Review of the Managed Investments Act 1998

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 Submissions - Alan Kernahan

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Initial Submission

From: alan kernahan []
Sent: Sunday, September 09, 2001 10:52 PM
To: Managed Investment Review
Subject: Submission from Alan Kernahan

Department of Treasury
Canberra ACT

I append herewith a submission for the Managed Investments Act Review being conducted by Mr.Malcolm Turnbull

Submission from Alan Kernahan

The legislation should be amended to prevent conflicts of interest arising and where they do exist to be corrected. There is no specific direction in the existing legislation to prevent conflicts.

Where a Sole Responsible Entity (SRE) is in a situation which may give rise to a conflict of interest and it is aware of a real or perceived conflict, then the SRE should be required to advise the Australian Securities and Investment Commission(ASIC) of its nature.

The ASIC on becoming aware of a conflict, from whatever source, should be required to investigate so that the conflict be resolved by either
(a): a meeting of beneficiaries, if it be capable of being resolved by them OR
(b): by requiring the SRE to desist from maintaining the course of conflict conduct.

A conflict does arise where an SRE or its associates operate in the same field of commerce as are the commercial objects of a trust, for unrelated benificiaries.

Examples appear to be in those fields of commerce such as Property Trusts and the Capital Markets and their derivatives.

The present legislation is deficient in that it leaves open for directors of a public company which deals in a specific field of commerce to be also directors of a controlled entity which acts as an SRE for a publicly listed trust in the same area of commerce.

It is also possible for some or all of these directors, if they be non executive directors, to be part of the Compliance Committee of the SRE.

In addition, there is a perceived lack of independence where members of firms of professional advisers to the parent of an SRE are appointed to the board of an SRE. The comments of Mr.Bradley (CEO, Perpetual Trustee Company) in his submission to the MIA Bill of 1997, dated 10th March 1998 were :
"And the independent directors are required to wear two hats: they have an inherent conflict of interest between their duty as a director to advance the interest of their shareholders and their obligation under the BIll to protect the interests of investors".

It is submitted that his comments should be heeded in amendments to the legislation in the interests of the investing public.

End of submission.

Supplementary Submission 1




The conflict referred to in my first submission is even more apparent in the case of "Split Trusts" where each class of unit holder is entitled to different rights and entitlements.

Where one Listed Public Trust issues only one class of units some of which units are held by the public and some are held by the Sole Responsible Entity(SRE) of a "Split Trust", conflicts are inevitable. when they each have the same SRE.

There is no independent mind only considering the interests of the holders of units in the "Split Trust" and those unit holders may, in turn, have even more disparate interests.

The SRE of one "Split Trust"(GPT SPLIT) has stated that it cannot always exercise its voting rights at meetings of unit holders of the "head" trust because it is an "associate" of the SRE of the "head " trust. That is, an associate of itself

Compliance Committee meetings or their alternative with independence may be impossible.

Supplementary Submission 2





Trustees are often required to balance the entitlements of beneficiaries whose interest in trust property are to an extent antagonistic. Typically, life tenants desire more present income and the remaindermen expect capital growth over the longer term.

Such a conflict also arises in listed Property Trusts where there are several classes of units.

One class , (Income Units), entitles the holders to all, or most , of the income and the other class ,(Growth Units)entitles the holders to all, or most, of any increased capital value of the trust assets, if and when trust capital is properly and prudently distributed.

Some trust deeds provide that the voting power of holders of Income and Growth units varies according to the market value of each unit. At any particular time, whichever units have the smaller market value have the smaller number of votes , irrespective of the amounts paid up on their issue.

It is fundamentally unfair that the voting rights of the unit holders can be affected by events extraneous to the administration of the trust.

In one trust, there has been an invasion of capital by the distribution of unrealised capital gains to subsidize a distribution rate to a now dominant class, purely resulting from the vagaries of the market place. Case studies show the effect of this anomaly.

The statute should be amended to confer equal voting power on units of different classes according to the the amount paid up on them, regardless of fluctuations in the market value.

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