Bills Digest No. 139   1997-98 Managed Investments Bill 1997

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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 Bill.


Passage History Purpose Background Main Provisions Endnotes Contact Officer and Copyright Details

Passage History

Managed Investments Bill 1997

Date Introduced: 3 December 1997

House: House of Representatives

Portfolio: Treasury

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 many others.

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 superannuation schemes.

Regulation under the Existing Law

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; and
  • 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 (CIR)

On 24 May 1991, the then Attorney-General, the Hon. Michael Duffy referred two issues to the Law Reform Commission:

  • 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; and
  • 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 scheme.(7)

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 practice

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 provides:

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 structure

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.

Main Provisions

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 following features:

  • 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; and
  • 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 601ED).

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 closely related.

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 accompanied by:

  • 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 Entity

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 section 601FA).

The licensing of responsible entities will be administered by the ASC under existing Part 7.3 of the Corporations Law.(16)

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 employees

These duties are set out in proposed new sections 601FC, 601FD and 601FE respectively.

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 duties.

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 610FC(1)(a), (b))
  • 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 section 610FC(1)(d))
  • segregate scheme property (proposed new section 610FC(1)(i))
  • ensure that payments are authorised by the scheme constitution or the Corporations Law (proposed new section 610FC(1)(k))

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), (h))
  • to identify and value the scheme property and to separately hold that property (proposed new paragraphs 610FC(i), (j))
  • 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 section 601FC(1)(m)).

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 Law.

ASC surveillance

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 check.

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 scheme
  • 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 scheme
  • winding up the scheme (proposed new section 601GA).

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 Plan

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 601EA).

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 section 601HE).

The ASC may direct the responsible entity of a scheme to modify its compliance plan in accordance with the ASC's direction.

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 plan.

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 Committee

When must a responsible entity establish a compliance committee?

A compliance committee must be established where less than half of the directors of the responsible entity are external directors (proposed new section 601JA).

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 corporate
  • 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 are:

  • to monitor the responsible entity's compliance with the scheme's compliance plan and report the findings to the responsible entity
  • 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 committee members

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 Part.

Non-liquid schemes

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 601KB).

Where there is insufficient money to satisfy all requests for withdrawal, requests must be satisfied proportionately.

New Part 5C.7 - Related Party Transactions

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 responsible entity.

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 section 601NA)
  • 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 601ND).

New Part 5C.10 - Deregistration

Voluntary 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 the scheme's:

  • 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 Modifications

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.

Transitional Arrangements

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 1457).


  1. 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 1997., 11927.
  2. Corporations Law, s. 1069(1)(a).
  3. Corporations Regulation 7.12.15(6)(m).
  4. Corporations Regulation 7.12.15(1)(f)(i).
  5. Unless the investors hold the legal title themselves.
  6. The Law Reform Commission and The Companies and Securities Advisory Committee, Collective Investments: Other People's Money, Sydney, 1993, pp. xv-xvi.
  7. Ibid., 135.
  8. Ibid., 132.
  9. Ibid., 133.
  10. Arthur Robinson & Hedderwicks, Managed Investments Bill 1997 Analysis and Comments, Melbourne, 1998.
  11. Ibid., 3.
  12. Ibid., 4.
  13. Ibid., 8.
  14. Ibid., 9.
  15. ibid., 13.
  16. 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.
  17. Arthur Robinson & Hedderwicks, op. cit., 7.
  18. 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.

Contact Officer and Copyright Details

Lee Jones
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.

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ISSN 1328-8091
© Commonwealth of Australia 1997

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Published by the Department of the Parliamentary Library, 1997.

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