Category: News

Sundaraj & Ker provides a regulatory update for its clients that are public companies and large proprietary companies. Please see link below.

Read here.

When registering a security interest on the Personal Property Securities Register, it is important to have regard to the time limits set out in section 588FL of the Corporations Act 2001 (Cth).

If it is discovered that time limits have not been met or mistakes have been made in the registration, practitioners should act quickly to properly register those interests and seek an extension of time under section 588FM of the Corporations Act.

Read article here.

Introduction

Amendments to the whistleblower protection regime under the Corporations Act 2001 (Cth) (Corporations Act) recently took effect on 1 July 2019. The purpose of these amendments is to expand the protections for certain whistleblowers in Australia’s corporate sector and encourage more disclosures of wrongdoing.

The amendments also require certain entities to have a whistleblower policy and make this available to its officers and employees. ASIC has provided draft guidance on what it expects whistleblower policies to include and has sought consultation on this proposed guidance.

This paper sets out a summary of the new whistleblower protection regime and discusses ASIC’s proposed guidance in relation to whistleblower policies.

Corporations Act amendments

The revised whistleblower protection regime in Part 9.4AAA of the Corporations Act sets out when an individual (known as the ‘discloser’) qualifies for protection under the regime.

At a high level, to qualify for protection under the regime, the discloser must:

1. be an eligible whistleblower in relation to a regulated entity;
2. make the disclosure to a regulator or an eligible recipient; and
3. the disclosure includes information where there are reasonable grounds to suspect that the information concerns:
4. misconduct or an improper state of affairs in relation to the company or entity (or a related body corporate); or
5. certain illegal conduct.

Please refer to the table of definitions at the end of this article.

The implications of these broad definitions are that persons outside of the entity (like contractors, consultants, auditors or lawyers, as well as any of their relatives) are able to make disclosures and receive the protections under this revised regime.

There are also limited situations where an eligible whistleblower can receive protection under this regime where an emergency or public interest disclosure is made to a journalist or a member of Parliament (of any of the Commonwealth, a State or Territory) where there has been a prior disclosure to a regulator. Emergency disclosures can relate to a substantial and imminent danger to the health or safety of one or more persons or to the natural environment.

It should be noted that work-related grievances such as interpersonal conflicts, employment matters, or matters which have implications for the discloser personally, do not form part of this regime.

Protections for whistleblowers under the Corporations Act

As part of the revised regime, the protections that eligible whistleblowers have when making disclosures include:

• confidentiality of the identity of the discloser;
• immunity from civil, criminal or administrative liability (including disciplinary actions) for making the disclosure. This includes immunity from contractual and other remedies (including confidentiality) which may be exercised against the discloser; and
• such disclosures which qualify for protection are inadmissible in criminal proceedings (other than proceedings in respect of false disclosures); and
• rights to compensation for detrimental conduct (actual or threatened) from their disclosure. Detrimental conduct is defined broadly, and examples include dismissal, injury (including psychological harm), damage to property, reputation, demotion or discrimination.

The protection of the identity of the disclosure is a paramount obligation that arises under these new provisions. Entities subject to this new whistleblower regime will need to ensure that they have processes in place to protect the confidentiality of the discloser. Any person that has obtained the identity of the whistleblower or identifying information are caught by these provisions. A breach of these provisions is a criminal offence and may also incur civil penalties.

As an example, if a whistleblower makes a disclosure to a director of a company, any internal investigations that are conducted using the disclosed information must be de-identified so that the whistleblower remains anonymous. This includes where the information is given to the board or senior management. If individuals involved in investigating the disclosed matters inadvertently disclose information that may identify the whistleblower, this will be a breach of the whistleblower regime.

There are some limited exceptions where the identity of the whistleblower can be disclosed, such as disclosures to a regulator, to a lawyer for legal advice, where the discloser consents, or where reasonably necessary (other than the identity of the discloser) to conduct an internal investigation.

ASIC’s proposed guidance on whistleblower policies

In addition to the expanded protections set out above, the new amendments require public, large proprietary and superannuation trustees to have a whistleblower policy in place by 1 January 2020. The policy should set out the whistleblower protection regime, how disclosures can be made as well as how the company will investigate disclosures and protect whistleblowers.

Small proprietary companies do not need a whistleblower policy but are still caught under the regime (discussed above) in relation to protection of whistleblowers.

In addition to the legal requirements for whistleblower policies under the Corporations Act, ASIC has set out in its draft guidance that it expects policies to include the following:

• explain the purpose of its whistleblower policy;
• set out the criteria for a discloser to qualify for protection as a whistleblower under the Corporations Act;
• explain that disclosures that do not qualify for protection under the Corporations Act are not covered by its whistleblower policy;
• explain that disclosures that relate solely to personal work-related grievances do not fall under its whistleblower policy;
• explain the circumstances when a disclosure about a personal work-related grievance qualifies for protection;
• outline the steps the entity will take after it receives a disclosure and explain that each disclosure will be assessed by the entity to determine whether it falls within its whistleblower policy; and
• ensure the confidentiality of its disclosure handling and investigation process.

The draft guidance also includes good practice guidance for entities to include in whistleblower policies such as examples of disclosures that may qualify for protection which relate specifically to the entity’s business operations, how disclosures that are not otherwise covered by the revised whistleblower protections (e.g. personal work-related grievances) may be dealt with by the entity, and how an entity can protect a discloser’s identity in investigations. Although this guidance is non-mandatory, it provides ways in which entities can give full effect to the policy of the revised whistleblower protections.

What entities need to do

All companies, banks, insurers and superannuation entities should be aware of the expanded whistleblower protections which are now in force. These entities should have internal processes in place to ensure that it is able to comply with this updated regime, particularly with the protection of any potential disclosers’ identities.

From 1 January 2020, all public companies, large proprietary companies and superannuation trustees must have a whistleblower policy in place and make it available to their officers and employees by that date. It is unlikely that existing whistleblower policies will meet these updated requirements.

ASIC’s consultation on their proposed guidance on whistleblower policies closed on 18 September 2019 and it is expected that ASIC will release its final regulatory guide in October 2019. In the meantime, entities should start preparing a whistleblower policy in anticipation of final guidance being released by ASIC.

For further information, please contact Anand Sundaraj, Bob Ker, Sean Coleman or Johnson Pang.

Eligible Whistleblower	An eligible whistleblower includes any of the following: – an employee or officer; – an associate of the entity (within its meaning under the Corporations Act); – an independent contractor who supplies goods or services to the entity, whether paid or unpaid (or an employee of that independent contractor); – a superannuation entity’s trustee, custodian or investment manager (or any of their employees, officers or independent contractors); and – relatives and dependants of any of the above
Regulated Entity	A regulated entity includes any of the following: – all companies (proprietary or public); – banks; – insurers; and – superannuation entities.
Eligible Recipient	An eligible recipient includes any of the following: – an officer or senior manager; – an auditor or member of the audit team; and – a trustee (or a director of a corporate trustee) of a superannuation entity
Regulator	– Australian Securities & Investments Commission (ASIC); – Australian Prudential Regulation Authority (APRA); or – Certain Commonwealth authorities later prescribed for these purposes
Illegal Conduct	Conduct that constitutes offences under any of the following: – the Corporations Act; – the ASIC Act; – the Banking Act; – the Financial Sector (Collection of Data) Act; – the Insurance Act; – the Life Insurance Act; – the National Consumer Credit Protection Act; – the Superannuation Industry (Supervision) Act; or – instruments made under any of the Acts above. Conduct that: – constitutes an offence against any other law of the Commonwealth that is punishable by imprisonment

The Australian Securities Exchange recently released a public consultation paper setting our a significant number of proposed amendments to the ASX Listing Rules: “Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules: 28 November 2018”

The proposed amendments are wide-ranging and, if implemented, will affect both listed entities and entities seeking admission.  The consultation process ends on 1 March 2019 and the reforms which result from the process are expected to take effect on 1 July 2019.

We welcome ASX’s decision to improve and streamline and clarify the application of its rules.

This paper sets out a summary of the proposed amendments in 8 key categories.

1. Improving market disclosures and other market integrity measures
Enhanced quarterly reporting	A new rule 4.7C is proposed that will require start-up entities that currently lodge an Appendix 4C (quarterly cash flow report) to also lodge a quarterly activities report with ASX, similar to the one required by mining exploration entities and oil and gas exploration entities. This amendment will affect any entity that has listed under the ‘assets test’.  Currently, such entities are only required to provide quarterly updates on their cash flows.This amendment will provide a more robust disclosure framework to require the provision of regular updates on the business including: if the quarter is included in a period covered by a “use of funds” statement in the entity’s listing prospectus or PDS, a comparison of its actual expenditure since the date of its admission to the official list against the expenditure estimated in that “use of funds” statement and an explanation of any material variances; if the quarter is included in a period covered by an expenditure program provided to under rule 1.3.2(b), a comparison of its actual expenditure since the date of its admission to the official list against the expenditure estimated in that expenditure program and an explanation of any material variances; if any category of expenditure in its quarterly cash flow report is materially different from the estimated cash outflows for the next quarter shown in its quarterly cash flow report for the preceding quarter, an explanation of why that is so; and a description of, and an explanation for, any payments to a related party.
Disclosure by listed investment entities of their NTA backing	For listed investment companies (LICs) and listed investment trusts (LITs): certain technical amendments are proposed to rule 19.12 which relate to the application of the relevant Accounting Standards to clarify their intended operation; proposed amendments to rule 4.10.20 to require a LIC or LIT to disclose in its annual report: the values of its individual investments (including derivatives); the level 1, level 2 and level 3 inputs used to value its investments in accordance with Australian Accounting Standard AASB 13 Fair Value Measurement; and the NTA backing of its quoted securities at the beginning and end of the reporting period and an explanation of any change therein over that period; and proposed amendments to rule 4.12 to require a LIC/LIT to disclose its monthly NTA backing as soon as that information is available and, in any event, not later than 14 days after the end of that month. Currently LIC/LITs are permitted to wait for 14 days after month end to disclose this information, even though it may be ready earlier.
Disclosure of closure dates for the receipt of director nominations.	Rule 3.13.1 currently provides that if directors may be elected at a meeting of security holders, the entity must tell ASX the date of the meeting at least 5 business days before the closing date for the receipt of nominations. However, the rule currently only requires a listed entity to disclose the intended date of the meeting and does not require any specific reference to the closing date for the receipt of such nominations. ASX is proposing clarification amendments to the scope and operation of this rule.ASX is also proposing to amend the rule 3.13.1 to state that the failure to give such notice does not invalidate the meeting or the election of any director at the meeting.  This is because the rule currently does not specify the consequence if a listed entity fails to give notice of the date of a meeting required under that rule.  Security holders have previously argued that the meeting and the election of directors at the meeting should be regarded as invalid or that the meeting should be postponed until the requisite notice has been given. ASX does not consider either of these outcomes to be appropriate.
Disclosure of voting results at meetings of security holders	Proposed amendments to rule 3.13.2 to standardise the disclosure of voting results at meetings of security holders.
Disclosure of underwriting agreements	Proposed amendments to various rules to achieve consistent disclosure of the key features of underwriting agreements, including the name of the underwriter, the extent of the underwriting, the fee or commission payable, and a summary of the material circumstances where the underwriter has the right to avoid or change its obligations.
Good fame and character	Proposed expansion of the current “good fame and character” requirement in the conditions for ASX admission in rule 1.1, condition 20 to cover an entity’s CEO or proposed CEO as well as its directors and proposed directors.
Persons responsible for communication with ASX on listing rule issues	Amendments to require the persons appointed by listed entities to be responsible for communication with ASX on listing rule issues to have demonstrated an adequate level of knowledge of the ASX Listing Rules.  This will involve a person being appointed to communicate with ASX after 1 July 2019 being required to have completed an approved listing rule compliance course.ASX will make an approved education course and examination available online on the ASX website for these purposes free of charge. The course is expected to cover key obligations of listed entities under chapters 3, 4, 7, 10, 11, 12, 14 and 15 of the ASX Listing Rules.
2. Improving market disclosures and other market integrity measures
Announcing issues of securities and seeking their quotation	Simplifying and rationalising the current process for announcing issues of securities and applying for their quotation via the lodgement of an Appendix 3B.Currently, announcing an issue and applying for quotation of securities are dealt with in the one form (i.e. an Appendix 3B). Currently, the Appendix 3B is a static form that attempts to extract data for all of the different types of issues an entity may undertake which makes the form much longer and more complicated than it needs to be in the majority of cases. ASX is proposing to amend the ASX Listing Rules to deal with announcements of new issues and applications for quotation of securities in two separate forms: an Appendix 3B for the notification of a proposed issue; and an Appendix 2A to apply for the quotation of securities. Both the Appendix 2A and Appendix 3B are proposed to be “smart” forms, tailored for the various types of issues an entity can make.
The additional 10% placement capacity in rule 7.1A	Implementing the changes foreshadowed in a recent consultation paper relating to an issuer’s additional 10% placement capacity under rule 7.1A: Strengthening Australia’s equity capital markets: ASX Listing Rule 7.1A after three yearsand some other changes to simplify and rationalise aspects of rule 7.1A
Issues of equity securities without security holder approval	Proposed amendments to rationalise the lists of equity issues that can be made without security holder approval under rules 7.2, 7.6, 7.9 and 10.12 and making them consistent.
Notices of meeting	Proposed amendments to expand and rationalise the requirements for notices of meetings in rules 7.3, 7.3A, 7.5 and certain new rules.
Employee incentive schemes	Proposed amendments to rationalise the rules dealing with the approval of issues to directors and their associates under employee incentive schemes by merging rules 10.15 and 10.15A into the one rule.
Voting exclusions	Proposed amendments the list of voting exclusions in the table in rule 14.11.1 for greater consistency and to give greater certainty as to which parties must have their votes excluded.
3. Efficiency measures
Escrow	Streamlining the escrow regime in chapter 9 and Appendices 9A and 9B that applies to entities seeking admission under the “assets test” to substantially reduce the administrative burden for applicants seeking to list on ASX.  ASX recognises the administrative burden of having to obtain (in some cases) hundreds of signed restriction agreements and issuers being exposed to “greenmail” from security holders who hold out from signing such agreements.ASX is proposing to introduce a two-tier escrow regime where ASX can (and will) require certain more significant holders of restricted securities and their controllers to execute a formal escrow agreement in the form of Appendix 9A, as is currently the case. It is anticipated that ASX it will impose this requirement on related parties, promoters, substantial holders, service providers and their associates.
Eliminating the need to apply for a number of standard waivers	ASX proposes to amend a number of rules to remove the need for listed entities to apply for standard waivers of those rules.
4. Updating the timetables for corporate actions
Timetable revisions	ASX is proposing to update a number of the timetables set out in the appendices for corporate actions including: dividends and distributions; interest payment dates; option expiry notices; conversion of convertible securities; opening dates for pro rata issues; equal access buy-backs; and security purchase plans.
5. Monitoring and enforcing compliance with the ASX Listing Rules
Additional powers to monitor and enforce compliance	ASX is proposing a number of rule changes to enhance its powers to operate the market and to monitor and enforce compliance with the ASX Listing Rules
6. Correcting gaps or errors in the listing rules
Corrections	ASX is proposing a number of rule changes to correct gaps or errors in the listing rules including in relation to: time limits for quotation of securities; employee incentive scheme issues; rule 7.1 and 7.1A placement capacities; ratifying agreements to issue securities; agreements to acquire or dispose of substantial assets; substantial holder notifications.
7. General drafting improvements
Changes for clarity	ASX is proposing ASX is proposing a number of minor drafting changes to the listing rules to improve their clarity.
8. New and amended guidance
New guidance notes	ASX is proposing new or amended guidance notes in relation to: GN 1 applying for admission; GN 11 restricted securities and voluntary escrow; GN 12 significant changes to activities; GN 13 spin-outs of major assets; GN 21 the restrictions on issuing equity securities in chapter 7 of the ASX Listing Rules; GN 24 acquisitions and disposals of substantial assets involving persons in a position of influence; GN 25 issues of equity securities to persons in a position of influence; and GN 33 removal of entities from the ASX Official List.

 

For further information please contact Anand Sundaraj.

The crowd-sourced funding (CSF) regime has recently been amended to expand its application to proprietary companies. The CSF regime was established to facilitate access to fundraising for small businesses and start-ups which can often have difficulty accessing traditional public fundraising methods.  However, the CSF regime was initially only accessible to unlisted public companies, which:

• limited its scope and potential to more mature businesses who would be able to meet the higher governance and reporting requirements for public companies required under the Corporations Act 2001 (Cth); and
• made it difficult for small businesses and start-ups, which are often proprietary companies, to access this method of funding as it would require introducing a public company to their structure either by conversion or top-hatting.

The regime was recently amended to permit eligible proprietary companies to participate, with some additional protections for investors being introduced over the ordinary regime for proprietary companies by the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth). In line with this change, ASIC has released its new Regulatory Guide 261 “Crowd-sourced funding: Guide for companies” and Regulatory Guide 262 “Crowd-sourced funding: Guide for intermediaries” setting out ASIC’s expectations for companies seeking to crowd source capital and the platforms which facilitate those raisings respectively.

A high-level snapshot of the features of the CSF regime before and after the extension to proprietary companies to date is summarised in the table below.

 

Feature	Pre-amendment	Post-amendment
Company type and additional obligations	Only unlisted public companies had access to the CSF regime (proprietary companies had to convert to public companies or top-hat with a public company if they wanted to access the regime).	Proprietary companies who meet certain eligibility criteria (including at least two directors) have access to the CSF regime. At least one of the Company’s directors must ordinarily reside in Australia. CSF shareholders will not count towards the 50-member proprietary company limit.
Company size	Unlisted public companies with less than $25 million in consolidated gross assets and annual revenue may seek access to the regime.	$25 million assets/revenue threshold is now extended to proprietary companies.
Capital raising	Companies can raise up to $5 million in any 12-month period through an AFS licensed intermediary by offering fully paid ordinary shares.	$5 million capital raising limit is now extended to proprietary companies.
Additional obligations to retail investors	Companies must ensure that retail clients only invest up to $10,000 (which is a “per company” limit) in any 12-month period and are provided with a 5-day cooling-off period within which to withdraw an application.	The obligations to retail investors are extended to proprietary companies.
Offer disclosure requirements	A CSF offer document must contain certain risk warnings and information about the offeror, the offer and investor rights, be presented in a clear, concise and effective manner and not be misleading or deceptive. It must be displayed on the platform (such as a website) of the CSF intermediary who holds an Australian financial services (AFS) licence authorising the intermediary to provide a CSF service.	The offer document disclosure requirements extend to proprietary companies, with the addition of extra content requirements such as the inclusion of a description of the key provisions of any shareholders agreement and any right of directors to refuse to register a transfer of shares.
Reporting obligations	Companies had to have their financial reports audited where more than $1 million was raised from CSF offers.	Companies now require audited financial reports where more than $3 million is raised from CSF offers. Proprietary companies which raise capital under the CSF regime are required to prepare annual financial and directors’ reports.
Interaction with takeover and related party transaction provisions of the Corporations Act	Public companies are subject to the Corporations Act Chapter 2E related party provisions and the takeovers rules in Chapter 6.	Proprietary and public companies which raise capital under the CSF regime are subject to the Corporations Act Chapter 2E related party provisions. Proprietary companies with CSF shareholders are exempt from the takeovers rules in Chapter 6 of the Corporations Act if conditions prescribed in the Corporations Regulations (namely that the company’s constitution includes exit mechanics which protect those CSF shareholders) are satisfied. Public companies remain subject to the Chapter 6 takeover rules.

 

The expansion of the CSF regime to proprietary companies should be a welcome addition for small business and start-ups who either find it difficult to access capital through loans, angel or venture capital investors and other traditional means, or who just prefer to raise capital from the public without the need for a full-blown prospectus.

For further information please contact Anand Sundaraj, Sean Coleman or Ashli Bergmann.

ASIC recently released its regular half-yearly update on the regulation of corporate finance: Report 589. The regulator has identified the promotion of initial public offerings (IPOs) as a focus area for the second half of calendar 2019.

The regulator’s key concerns regarding IPO promotion are summarised below.

• For “larger” IPOs:  ASIC chided issuers and promoters for leaking investor education (sometimes known as pre-IPO research) to the media prior to lodgement of the prospectus.  ASIC noted its concern that the media had published information gleaned from research analyst reports on upcoming IPOs, including analyst valuations and forecasts.  Commenting that these leaks appeared be aimed at promoting the relevant IPOs, the regulator expressed apprehension that such information may be misleading for retail investors especially in circumstances where the valuations and/or forecasts were not included in the prospectus.  ASIC said that they may require issuers caught in these circumstances to publish a retraction of such information.
• For “smaller” IPOs:  issuers were reminded not to include potentially misleading information in their advertising and promotional materials.  One company that had been required by ASIC to remove misleading statements from their prospectus was later caught publishing those same misleading statements in advertising and promotional material.  Had the relevant IPO not been withdrawn, ASIC said that it was prepared to issue an order requiring the company to publish a retraction.
• For “financial services” industry IPOs:  ASIC has placed an emphasis on the disclosure of the specific risks encountered within the banking, superannuation and financial services industry. As an example of the kind of scrutiny it would apply to the industry, ASIC highlighted two cases:
  • the first, relating to an issuer providing inadequate disclosure of risks associated with a wealth management company’s vertical integration model; and
  • the second, relating to a credit provider who withdrew their IPO after discussions with ASIC about its loan agreements.  Although not named, this was clearly a reference to Prospa who withdrew its IPO after the regulator expressed significant concerns about unfair contract terms in their business loan contracts.

• For IPOs with “cornerstone investors”:  ASIC expressed concern that statements concerning pre-commitment by institutional investors may be influential to retail investors and should be made with care.  In ASIC’s view, such statements could be misleading and/or cause market integrity issues. Although no specific case studies were provided by the regulator, ASIC said that issues that it may consider include:
  • the nature of the pre-commitment (for example, whether it is binding or a statement of intention, and whether it is conditional and what those conditions are);
  • the price at which the institutional investor has made their commitment; and
  • where the institutional investor is effectively acting as an underwriter, whether any fees or interest they will receive have been disclosed.

For further information please contact Anand Sundaraj.

Recently, we released an article introducing the Federal Government’s proposal of a new corporate collective investment vehicle (CCIV) scheme which aims to create a new form of investment vehicle similar to corporate investment vehicles used overseas.

Since our article was released, the Federal Government has released the third tranche of legislation (Third Tranche) which sets out:

1. independence requirements for depositaries of a retail CCIV;
2. external administration procedures for a sub-fund of a CCIV;
3. interaction with takeovers, compulsory acquisitions and buy-outs, disclosure and fundraising laws under the Corporations Act 2001(Cth) (Corporations Act);
4. miscellaneous amendments to the Corporations Act, ASIC Act and Personal Property Securities Act to ensure that the new laws work appropriately.

Independence requirements for depositaries

Retail CCIVs must have an Australian public company that acts as a depositary for the CCIV. The depositary must have an AFS licence and holds the assets of the CCIV on trust. The Third Tranche provides three independence requirements for depositaries being:

• a structural independence requirement that separates the depositary from the corporate director or a person that makes investment decisions for the CCIV;
• voting/control thresholds where the depositary must not hold more than 20% of voting power in the corporate director of the CCIV; and
• independent director requirements where directors on the board of the depositary cannot be on the board of the corporate director of the CCIV. Where there are less than 6 directors on the board of the depositary, common directors are prohibited. Where there are 6 or more directors on the board of the depositary, only one common director may sit on both boards.

A depositary must satisfy all of these requirements to be considered independent.

External administration

The Third Tranche introduces concepts of interpretation to “translate” the existing parts of the Corporations Act relating to external administration (eg. schemes of arrangement and reconstructions, receivership and liquidation provisions) to allow the CCIV provisions to operate effectively.

In a scheme of arrangement or reconstruction, the translation rules allow the sub-funds (and the underlying property) within a CCIV to be re-arranged or combined. In a receivership scenario, receivers are taken to be appointed for each sub-fund separately (keeping in line with the broad principle that each sub-fund within a CCIV is to be kept separate). In a winding up scenario, creditors (such as those serving statutory demands) must specify the sub-fund or sub-funds to which the debt relates (and if relating to multiple sub-funds, the proportion of the debt). Liquidators are also given powers to deal with the property of the sub-fund in which they are appointed (not the whole CCIV).

Takeovers, compulsory acquisitions and buy-outs, disclosure and fundraising

The takeovers, compulsory acquisitions and buy-out rules in the Corporations Act do not apply to CCIVs. The Takeovers Panel does not have jurisdiction in relation to a takeover of a CCIV or the acquisition of a relevant interest in a CCIV. However, where the CCIV is the bidder in a takeover then standard Corporations Act provisions apply.

In terms of disclosure, CCIVs are subject to the PDS disclosure regime as modified by the second tranche of draft legislation relating to CCIVs by the Federal Government.

Conclusion

The Third Tranche of legislation was released for consultation on 12 October 2018 and the consultation period closed on 26 October 2018. We will continue to keep our clients updated of these developments however it may be a while before recommendations from submissions and amended draft legislation are released.

For further information please contact Anand Sundaraj, Jon Swain, Sean Coleman or Johnson Pang.

For years, wholesale fund managers have spent time explaining the trust and managed investment scheme (MIS) structures to foreign investors from either civil law jurisdictions or countries where trusts are not widely used. Following the Johnson Report which recommended policy changes to improve the performance of Australia’s financial sector internationally, the Federal Government has introduced draft legislation which proposes a new corporate collective investment vehicle (CCIV) scheme which is similar to investment vehicles currently used overseas (such as the UK’s open-ended investment company or OEIC) and better understood by foreign investors.

What is a CCIV?

The key features of a CCIV are outlined below.

1. The CCIV will be a company limited by shares with its own legal identity and regulated by the Corporations Act. It will be operated by a sole corporate director that is a public company which holds an Australian financial services (AFS) license authorising it to operate a CCIV. The corporate director of a CCIV will play a similar role to that of a responsible entity in a MIS.
2. A CCIV will be incorporated as retail or wholesale and both must be registered with ASIC. A CCIV that acts for one or more retail clients will be subject to a more comprehensive regulatory framework than a wholesale CCIV. In particular, a retail CCIV must have an Australian public company depositary with an AFS licence authorising it to act as a depositary, where it holds assets on trust for the CCIV.
3. All assets and liabilities of a CCIV must be allocated to one or more sub-funds of the CCIV, each of which will need to be registered with ASIC. The operation of each sub-fund is strictly segregated from the operation of any of the other sub-funds. From an insolvency perspective, this means that the assets of one sub-fund will not be able to be applied to meet the liabilities of another sub-fund.
4. The government has proposed that the Income Tax Assessment Act be amended to align the tax treatment of CCIVs with that of MISs. This would mean that CCIVs are limited to passive investment activities (such as investments in property, shares or bonds).

Objectives of the CCIV regime

Issues raised with the traditional trust and MIS structure as compared to other international investment vehicles include the fact that these structures are not separate legal entities, are not governed by a standard insolvency regime and are regulated by both corporations and trust laws. This gives rise to difficulties in explaining this regime to foreign investors who are accustomed to corporate-based rather than trust-based investment structures.

The new legislation aims to provide a simpler regulatory regime and a structure that overseas investors are more comfortable with, a coherent solvency regime, and tax neutrality for investors. It will also aim to facilitate migration from the MIS regime to the CCIV regime, where possible.

Implementation

It is currently uncertain when the CCIV legislation will be implemented. The initial exposure draft legislation was released in August 2017, with a first draft of the revised bill released for further public consultation in two tranches in June and July of this year. Submissions closed in mid-August and many highlighted areas on which further clarity is required including governance, responsibility and accountability of the corporate director as well as how MISs will migrate to the new structure.

While the overall aim may be to provide a simpler and more easily understood collective investment vehicle, the legislative changes required to establish this, and the additional guidance being developed by ASIC to assist with regulation of the new CCIV are relatively complex. It may still be some time before the new vehicle gets onto the road.

We will continue to keep our clients updated of developments to the proposed CCIV framework.

For further information please contact Anand Sundaraj or Jon Swain.

On 31 May, ASIC released guidance to regarding the quality of financial report information that would be expected of companies in the lead up to the 2017 financial reporting season. In the release, ASIC continued to highlight the need for companies to include useful and meaningful financial information, and urged companies to avoid the implementation of unrealistic assumptions in calculating the value of assets or inappropriate approaches in areas such as revenue recognition.

A full version of ASIC’s release can be found here: ASIC calls on preparers to focus on the quality of financial report information.

The role of directors and management

Directors have a critical role, as they are primarily responsible for the quality of the financial report, and ensuring that management produces accurate financial information. It is essential that companies employ appropriate processes and maintain sufficient records to support the information provided in the financial report, rather than simply relying on verification by independent auditors.

ASIC emphasised that while they do not expect directors to be accounting experts, they should continually seek advice surrounding the accounting treatments chosen and if appropriate, challenge the accounting estimates produced in the financial report – particularly if such treatments and estimates vary from their understanding of the arrangement.

This process of the directors taking an active role in ensuring that the information is supported by appropriate analysis and documentation will enhance the quality of financial information, as it will allow auditors to focus on providing independent financial assurance on the financial report.

New accounting standards

Subject to transitional arrangements, new accounting standards on revenue and financial instrument valuation will come into force on 30 June 2017. It is essential that directors and management plan for these new standards, and inform investors of the potential impact of the new standards on reported results. Disclosure of this impact can take many forms, but ASIC suggested in their release that this could take place in the notes to the financial report.

Enhanced audit reports

The auditors of listed entities are required to issue enhanced audit reports, which are specific to the circumstances of the company. The reports must outline the key matters that required significant attention in performing the audit. It is important that auditors describe these matters in a clear and understandable way, in order to cater for the broad audience of investors, some of whom would not have a significant understanding of general financial and auditing principles.

Material disclosures

ASIC warned that their surveillance continues to focus on material disclosures of information useful to investors, such as significant accounting policy choices and assumptions supporting accounting estimates.

Client monies

AFSL holders have a responsibility to ensure that client monies are maintained in separate, designated trust bank accounts and are utilised in accordance with both client instructions and the Corporations Act. ASIC reminded auditors that any breaches in the handling of client monies must be reported to ASIC.

Operating and financial review of listed companies

Listed companies should disclose information on any matters that may have a material impact on the future financial position of the entity. ASIC cited the possible impact from climate change and cyber security considerations.

If you require further information about ASIC’s recommendations and how they may affect your business, please contact Anand Sundaraj.