Understanding Managed Investment Schemes: Corporations Act Explained

A managed investment scheme, also known as a 'scheme' or 'pooled investment', is a type of financial product regulated by the Corporations Act. In a managed investment scheme, multiple investors contribute money and get an interest in the scheme. The money from different investors is pooled together and is often from hundreds or thousands of investors. A 'responsible entity', or 'fund manager', operates the scheme, and investors do not have day-to-day control over its operation. Managed investment schemes cover a wide range of arrangements and underlying assets, including cash management trusts, Australian equity schemes, international equity schemes, and agricultural schemes. The Corporations Act 2001 outlines when a managed investment scheme must be registered, and the Australian Securities and Investments Commission (ASIC) is responsible for administering the Act.

When must a managed investment scheme be registered?

A managed investment scheme (MIS) must be registered under section 601EB of the Corporations Act 2001 if it meets certain criteria.

Firstly, a managed investment scheme must be registered if it has more than 20 members. In this context, joint holders of an interest in the scheme count as a single member. Additionally, if an interest in the scheme is held on trust for a beneficiary, it is considered to be held by the beneficiary rather than the trustee if the beneficiary is entitled to a share of the trust estate or income, or if they are in a position to control the trustee.

Secondly, registration is required if the scheme was promoted by a person or their associate who is in the business of promoting managed investment schemes. Case law indicates that a person promoting a single scheme with fewer than 20 members will generally not be considered to be "in the business" of promoting such schemes.

Thirdly, a managed investment scheme must be registered if ASIC determines in writing that multiple schemes are closely related, and the total number of members across all related schemes exceeds 20.

It is important to note that some managed investment schemes may be exempt from registration. For example, if all interests in the scheme are issued to wholesale clients only, or if the scheme falls under specific exclusions, such as being a notified foreign passport fund.

What are the requirements for the responsible entity?

To register a managed investment scheme, the proposed responsible entity must meet several requirements. These include:

• Being a registered Australian public company
• Holding an Australian Financial Services (AFS) licence authorising the entity to operate the scheme (either an 'in-kind' scheme authorisation or 'named-scheme' authorisation) and provide any other relevant financial services in relation to the scheme and its underlying assets
• Having a minimum of three directors
• Having minimum net tangible assets of $50,000 or 0.5% of the value of the scheme's gross assets, up to $5 million if a custodian is appointed, otherwise $10 million is required
• Appointing custodians in some cases
• Executing and lodging a constitution, similar to a trust deed, that meets the Corporations Act requirements with ASIC
• Creating and lodging a compliance plan with ASIC, outlining the measures the responsible entity will undertake to ensure compliance with the constitution and the Corporations Act
• Creating a compliance committee if the board of directors does not consist of at least half external directors

Additionally, when registering a scheme, it is important to note that unregistered schemes are referred to as schemes with 20 or fewer members and are not promoted by a person in the business of promoting managed investment schemes. Operators of unregistered schemes must generally hold an AFS licence to issue, vary, and dispose of interests in the scheme to wholesale investors.

What are the different types of managed investment schemes?

Managed investment schemes, also known as 'schemes' or 'pooled investments', are a type of investment where multiple investors contribute money and get an interest in the scheme. The money from the different investors is then pooled together and used in a common enterprise. A 'responsible entity', or fund manager, operates the scheme, and investors have no day-to-day control over its operation. Managed investment schemes cover a wide variety of arrangements and underlying assets.

Some of the different types of managed investment schemes include:

• Cash management trusts
• Australian equity (share) schemes
• International equity schemes
• Exchange-traded funds (ETFs)
• Agricultural schemes (e.g. horticulture, aquaculture, viticulture)
• Horse-breeding and horse racing schemes
• Time-sharing schemes
• Serviced strata schemes
• Financial asset schemes
• Direct real property schemes
• Stable property trusts or syndicates
• Listed property trusts
• Primary production schemes

Managed funds are another type of managed investment scheme. Within managed funds, there are single-asset and mixed-asset or multi-sector funds. Single-asset funds invest in a single class of assets, such as shares, property, or bonds. Mixed-asset or multi-sector funds, on the other hand, invest in a range of different assets.

What is the role of ASIC in regulating managed investment schemes?

The Australian Securities and Investments Commission (ASIC) is the regulator responsible for administering the Corporations Act and the Australian Securities and Investments Commission Act 2001 (ASIC Act). These Acts outline the conduct and disclosure obligations of financial service providers, including operators of managed investment schemes.

ASIC's role in regulating managed investment schemes includes:

Undertaking proactive and reactive supervision and surveillance activities

ASIC monitors the conduct and disclosure obligations of operators to ensure compliance with the relevant Acts. This includes both proactive and reactive supervision and surveillance activities.

Enforcement action

ASIC has the power to take enforcement action in response to non-compliance with the laws it administers. This includes taking legal action and issuing fines or other penalties for non-compliance.

Assessing Australian financial service (AFS) licence applications

ASIC assesses applications for AFS licences from entities seeking to operate registered and unregistered managed investment schemes. This includes reviewing the entity's qualifications, experience, and financial stability to ensure they meet the required standards.

Assessing applications for registration of managed investment schemes

In addition to licensing, ASIC also assesses applications for the registration of managed investment schemes. This involves reviewing the scheme's structure, compliance with relevant laws, and financial viability to ensure it meets the requirements for registration.

Exercising administrative powers

ASIC has administrative powers related to AFS licences and disclosure, which it can exercise to ensure compliance with the relevant Acts. This includes the power to grant, vary, or revoke licences and to require the disclosure of information from financial service providers.

Providing guidance and policy advice

ASIC provides guidance to the financial services industry on regulatory requirements and best practices. It also advises the Australian Government on policy matters related to financial services and managed investment schemes.

Providing relief from provisions of the Corporations Act

In certain circumstances, ASIC can provide relief from specific provisions of the Corporations Act. This is typically done to ensure that managed investment schemes are regulated in a way that is appropriate for the current market environment.

Overall, ASIC plays a crucial role in regulating managed investment schemes in Australia. It ensures that operators of these schemes comply with their legal obligations, protects investors' interests, and promotes the stability and integrity of the financial markets.

What are the eligibility requirements for a managed investment trust?

A trust qualifies as a managed investment trust (MIT) if the following eligibility requirements are met for the income year in which it operates:

• The trustee is an Australian resident, or the central management and control of the trust is in Australia.
• The trust does not carry on or control an active trading business.
• The trust's investment management activities throughout the income year are carried out in Australia.
• The trust is a managed investment scheme.
• The trust meets the 'widely held' test at the time of the first fund payment.
• The trust meets the closely held restriction.
• The trust is operated or managed by an appropriately regulated entity.

The eligibility requirements are designed to ensure that an MIT is a genuine collective investment vehicle and to limit the ability of foreign residents to adopt trust structures to access concessional withholding tax rates.

The 'widely held' requirements differ depending on whether the MIT is a registered MIS that is a retail trust, a registered MIS that is a wholesale trust, or an unregistered MIS that is a wholesale trust. For example, a registered MIS that is a retail trust must be widely held if it is listed on an approved securities exchange in Australia, has at least 50 members, or has specified widely held entities that together hold more than 25% of the participation interests in the trust, with no other type of single entity holding more than 60%.

There are also restrictions on the extent to which a trust can be 'closely held'. These restrictions differ depending on whether the MIT is a registered MIS that is a retail trust or a MIS that is a wholesale trust. For instance, a registered MIS that is a retail trust must not have 20 or fewer persons holding 75% or more of the participation interests, or a foreign resident individual holding 10% or more of the participation interests.

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