Review of the Managed Investments Act 1998

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 Submissions - Minter Ellison

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Submission 1:



1. Purpose

1.1 This submission has been prepared in response to the invitation to make submissions to the review of the MIA in accordance with the terms of reference provided by Minister Joe Hockey in his press release of 6 August 2001.

1.2 It addresses the terms of reference in the following areas:

    - responsibilities, obligations and liability of scheme operators;

    - compliance practices, procedures and costs;

    - administration of the MIA by the Australian Securities and Investments Commission (ASIC); and

    - legislative refinements.

1.3 The impact of the Financial Services Reform Bill has not been addressed in this submission although it should be taken into account in terms of the review of the MIA (for example the costs of compliance with new provisions that will come into effect immediately including the introduction of cooling-off, confirmation of transactions and trust accounts pending issue of the product).

2. Responsibilities, obligations and liability of scheme operators

2.1 Clarification of the role and duties of the custodian

    - The 'single responsible entity' (SRE) approach focuses sharply on the accountability of scheme responsible entities to their members. There remains some uncertainty about the extent of a custodian's accountability to those members.

    - The terms of appointment of a custodian vary widely from scheme-to-scheme. In general, a custodian is merely the holder of property as agent for its client and it is not obliged to look into the circumstances of a transaction. However, this is not always so.

    - Does a custodian also have duties directly to the members of the fund or scheme to act in their best interests? Must a custodian make reasonable inquiries in relation to instructions given to it, or can it disregard instructions from its client the SRE, or an investment manager appointed by the SRE, having regard to the interests of fund or scheme members?

    - Where a custodian fails to act with due care or to exercise proper judgement when carrying out its duties, it will have liability to its client the SRE, but members may also seek to make the custodian directly accountable to them.

    - Although the courts are yet to finally determine the extent of a custodian's direct accountability to members, Minter Ellison has suggested some practical steps custodians could consider to minimise their risks of liability for transactions that may not be in the best interests of scheme members. These include:

      - open communications

      - assessing obligations under the custody agreement

      - in certain circumstances, making a report to ASIC, APRA or the compliance plan auditor.

    - The SRE approach is to make the responsible entity liable to scheme members for anything that an agent it has appointed has done or failed to do, even if the agent was acting fraudulently or outside the scope of its authority or engagement.

    - The MIA should be amended to make it clear that the custodian is not liable to investors when acting on instructions from the SRE and is not bound to inform itself of the terms of the scheme constitution, compliance plan or offer documents, nor is the custodian required to take into account any of the contents of any of those documents, but is bound to act only on the basis of the responsible entity's instructions, whether it has actual notice of those documents or not. This clarification will save costs as otherwise custodians have to factor in a cost of risk which lessens the benefits of the SRE approach in the MIA regime. Taken to extremes, it could be argued that they are not in a position which is any different to that of trustees under the system that the MIA replaced.

    - Amendment should also be considered to permit self -custody where prudential requirements are met so that segregation of assets need not always be done by an unrelated party, ie an independent custodian.

2.2 Changing the responsible entity

    - Section 601FL(1) provides for the SRE to retire by calling a members' meeting and members voting (by extraordinary resolution) on choosing a new company to be the SRE. This is an extremely cumbersome, expensive and often difficult method of replacing the SRE. To obtain 50% of all possible votes of members, regardless of the nature of the scheme, makes it impossible to change in the case of some funds, and almost impossible for most. A special resolution should be sufficient. If people are not interested enough to vote, they should be prepared to accept decisions made on the basis of votes of people who do.

    - Section 601FC(1) should in any case be amended at least to allow for the SRE to be changed to another company in the same group without member consent (section 601FK already provides that a company cannot be the SRE unless it complies with section 601FA ie is a public company and holds a dealers licence to operate a registered scheme). A change of SRE operating a fund can be no different to a change in key personnel within the same SRE operating the fund, or a sale of the shareholding in the SRE itself. The critical issue is investment style and a different company operating the scheme might acquire the investment personnel from the former SRE and even if it does not, the new SRE might nevertheless continue the same investment style.

3. MIA compliance practices, procedures and costs

3.1 Definition of managed investment scheme/registration of a single scheme

    - The definition of 'managed investment scheme' (section 9 of the Corporations Act) is extremely broad and sometimes it is difficult to determine where a scheme starts and where it finishes. This causes problems for ASIC, who remains unwilling to register several trusts as a single managed investment scheme.

    - In a particular matter that Minter Ellison took to the Administrative Appeals Tribunal, there was a collection of 21 trusts under one umbrella constitution deed. ASIC required each scheme to be registered separately with 21 identical constitutions and compliance plans. Practically this meant 21 sets of fees were also paid.

    - ASIC can declare a number of schemes to be closely related requiring each one to be registered (section 601ED(3)). This is an anti-avoidance provision. However it is clear from the explanatory memorandum to the MIA that this anti-avoidance provision was to be based on the High Court decision of ASIC v Su (1995) 13 ACLC 770 which supported the notion that a scheme could be comprised of a number of trusts. Olsson J at 776 stated that 'It is quite unreal to suggest that there were in fact 3 separate schemes simply because there were 3 separate trusts'.

    - In practice ASIC is reluctant to group several different trusts as a single registered managed investment scheme, which can be both inefficient and costly from the promoter's or applicant's point of view. Legislative change is not necessary because ASIC has the power to do so currently, but is reluctant to use it.

3.2 Inability to register umbrella constitutions and lodge model constitutions

    - Related to the issue of registering several trusts as a single scheme is the inability to register an umbrella constitution. The benefits of providing one constitution for a number of trusts are simplicity and cost efficiency. Streamlining documentation would also make administration easier.

    - The MIA should be amended to allow a facility for an SRE to lodge model constitution provisions not tied to any one scheme, that can be adopted or incorporated by reference into new managed investment schemes whether with or without modification for particular operators or classes of products. It should be a simple matter to link the model text with the individual constitutions, so that any person wishing to access the material through ASIC can do so readily. The incorporation by reference principle is already accepted in relation to compliance plans.

3.3 Compliance Committee/Compliance Plan

    - The compliance committee structure is seen by some as a statutorily imposed burden on the managed investment business which is not borne by other types of businesses.

    - The current provisions only allow for individuals to be external directors of a SRE or members of a compliance committee. Sections 601JA(2) and 601JB(2) should be amended to allow companies to be members of compliance committees or external directors of the SRE (in the UK, corporate directors are permitted).

    - A compliance plan is not always seen as an effective tool in ensuring compliance. As ASIC becomes increasingly vigilant of compliance plans it is requesting a great amount of detail and refusing to register the scheme unless this detail is provided. In some cases compliance plans have simply added to the amount of 'paper pushed' in the particular scheme. Some argue that the SRE of a properly run managed investment scheme should (or would, in any event) have compliance strategies in place in order to comply with their obligations under the Corporations Act and that it is unnecessary to further restate these obligations in the form of a compliance plan. The obligation of 'compliance' is not one that need be explicitly provided for by legislation.

    - Smaller schemes, especially those with up to 50 members, are particularly affected by the organisational and financial costs of meeting the ASIC requirements for compliance (that are particularly suited to large public schemes). The compliance burden for such smaller schemes should be reduced, or adapted, for their needs where alternative risk and control mechanisms are often better suited. The Corporations Act could be amended to allow for ASIC to impose as a licence condition a requirement for a licensee of a smaller scheme to establish and maintain 'compliance procedures'. This would be similar to the approach ASIC has taken under class order relief for IDPS (investor directed portfolio service) operators.

    - Minter Ellison has provided several clients with a new type of simplified compliance plan. It is innovative in that the compliance plan is presented from the user's point of view allowing each senior manager to clearly identify the compliance issues in their area of responsibility, why they are required to comply and the risks of non-compliance.

    - The MIA should be amended to permit lodgement of a model compliance plan by an SRE, not tied to any particular scheme, which can in whole or in sections be incorporated by reference. The problem at the moment is that if you incorporate by reference a compliance plan for an existing scheme which is terminated, you have to file a change for all the schemes that incorporate it by reference.

4. MIA administration by the ASIC

4.1 Transitional period/provisions

    - It should be noted that ASIC was very facilitative during the MIA transitional period and tried to meet commercial deadlines and time frames.

    - In relation to the transitional provisions particular problems arose with the extent of the trustee's powers (under section 1460(3) of the Corporations Act) to modify a deed to meet the requirements for a constitution of a registered scheme. In practice, many trustees or responsible entities had wanted to simplify or streamline the constitution at the time of transition, but this was not done because of the uncertainty in terms of the limited power in the Corporations Law. While some trustees and responsible entities called unitholder meetings to consider substantive changes and improvements to the deeds, Minter Ellison is aware that many trustees or responsible entities were reluctant to call a unitholders meeting as this could have become unwieldy, impractical and expensive.

    - Another problem was that other significant issues that impacted on the MIA were not resolved until quite late in the transitional period, particularly issues relating to stamp duty and capital gains tax. In practical terms, these were very important issues as many schemes had to ensure that were falling within stamp duty and capital gains tax exemptions.

    - Although it is mainly a tax/stamp duty issue, Chapter 5C could be amended to make it clear that no amendment of a constitution will amount to a re-settlement or fresh declaration of trust, so long as there is no shifting of value between scheme members. That would go a long way towards alleviating income tax or stamp duty consequences of amending a constitution in accordance with section 601GC(1). This will give certainty to the status of these matters where changes permitted by the Corporations Act, or required due to changes in applicable ASIC policy, are made.

    - There are many ancient and inefficient scheme constitutions that began as trust deeds under the old prescribed interest regime or even as exempt rights or interests, and would benefit from the adoption of a more modern, streamlined format. The Corporations Act constitution amendment provisions are too restrictive in this regard. So long as the changes do not materially detract from the benefits to which members are entitled, it should be possible to amend or replace constitutions by notification to members, so they have the opportunity to call a meeting (in which case a special resolution should be required).

4.2 Lack of review of old law policies

    - One of the frustrating aspects of dealing with the MIA is that ASIC (or even older NCSC) policies that apply to registered schemes have not been updated to incorporate MIA changes. No doubt this is a resource issue, however it makes dealing with these policies on an ongoing basis increasingly difficult. Not only does this cause inefficiencies, it also reduces regulatory certainty and increases complexity for new entrants.

4.3 Lack of resources

    - In our experience, ASIC's lack of resources in terms of dealing with applications on a day-to-day basis (particularly for applications not within existing policy) as well as addressing the large amount of law reform that has occurred over the last few years, is making it increasingly difficult to deal effectively with the regulator. The end result of this can be that policies in the making over several years can end up being uncommercial and contrary to common industry practice (for example, the differential fees policy).

4.4 Growth in complexity and number of ASIC policies and guidelines

    - The MIA regime, and before it the regime applicable to prescribed interests, can be similarly characterised as being subject to prescriptive regulation through ASIC policies and other instruments. In contrast to other areas of corporate and securities law and regulation, mandatory prescriptive requirements are imposed to set a very high benchmark with the regulator being empowered either in the legislation or by regulation to adapt, modify or exempt specific schemes or classes of schemes (or classes of persons) that do not fit the 'standard model'. While this situation can allow greater scope for new products, its also has several unappealing consequences:

      - the regulator must apply scarce resources to fill in the detail missing in legislation which seeks to cover the field but does so in an ineffectual way for specific classes of schemes or industry participants;

      - the lack of detail in legislation (where appropriate) requires voluminous policies, guidelines and interpretive instruments (including class orders or specific scheme instruments) that alter the application of the law;

      - both the cost of regulation (from a government perspective) and the cost of compliance (from a scheme perspective) are excessive, unreasonable and more than should be the case.

5. Legislative refinements

5.1 De-registration on subdivision

    - Section 601PA(2) should be amended to permit an SRE with approval of a special resolution of members, to apply for de-registration if the scheme has been subdivided into separate schemes which are registered. Section 601GC(1)(a) should be amended to make clear that the responsible entity may amend the constitution to give effect to the special resolution. It is what happens in practice, but it is unsatisfactory that it seems to be the special resolution as such that achieves the amendment.

5.2 Fees

    - The MIA should be amended to make it clear that there is no limit on the ability of any SRE to reduce any fees across the board or individually. For example, section 601GA(2) could be amended by adding 'Nothing in this section or elsewhere in Part 5C shall be taken to limit the discretion of a responsible entity to charge fees at a rate lower than that specified in the scheme constitution, to any member or applicant or to members or applicants generally.'

    - Sections 601GA(1)(a) and 601FC(1)(d) need to be amended to make it clear that although the fees are stated in the constitution, the RE can actually charge lower fees to any one or more investors at its discretion (just as advisers currently do by rebating fees).

    - A further issue that the MIA needs to clarify is whether a fee payable to an SRE from application monies is actually part of the scheme property, ie. the scheme only gets the net amount after the fee. Not all constitutions include the fee as payable out of the fund from gross application monies received.

5.3 Liquid assets

    - Section 601KA(5) which classifies what are liquid assets, should be amended by inserting 'maximum' before 'period' in line 2, otherwise there is a doubt whether you can redeem in a shorter period than that specified.

Minter Ellison


7 September 2001

Submission 2:

27 September 2001

Mr. Malcolm Turnbull
Managed Investments Act Review
c/- Financial Markets Division
The Treasury
Langton Crescent

Dear Mr. Turnbull

Review of the Managed Investments Act 1998

Thank you for your email dated 14 September 2001 requesting clarification of some of the issues we raised in our submission to you dated 7 September 2001.

We provide the following comments in relation to the issues you have raised:

1. Question: You proposed a codification of the role of custodians. Isn't the description you propose no more than the law as it stands today. Why is there a need to codify it? Are there any specific instances of problems arising from lack of clarity?

1.1 Our submission refers to clarification of the legal relationship between, on the one hand, the custodian and the responsible entity, and on the other hand, the custodian and the members of the scheme. We believe that there is a sufficiently strong legal argument (which we have outlined below) which leaves room for the potential liability of the custodian to scheme members. As a result, the Corporations Act should be amended to make it clear that a custodian does not have a duty to members of a registered managed investment scheme and need not look to the scheme or its investors in taking account of their interests before deciding to act. Specifically a custodian should not need to have regard to the terms of the scheme constitution or prospectuses.

Outline of legal relationship

1.2 Section 601FB(2) of the Corporations Act confers specific power on a responsible entity to appoint an 'agent' or 'otherwise engage a person' to do anything the responsible entity is authorised to do in connection with the scheme. An 'agent' may hold 'scheme property on behalf of the responsible entity', in other words, act as a custodian (section 601FB(4)).

1.3 A custodian will (normally) be selected and appointed by the responsible entity under the terms of a written agreement which will set out the terms and conditions of the contract between the responsible entity and the custodian ('Agreement'). The Agreement will usually provide for the custodian to hold scheme property in its own name, as and when requested by the responsible entity (or by investment managers engaged by the responsible entity). It follows that the legal relationship between the responsible entity and the custodian is a contractual relationship, normally governed by the terms of the written agreement. The question is whether the legal relationship between the responsible entity and the custodian is also a relationship of trustee and beneficiary?

1.4 We are aware that some custodians contend strongly that the relationship is not that of trustee and beneficiary, but that the custodian acts simply as a 'bailee for hire'. That argument may be valid in relation to personal property of which the custodian merely has possession (such as share certificates or physical property) which can be transferred without transfer of legal title. Where the custodian in fact obtains legal title it is inevitable, in our view, that under our law the custodian becomes a trustee for the benefit of the owner of the property.

1.5 The only alternative is for title to remain registered in the name of the responsible entity (as does occur under some custody arrangements) in which case the function of the custodian is essentially in the nature of administrative services on behalf of the responsible entity.

1.6 Given that the responsible entity itself is a trustee, and that the custodian will normally be fully on notice that the property it receives is trust property, it must at least be arguable that the custodian holds property entrusted to it by the responsible entity, as trust property not only for the benefit of the responsible entity but also for the benefit of the ultimate beneficiaries, namely, members of the managed investment schemes. This means that the custodian is not in a position where it can say that the property vested in it is not property impressed with a trust or that it is not on notice of the interests of the ultimate beneficiaries.

1.7 Does this mean that the custodian has an obligation to inform itself not only of the terms of the trust constituted by the Agreement but also the terms on which the responsible entity holds the scheme property under the scheme constitution and the terms of the prospectuses and other offer documents issued in respect of the scheme? Does the custodian then have a duty to ensure that in respect of each transaction it is requested to undertake by the responsible entity (or investment managers) that they do not constitute a breach by the responsible entity of its obligations as trustee or its obligations under prospectuses?

1.8 It is possible to imagine extreme cases where instructions given to a custodian would raise suspicion or breach of trust, such as requests to transfer substantial amounts to the private bank account of an individual associated with the responsible entity. On the other hand it would seem inappropriate for the custodian to become involved in checking individual investments to determine whether they comply with scheme constitutions and the terms of prospectuses and other offer documents.

1.9 An alternative view is that the custodian is trustee for the responsible entity alone and has no trust obligation to members of the relevant schemes. In our opinion this is a preferable outcome. In principle, the custodian would then be in no different position than a bank with whom the responsible entity opens a bank account into which money comprising part of scheme property is deposited. The bank would not normally consider it had duties to any party other than the responsible entity.

1.10 The case of Brook Bond (1963 1Ch 357) supports the view that a custodian is in a position 'quite unlike that of a third party - a bailee of the trust property, for instance - who was in a contractual relationship with the trustee but owes no duty to the beneficiaries' (page 363). The court rejected the argument that the custodian need only be concerned with whether the trustee (in our case responsible entity) had power to enter into the transaction - in effect, normally, simply doing what it is asked to do without question. Cross J held that the custodian had a duty to avoid placing itself in the position of conflict by entering a separate contract with the trustee to provide a group insurance policy. It would be bound to disclose any special information it possessed about the advantages or disadvantages of the contract, a duty which would be in conflict with its interests in securing the contract.

1.11 Although a custodian is clearly in a position very similar to that of a custodian trustee, a custodian trustee is a position recognised by statute and it would not be safe to assume that its rights and obligations are identical in all respects to those of a custodian appointed by contract for purposes of a managed investments scheme.

1.12 A consequence of the custodian being a trustee for the benefit of the responsible entity is that, as a trustee, it will have certain duties as trustee under the general law which cannot be excluded, for example, for gross negligence or where the trustee commits a breach of trust in bad faith or intentionally or with reckless indifference to the interests of the beneficiaries, or if the trustee has personally profited through a breach of trust.

Duties to members of the scheme

1.13 The custodian will clearly be aware that the responsible entity holds the scheme assets as trustee for the scheme members and not in its own right. However, custodians are frequently authorised to accept instructions from an investment manager rather than from, in our case, the responsible entity itself, and under the arrangements is legally bound to accept those instructions.

1.14 In for example the UK Maxwell case (involving the unauthorised removal of pension fund assets at the initiative of Robert Maxwell), BankAmerica as custodian was sued by the pension trustees for implementing the manager's instructions in a way which led to the loss of the pension assets. The basis for the claim was that the custodian's suspicions should have been raised and, as a fiduciary, it should have reviewed the instructions and enquired into the circumstances surrounding them. This claim raises the suggestion that the custodian's duties may extend to oversight of the manager, or even co-management. However, the claim was settled out of court and accordingly, no authoritative determination is available1.

1.15 Under the Corporations Act, a custodian is made liable to indemnify the responsible entity (for the benefit of the scheme) against any loss or damage that the responsible entity suffers as a result of a wrongful or negligent act or omission of the custodian and relates to a failure by the responsible entity to perform its duties in relation to the scheme (section 601FB(4)(b)).

1.16 This raises the question whether the custodian would be 'negligent' in acting in accordance with an instruction where it is on notice that the assets are held by the responsible entity in respect of a scheme and the instruction requires the assets to be dealt with in a manner which is not consistent with the terms of the scheme (including those contained in the offer documents as well as the constitution).

1.17 On the other hand, it seems contrary to the fundamental philosophy of the managed investments provisions that the act or omission of the responsible entity itself should be subject to review or supervision by other parties.

1.18 The difficulty, perfectly illustrated by the Maxwell case, is that in an extreme case, where proceedings are taken against a responsible entity, there is every chance that a custodian may be joined if it can be demonstrated that the custodian was on notice that the assets which it holds for the responsible entity are trust assets and it is on notice of the fact, or of facts from which it ought to have known, that those assets were either acquired in breach of trust or, in the case of disposal, are disposed of in breach of trust.


1.19 In our opinion, the possibility cannot be ruled out that a custodian appointed by a responsible entity to hold scheme assets may be held to be a trustee of those assets for the benefit not only of the responsible entity but also for the benefit of the members of the scheme in their capacity as the ultimate beneficial owners of the assets.

1.20 It follows that it also cannot be ruled out that a custodian in these circumstances could be liable if it acquires or disposes of scheme property or deals with it in other ways (such as giving security for borrowings or entering into leasing arrangements) where the relevant transaction constitutes a breach by the responsible entity of its obligations as trustee.

1.21 If this has the consequence that a custodian must acquaint itself with the terms of the constitution and offer documents for each scheme of which it holds assets, and satisfy itself that each dealing does not constitute a breach of the trust obligations of the responsible entity, you would have a set of arrangements not substantially different from those which Parliament thought it was removing by adopting the Managed Investments Act (ie former Division 5 of Part 7.12 of the Corporations Law in force prior to 30 June 1998).

1.22 Practically, it is difficult for custodians' potential duties as trustee to be limited by agreement.

2. Question: You propose that corporations should be able to be independent directors of a responsible entity or compliance committee. How do you see this working in practice? In particular, where would the 'buck' stop when the responsibilities of the independent director were imposed on a company with all the potential for blame shifting?

2.1 In the UK, the principle that there is nothing to prevent a company being appointed director of another company is longstanding (see the decision of In re Bulawayo Market and Offices Co Limited [1907] 2 Ch 458). The concept of corporate directors has been carried forward in UK company law and is now reflected in the current Companies Act 1985.

2.2 Under the Australian Corporations Act, a director of a company must be a 'person' and 'person' in this context can include bodies corporate (section 22(1)(a) of the Acts Interpretation Act 1901). However, section 201B of the Corporations Act provides that it is only an individual who is at least 18 that may be appointed as director of a company.

2.3 Interestingly, section 601JB of the Corporations Act does not require that the compliance committee members be 'individuals', the requirement is merely that there be at least 3 members. Despite the facilitative words of the Acts Interpretation Act, ASIC policy is that compliance committee members must be individuals (Policy Statement 136 'Managed Investments: Discretionary powers and closely related schemes' at 136.76A).

Working in Practice

2.4 The UK Companies Act 1985 is a useful analogy to how the Corporations Act 2001 could accommodate 'corporate directors'. The Companies Act does not establish a separate regime governing the conditions of appointment of corporate directors. In fact there are limited references in the legislation specifically to corporate directors. There are no capital adequacy requirements or a higher standard of care imposed on corporate directors. Essentially, for the purposes of the Companies Act, no distinction is drawn between the duties and obligations imposed on a corporate director, as compared to those imposed on an individual director.

2.5 It is submitted that corporate directors would facilitate and encourage the development of professional organisations that offer director services beyond the means or capability of a single person or individual. For example, individual A may offer his or her services as a professional director. Why should the law prevent individual A from establishing a company with appropriate means and expertise from offering the same services? People that contract with the company established by individual A to provide a corporate director, should receive the same service, perhaps even enhanced through skills or expertise of other individuals who participate in the company and the services it provides.

Where would the 'buck' stop

2.6 In terms of where would the 'buck' stop, the UK experience is again relevant. Section 14 of the Company Directors Disqualification Act 1986 ('Disqualification Act') provides an insight, albeit applicable to very limited circumstances, into the treatment of corporate directors. Where a disqualification order is made against a corporate director, and the company contravenes that order, the directors (and any other officers) responsible for the contravention, or with whose consent or as a result of whose neglect the offences were committed, are also guilty of an offence.

2.7 There is a recent decision of Official Receiver v Brady [1999] BCC 258 which did consider whether a company could be subject to disqualification proceedings under the Disqualification Act. In that decision, the court found it was useful in practice to be able to be disqualify corporate directors as well as individual directors. Orders were made for the disqualification of the corporate directors from being directors for the maximum period of 15 years permitted under the Disqualification Act. Jacob J said:

    'The first question, which I am told has yet to be decided, is whether companies may be the subject of a company director disqualification proceedings as opposed to individuals. I have no doubt whatever that they can be the subject of such proceedings. Firstly, it is quite clear that companies may be directors of other companies. The Company Directors Disqualification Act 1986 defines the term 'director' as including 'any person' who occupies the position of director, by whatever name called (s. 22(4)), and the same definition appears in the Companies Act 1985 in s. 741(1). The Companies Act itself plainly contemplates that one company may be a director of another. Mr Corbett has drawn my attention to a number of provisions which make that clear, for example s. 283(4), 289(1) and 305(4). There is nothing in the Company Directors Disqualification Act which suggests that company directors should be treated differently from other directors. Of course companies can only act by real people. So it might be said, 'Well, what's the point of disqualifying companies when you can disqualify and need to disqualify the people behind them?' That, as a matter of law, is no answer to the question of whether the statute permits the disqualification of companies, and there is nothing in the statute which says that companies should be treated any differently from individuals. As a matter of practice there may be a useful purpose in being able to disqualify companies as well as the individuals behind them. It means that one of the tools used by people who are unfit to be company directors can themselves be attacked. It may be in some cases this would have advantages in relation to costs. There may be a host of other advantages. You may not be able to find the individuals behind the controlling director. To my mind those are all practical considerations which may in some cases make it unnecessary to bring proceedings against company directors, companies which are directors. In other cases there may be practical advantages. That is a matter for the Secretary of State or the official receiver. But in law I see no reason why companies who are directors should not be subject to disqualification proceedings.'

2.8 At a functional level, permitting companies to act by their representatives as compliance committee members, would permit participation in that role of organisations with the depth of skill, experience, resources and insurance cover, that could only improve the quality of compliance committees generally.

3. Have you raised the 'single scheme' issue with ASIC and if so what was their response?

3.1 ASIC has shown a reluctance to group several different trusts as a single managed investment scheme (despite the decision in ASIC v Su (1995) 13 ACLC 770). We have raised this issue with them, however ASIC believes that this may be seen as a mechanism to avoid the registration of each separate scheme (and therefore contrary to its power to declare a number of schemes to be closely related requiring each one to be registered (section 601ED(3)).

3.2 In our view, the option of registering separate funds as a single scheme should be available.


We hope this information is of assistance to you in expanding upon the brief comments made in our submission. If you have further issues upon which you would like clarification we would be more than happy to speak or meet with you.

Yours sincerely


R A F Stewart

Contact: Vesna Zuro (02) 9921 4178
Partner responsible: Russell Stewart (02) 9921 4909
Our reference: RAS:VAZ 202863335

1 Part 2 of the Article 'Custody-an English law analysis' by Joanna Benjamin of Clifford Chance, published in the Butterworths Journal of International Banking and Finance Law, April 1994.

Submission 3:

1 November 2001

Mr. Malcolm Turnbull
Managed Investments Act Review
c/- Financial Markets Division
The Treasury
Langton Crescent

Dear Mr. Turnbull

Review of the Managed Investments Act 1998

Further to our letter to you dated 27 September 2001 we would like to make an additional comment on section 601FC(4) of the Managed Investments Act.

Section 601FC(4) provides that the responsible entity may only invest scheme property or keep scheme property invested in another managed investment scheme if that other scheme is registered under Chapter 5C. The restriction was originally imposed in order to prevent a registered trust being established merely as a 'shell' through which investors' funds would be invested in more flexible unregulated trusts.

Firstly, this prohibition is out of keeping with the 'level playing field' concept that underpins the Financial Services Regulation Act. This is not a prohibition that applies to companies nor to superannuation funds which can invest as they think fit.

Secondly, the prohibition is so broad that it extends to schemes that are 'managed investment schemes' even if those schemes may not be subject to Chapter 5C regulation because they come within one or more of the exceptions. Accordingly, non-regulated schemes such as wholesale schemes effectively require registration if retail schemes are to invest in them. This result would appear to be both unintended and inefficient, ultimately leading to increased costs for retail investors.

Although ASIC has given some relief from section 601FC(4) (CO 98/55), the relief is limited to certain foreign collective investment schemes (as recognised by ASIC in Policy Statement 65), pooled custody arrangements and a limited range of other funds (see Policy Statement 136).

We believe that section 601FC(4) is unduly restrictive and causes serious commercial difficulties in terms of sensibly and efficiently running managed investment schemes.

Yours sincerely

R A F Stewart

Contact: Vesna Zuro (02) 9921 4178
Partner responsible: Russell Stewart (02) 9921 4909
Our reference: RAS:VAZ 202863335




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