Regulation of MIS
Regulation of MIS
Fiduciary duties imposed on RE and its officer
RE's Duties at General Law
The old notion of the trustee as a selfless volunteer
A unit trust deed is a contract that establishes an investment scheme
Although a unit trust is established by commercially contractual agreement between the parties, the core obligations owed by the trustee is irreducible, that is the duty of the trustees "to perform the trust honestly and in good faith for the benefits of the beneficiaries."
RE owes to the members a duty of care arising under contract, at common law and in equity. The standard of care required is that of a professional person exercising investment functions.
RE owes to the members the interlocking proscriptive duties of a fiduciary such as (1) not to obtain any unauthorised benefit from the relationship and (2) not to be in the position having conflict of interests or duties.
RE owes to the members prescriptive duties of a fiduciary including (1) the duty to act with care, skill and diligence and (2) the duty to act in good faith in the interest of the members in exercising its power.
A single party responsible for all activities and functions of the scheme. RE is the trustee for the members.
RE and its offers are subject to statutory obligations designed to prevent inherent agent problem (separation between funds and managers). These obligations purports to place members' interest above interests of RE and its officers.
Unlike a corporate entity owning duties to the fund, RE and its offers (as a unit trust) owe duties directly to the members.
The imposition of fiduciary-type duties directly on RE's officer significant depart from ordinary trust principles. An offer of a corporate trust does not owe fiduciary duties directly to the beneficiaries of the fund.
Officers' Duties to Members
Under s 601FD(1), Officers shall prioritise the interests of members over the interests of RE.
Under s 601FE(1), not to make improper use their positions or information
Obligations to override any conflicting duties. Intentional or reckless is a criminal offence.
Under d 8 of p 7.6, wrongdoing officer is disqualified from acting as a company director or banned from providing financial service in the future.
RE's Duties to Members
Section 601FC(1) imposes duties of honesty, care, diligence and loyalty.
Duties to comply with law and documents such as (1) the constitution meets 601GA's and 601GB's requirements, (2) compliance plan meets 601HA's requirements, (3) compliance with compliance plan (4) clearly identified and separately held scheme's property, (5) appropriate valuation of property, (6) payment out of scheme's property complies with the constitution.
Under s 912A, RE is subject to obligation to do all things necessary to conduct their business efficiently, honestly, and fairly and to manage conflicts of interests.
ASIC can exercise its administrative power and impose conditions on RE's license or suspend or cancel its license.
Under P 9.4B, ASIC can take enforcement action for breach of civil penalty provision (601FC).
Court may order RE to compensate the members.
Members suffer loss or damage because of the contravention of Chapter 5C have standing to bring civil proceedings under s 1325 for recovery against RE and anyone involved in the contravention.
Investor "self-help" mechanism
RE is required to produce PDS
RE must produce separate financial reports and directors' reports for each registered fund, generally half-yearly.
RE must provide each fund member with personalised statement for each reporting period containing information about transactions, performance of the fund and the fee and expenses incurred.
RE is subject to a continuous disclosure obligation to disclose not generally available information.
A member may apply to a Court for an order allowing for inspection of the fund's books.
A member may apply to inspect the register of member of a registered MIS.
amend the constitution
approve the appointment of new RE following the retirement of incumbent RE
veto certain transactions
initiate winding up of RE
Recover under ordinary equitable principles against a RE in breach of trust
Has standing to bring civiil proceedings to recover loss or damage caused by a contravention of CA .
A range of statutory remedies is available in respect of incorrect or inadequate disclosure including statutory rights to recover loss/damage caused by failure to comply with RE's mandatory disclosure requirements or any misleading or deceptive conducts.
Unlike the members of a company, individual fund's members do not have a general statutory remedy in respect of conduct that is oppressive, unfairly discriminatory, unfairly prejudicial or contrary to the interests of members as a whole.
Members have only withdrawal rights provided in the constitution.
Chapter 5C requires that the redemption of interest is suspended in the conditions of illiquidity.
Limited roles of independent party to monitor and oversee RE's conduct of fund
Neither ASIC oversight nor audit of the compliance plan real-time monitoring of fund transactions.
Compliance Committee is not required when the board of RE has a majority of external directors.
Under s 601JA(1), the establish of Compliance Committee is mandatory unless the board of RE has a majority of external directors. The Compliance Committee at least has 3 members and the majority of them are external.
Under 601JC, the Compliance Committee shall:
Monitor to what extend RE complies with the compliance plan and report findings to RE.
Report to RE any breach of CA and the scheme's constitution.
Report to ASIC if RE does not take appropriate action to deal with the matter so reported.
Periodically assess the adequacy of the compliance plan and report to RE on the assessment and make recommendation for improvements.
The members of the compliance committee are subject to statutory duties of honesty, care and loyalty. A contravention by a member of the compliance committee carries similar consequences to those breach of duty by RE's officers.
Under s 601FF, ASIC has extensive powers to request information and conduct surveillance checks. However, ASIC does not ongoing-inspection; instead it uses risk-based approach to allocate its resources that are largely reactive to complaints, breach reports, and trend data.
ASIC has ability to conduct surveillance checks, to direct changes to the compliance plan, to accept enforceable undertakings, to remove license, to appoint temporary RE, to wind up and deregister the scheme, to enforce civil penalty provisions, to seek injunctions and take civil action under s 5 of ASIC Act.
The independent trustee requirement is replaced by the requirement for a formal written compliance plan, adherence to which was to be monitored by external parties.
ASIC's enforcement actions to be investigative or corrective rather than preventative.
ASIC cannot regulate commercial feature of the fund and the failure of the fund may result from a flawed investment strategy or business model, rather than from misconduct or mismanagement.
Affiliation with major financial institutions may suggest a lower level of compliance risk.
Compliance Plan Audit
RE's compliance with the compliance plan must be audited annually by a registered company auditor and report RE whether RE has complied with the plan and whether the plan meets the requirement of Part 5C.4.
Notify ASIC any contravention of CA. However, auditors do not engage in a systematic search for all possible contraventions of CA.
Regulatory and Legal Framework
Scheme Registration Requirement
(Legal structure & governance regime)
Mandatory pre-sale & on-going reporting and disclosure requirement
AFS Licensing Requirement
(who can operate MIS?)
Separation of roles of funds (Trustee) and manager [5C]
Part V: Independent oversight roles. The extent to which external monitoring by independent trustee or depositary on RE's management of fund
Part VI: Right conferred on investors such as withdrawal rights, voting rights, rights to remove and replace RE, enforcement right and information rights
Part IV: Fiduciary duties imposed on RE and its directors to overcome principal-agent divide that results from the separation of funds and managers