Executive summary
If you are adopting or drafting a constitution for a registered Managed Investment Scheme (MIS) you need to take care.
ASIC will request amendments to any deficient proposed constitution and will not register a MIS until it is satisfied that the constitution meets the Corporations Act requirements.
ASIC has recently identified common issues that arise with proposed MIS constitutions. In this article, we provide several tips for drafting an MIS constitution, in order to avoid these pitfalls.
1. Know the basics
A constitution of a managed investment scheme (scheme) that is registered with ASIC must be a legally enforceable document between the responsible entity and members that sets out some or all of the rights, duties and liabilities of the responsible entity in its operation of the scheme.1
The constitution of a registered scheme must make adequate provision for, or specify, certain prescribed matters2, including:
- the consideration to acquire and dispose of an interest in the scheme;
- the powers and rights of the responsible entity, including:
- for making investments, borrowing or dealing with scheme property; and
- to be paid fees or be indemnified out of scheme property.
- the method for dealing with complaints about the scheme;
- any rights of members to withdraw from the scheme; and
- winding up the scheme.
2. Be careful when defining “member”
Under the Corporations Act, a member is defined as a person who holds an interest in the scheme.
A common pitfall is to use a narrower definition in the constitution, for example, when defining a member as a person who is listed in the scheme register.
A restricted definition can mean that people who would fall within the definition of member under the Corporations Act, but outside the constitution, lose rights they should have if a complaint or withdrawal is made.
In such cases, ASIC will ask for the constitution to be amended so that either:
- the definition accords with the Corporations Act definition; or
- the provisions relating to complaints or withdrawals apply to all members who would fall within the Corporations Act definition.
3. Only reimburse the responsible entity for fees and expenses in the proper performance of its duties
If the responsible entity has a right to be paid fees or expenses out of scheme property, that right must be subject to the proper performance of its duties.
It is not appropriate to make the right subject to the proper performance of its duties or powers.
If the constitution is drafted in this way, ASIC will ask that the provisions are amended to either:
- remove the reference to the proper performance of the entity’s powers; or
- be expressed so that the provision allows the right to be exercised for any of the responsible entity’s powers in the proper performance of its duties.
4. Be specific about how fees are calculated
The constitution must clearly specify all variables surrounding how a fee payable to a responsible entity is to be calculated, such as:
- when it accrues;
- the performance to which it relates; and
- factors affecting how much is payable.
Uncertain timing variables and performance periods, (for example, where phrases are used such as “such other times as determined by the trustee”, “at least 30 days” or “from time to time”) will attract scrutiny and require amendment.
5. Have clear and objective member withdrawal procedures
The constitution should explain how a member may withdraw from the scheme.
The withdrawal procedures must not leave too much to the responsible entity’s discretion, for example, the imposition and satisfaction of any pre conditions for members to exercise their right to withdraw, or the form of the withdrawal request. The constitution must contain clear steps that members need to take and how members can satisfy the pre-conditions (if any) for exercising the right to withdraw.
In relation to the administrative form of constitution, ASIC has held the view that it is not sufficient to state in the constitution that the withdrawal process is contained in a separate document.
ASIC acknowledges that responsible entities may want to preserve their flexibility in constitutions to change their processes, and as such, will not require amendments where a provision requires a withdrawal request to contain “information as required by the responsible entity.”
6. Pay withdrawing members back quickly
If the timeframe for payment of the withdrawal amount for a liquid scheme is longer than 21 days from the date the request is accepted, ASIC may ask for an explanation.
Reasonable explanations for a longer timeframe may include:
- Extreme market events – where the event was not reasonably foreseen by the responsible entity at the time it accepted the withdrawal request. A provision that merely allows the responsible entity to delay payment where it is ‘in the best interests of members’ is discouraged.
- Systems and processes are already in place for a longer period – this is appropriate where responsible entities operate multiple schemes and the other schemes (registered prior to October 2013) may have timeframes of 30 days.
- The scheme is a feeder fund – where the scheme is a feeder fund for another scheme that has a longer period to pay withdrawal amounts.
7. Winding up? An independent audit by a registered auditor must be mandated
A scheme’s constitution should include a provision specifying that, after a scheme is wound up, the responsible entity must obtain an independent audit of the final accounts conducted by a registered company auditor or audit firm. Provisions requiring an audit by an “independent auditor” or an “independent review” are not sufficient.
For more information, please contact HopgoodGanim Lawyers’ Corporate Advisory & Governance team.
1 Section 601GB Corporations Act 2001 (Cth).
2 Section 601GA Corporations Act 2001 (Cth).