed Investments Bill on the basis that it is better that
obligations on directors be owed directly to, and be enforceable
by, the members of the scheme.(17) Under the Managed Investments
Bill, only the responsible entity and the ASC have standing to sue
for breach of those obligations. If the responsible entity decides
not to pursue legal action, the investors have no recourse, other
than to request the ASC to bring an action.
The trustee-like duties are to:
- act honestly and carefully (proposed new section
- act in investors' best interests and to prefer their interests
to its own (proposed new section 610FC(1)(c))
- treat investors equally and fairly (proposed new
- segregate scheme property (proposed new section
- ensure that payments are authorised by the scheme constitution
or the Corporations Law (proposed new section
Proposed new section
610FC(1)(e) is a mirror of the duty imposed on directors
and officers of corporations under subsections 232(5) and (6) not
to make improper use of their position.
Finally, there are a group of duties created
expressly because of the nature of a responsible entity:
- to ensure that the scheme constitution and compliance plan
comply with the Corporations Law and that the compliance
plan is observed (proposed new paragraphs 610FC(1)(f), (g),
- to identify and value the scheme property and to separately
hold that property (proposed new paragraphs 610FC(i),
- to report certain breaches of the Corporations Law to
the ASC (proposed new section 601FC(1)(l))
- to comply with the scheme constitution (proposed new
The Managed Investments Bill also imposes duties
directly on officers and employees. The duties of the officers of a
responsible entity generally mirror those of the responsible
entity; for example, to act honestly and carefully, to act in the
interest of the investors, not the responsible entity, and not to
make improper use of position. Employees who are not officers only
have a duty not to make improper use of their position.
All of these duties are enforceable through the
civil penalty regime in Part 9.4 of the Corporations
Proposed new section 601FF
provides that the ASC may, from time to time, check whether a
responsible entity is complying with the scheme's constitution,
compliance plan and the Corporations Law.
The responsible entity and its officers must
provide all reasonable assistance to the ASC in carrying out the
New Part 5C.3 - The Constitution
Contents of the constitution
There are four basic matters with which the
constitution of a registered scheme must deal:
- the amount that is to be paid to acquire an interest in the
- the powers of the responsible entity in relation to making
investment of, or otherwise dealing with, scheme property
- the method of dealing with complaints in relation to the
- winding up the scheme (proposed new section
If the responsible entity is to have any rights
in respect of payment of fees or receiving an indemnity out of
scheme property or raising or borrowing money those rights must be
specified in the scheme constitution.
If members are to have a right to withdraw from
the scheme, that right must be specified in the constitution.
Changing the constitution
A special resolution of the members of the
scheme is required before the constitution of the scheme can be
changed or replaced, unless the responsible entity reasonably
considers that the change will not adversely affect members'
rights. In that case the responsible entity can make the change
(proposed new section 601GC).
New Part 5C.4 - The Compliance
A registered 2 scheme must have a compliance
plan and a copy of that plan must be lodged with the ASC when the
scheme applies for registration (proposed new section
Contents of the compliance plan
The compliance plan must contain adequate
measures to ensure that the responsible entity is complying with
the Corporations Law and the scheme constitution.
Specifically the plan should include arrangements for ensuring:
- scheme property is identified and segregated from property of
the responsible entity
- where the scheme is required to have a compliance committee
(see below), that the compliance committee functions properly
- that scheme property is valued regularly
- that the compliance plan is audited as required
- the keeping of adequate records of the scheme's operations
- the meeting of any other requirement prescribed by regulation
(proposed new section 601HA).
Changing the compliance plan
The responsible entity of the scheme may modify
or replace the scheme's compliance plan (proposed new
The ASC may direct the responsible entity of a
scheme to modify its compliance plan in accordance with the ASC's
Auditing the compliance plan
The responsible entity of a registered scheme
must ensure that, at all times, a registered company auditor is
engaged to audit compliance with the scheme's compliance plan
(proposed new section 601HG).
Certain persons related to the responsible
entity are not eligible to act as the auditor of the compliance
An audit must be conducted each year within 3
months of the end of the financial year of the scheme. A report
must be provided to the responsible entity stating whether the
responsible entity has complied with the scheme's compliance plan
during the financial year and whether the plan continues to meet
the requirements of this Part.
If the auditor has reasonable grounds to suspect
that the Corporations Law has been contravened and that
the contravention will not be adequately dealt with by bringing it
to the attention of the responsible entity, he or she must notify
the ASC as soon as possible.
New Part 5C.5 - The Compliance
When must a responsible entity establish a compliance
A compliance committee must be established where
less than half of the directors of the responsible entity are
external directors (proposed new section
A director is an external director if:
- during the previous 2 years they have not been an employee or
executive officer of the responsible entity or a related body
- during the previous 2 years they have not been substantially
involved in business dealings or in a professional capacity with
the responsible entity or a related body corporate, whether
personally or as a member of a partnership
- they do not have a material interest in the responsible entity
or a related body corporate and they are not a relative or de facto
spouse of such a person.
Functions of the compliance committee
The functions of the compliance committee
- to monitor the responsible entity's compliance with the
scheme's compliance plan and report the findings to the responsible
- report any suspected breach of the Corporations Law
involving the scheme or any breach of the provisions of the
scheme's constitution to the responsible entity and report to the
ASC if the committee is of the view that the responsible entity has
not taken appropriate action to deal with the reported matter
- regularly assess the adequacy of the scheme's compliance plan
(proposed new section 601JC).
Membership of the compliance committee and indemnifying
A scheme's compliance committee must have at
least 3 members and a majority of them must be external members
(proposed new section 601JB).
The responsible entity of a registered scheme
(and related bodies corporate) is prohibited from indemnifying
members of the scheme's compliance committee against liability
incurred as a member of the committee and from exempting persons
from that liability (proposed new section 601JF).
However, that prohibition does not prevent a member of the
compliance committee being indemnified against:
- a liability to another person (i.e. other than the responsible
entity or a related body corporate) unless the liability arises out
of conduct involving lack of good faith
- a liability for costs and expenses incurred in defending legal
proceedings in which a judgment is given in their favour.
The responsible entity of a scheme (any related
bodies corporate) is also prohibited from paying insurance premiums
in respect of insuring against a liability incurred as a member of
the compliance committee arising out of conduct involving a wilful
breach of duty (proposed new section 601JG).
New Part 5C.6 - Members' Rights to
Withdraw from a Scheme
For the purpose of this Part, schemes must be
classified as either liquid or non-liquid.
A registered scheme is liquid if liquid assets
account for at least 80% of the value of the scheme property.
Liquid assets are things like money deposited in financial
institutions, bank accepted bills and marketable securities.
A registered scheme's constitution may provide
for members to withdraw from the scheme:
- where the scheme is liquid, at any time;
- where the scheme is not liquid, in accordance with this
Non-liquid schemes may offer members an
opportunity to withdraw from the scheme to the extent that assets
are available to be converted to money in time to satisfy
withdrawal requests (proposed new section
Where there is insufficient money to satisfy all
requests for withdrawal, requests must be satisfied
New Part 5C.7 - Related Party
The provisions of Part 3.2A of the
Corporations Law prohibit the giving of any financial
benefit to a related party of a public company by the public
company or a child entity(18) of the public company unless:
- the financial benefit falls within one of the limited exception
to the part; or
- the financial benefit has been approved by a majority of
disinterested shareholders who have been fully informed regarding
the costs and consequences of the proposed financial benefit.
The scope of the transactions affected by Part
3.2A is extremely wide. For example, it regulates all benefits
given to directors, including remuneration and loans and any asset
transfers between a public company and its related parties.
Proposed new section 601LA
applies Part 3.2A, with some modifications, to registered managed
investment schemes to prohibit the responsible entity from
providing either a financial benefit to a related party out of
scheme property or from providing it in circumstances that could
diminish or endanger the scheme property.
New Part 5C.8 - Effect of Contraventions
(Civil Liability and Voidable Contracts)
Proposed new section 601MA
allows a person who suffers loss as a result of a contravention of
Chapter 5C to recover the amount of the loss by action against the
Where an unregistered scheme, which is required
to be registered, offers an interest in the scheme and a contract
is entered into by a person to subscribe for the interest, that
contract is voidable at the option of the person who subscribed
(proposed new section 601MB).
New Part 5C.9 - Winding Up
This Part envisages four bases upon which a
scheme will be wound up:
- when it is required by the scheme's constitution by the
specification of a time or circumstance (proposed new
- at the direction of members resolving by extraordinary
resolution (proposed new section 601NB)
- where the scheme's purpose is accomplished or cannot be
accomplished (proposed new section 601NC)
- where it is ordered by the Court on application by the
responsible entity, a director of the responsible entity, a member
of the scheme, the ASC or a creditor (proposed new section
New Part 5C.10 - Deregistration
A responsible entity of a registered scheme may
apply to the ASC to deregister that scheme only where all members
agree that the scheme should be deregistered, and where the scheme
has 20 or fewer members and where it was not promoted by a person
in the business of promoting managed investment schemes
(proposed new section 601PA).
Deregistration by the ASC
The ASC may deregister a registered scheme if
- responsible entity is not a public company or does not hold the
appropriate dealers licence;
- constitution or compliance plan fails to meet the requirements
of this Chapter; or
- property is not being properly segregated.
New Part 5C.11 - Exemptions and
Proposed new section 601QA
empowers the ASC to exempt persons from provisions of the Chapter
and to declare that the Chapter applies to a person in a modified
way. Very importantly the ASC is specifically entitled to impose a
requirement that a scheme's property be held by a custodian, as
agent for the responsible entity.
The existing law continues to apply to those
presently involved in managed investments for 2 years, unless the
undertaking becomes a registered scheme before that time
(proposed new section 1454).
During the first year after commencement of the
Managed Investments Bill, either the existing trustee or management
company may retire from the office it holds by giving notice of
retirement to the other body (proposed new section
1456). If neither body gives a retirement notice the
management company must convene a meeting of interest holders, as
soon as practicable after the end of that year, to choose a
proposed responsible entity (proposed new section
- Australia, House of Representatives, Parliamentary Secretary
(Cabinet) to the Prime Minister, Second Reading speech in respect
of the Managed Investments Bill 1997, Debates, 3 December
- Corporations Law, s. 1069(1)(a).
- Corporations Regulation 7.12.15(6)(m).
- Corporations Regulation 7.12.15(1)(f)(i).
- Unless the investors hold the legal title themselves.
- The Law Reform Commission and The Companies and Securities
Advisory Committee, Collective Investments: Other People's
Money, Sydney, 1993, pp. xv-xvi.
- Ibid., 135.
- Ibid., 132.
- Ibid., 133.
- Arthur Robinson & Hedderwicks, Managed Investments Bill
1997 Analysis and Comments, Melbourne, 1998.
- Ibid., 3.
- Ibid., 4.
- Ibid., 8.
- Ibid., 9.
- ibid., 13.
- Part 7.3 of the Corporations Law contains a
prohibition on a person carrying on a securities without holding a
dealers licence. The Part then sets out a regime for applications
for and granting of dealers licences.
- Arthur Robinson & Hedderwicks, op. cit., 7.
- An entity is a child entity in relation to another entity where
the first entity is a holding company of the other entity or
controls the other entity.
2 March 1998
Bills Digest Service
Information and Research Services
This paper has been prepared for general distribution to
Senators and Members of the Australian Parliament. While great care
is taken to ensure that the paper is accurate and balanced, the
paper is written using information publicly available at the time
of production. The views expressed are those of the author and
should not be attributed to the Information and Research Services
(IRS). Advice on legislation or legal policy issues contained in
this paper is provided for use in parliamentary debate and for
related parliamentary purposes. This paper is not professional
legal opinion. Readers are reminded that the paper is not an
official parliamentary or Australian government document.
IRS staff are available to discuss the paper's contents with
Senators and Members
and their staff but not with members of the public.
© Commonwealth of Australia 1997
Except to the extent of the uses permitted under the
Copyright Act 1968, no part of this publication may be
reproduced or transmitted in any form or by any means, including
information storage and retrieval systems, without the prior
written consent of the Parliamentary Library, other than by Members
of the Australian Parliament in the course of their official
Published by the Department of the Parliamentary Library,
Back to top