Senate

Corporations Amendment (Asia Region Funds Passport) Bill 2018

Revised Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)
This memorandum takes account of amendments made by the House of Representatives to the bill as introduced.

Chapter 2 Key definitions

Outline of chapter

2.1 Schedule 1 to the Bill inserts a new Chapter 8A into the Corporations Act. Parts 8A.1 and 8A.2 mainly contain a number of key definitions and set out the mechanism for incorporating the rules for passport funds into Australian domestic law.

Context of amendments

2.2 The MOC provides the key definitions for the Passport as follows:

·
definitions applicable to the framework of the MOC, such as Participant, the MOC, passport fund and Joint Committee (paragraph 4 of the MOC); and
·
key definitions for the Passport Rules, such as home economy, home regulator, host economy, host regulator and operator (Part 9 of Annex 3 of the MOC).

2.3 To give effect to the Passport in Australia, key definitions are inserted into the Corporations Act.

2.4 The Passport Rules contained in Annex 3 of the MOC are the Passport's core operating rules that are to apply as requirements in each Participant's economy. They apply to CISs that are admitted to enter the passport arrangements by their home economy. They will have effect in Australia as a consequence of the Minister making rules incorporating the content of the Passport Rules, using a new rule-making provision. The Passport Rules are made in Australia must be substantially the same as the Passport Rules contained in Annex 3 of the MOC.

Summary of new law

2.5 The new law states that a signatory of the MOC is a participating economy and eligible for the special Passport arrangements if it signed and implemented the MOC and has not withdrawn from the MOC. Economies will cease to be participating economies if the MOC is terminated.

2.6 The Minister must publish by notifiable instrument a list of the participating economies.

2.7 The Passport Rules for this jurisdiction are the rules for passport funds that are made by the Minister and in force in Australia. The Passport Rules for a participating economy other than Australia are the rules for passport funds in force in another economy that has signed and implemented the MOC. Both the Passport Rules for this jurisdiction and the Passport Rules for a participating economy other than Australia must be substantially the same as the agreed rules for passport funds in Annex 3 of the MOC.

2.8 Passport funds are regulated CISs and sub-funds of regulated CISs that are registered as a passport fund in a participating economy. The economy where the passport fund is first registered or approved is referred to as the fund's home economy. If the fund applies or is permitted to offer interests in another economy, the other economy is the fund's host economy.

Comparison of key features of new law and current law

New law Current law
Special arrangements apply to passport funds. Passport funds are regulated CISs, and sub-funds of regulated CISs, that are registered as a passport fund in a participating economy. No equivalent.
A participating economy is a signatory to the MOC that has been listed by the Joint Committee as having implemented the MOC. An economy will cease to be a participating economy if it withdraws from the MOC or the MOC is terminated. No equivalent.
The Minister must publish a list of the participating economies. No equivalent.
The Minister may make the Passport Rules for this jurisdiction by legislative instrument and these rules must be substantially the same as the rules in Annex 3 of the MOC. No equivalent.
The Passport Rules for a participating economy other than Australia are the rules in force in another economy that has signed and implemented the MOC, provided that those rules are substantially the same as the rules in Annex 3 of the MOC. No equivalent.
The home economy for a fund is the participating economy where the fund was first registered or approved as a passport fund. The regulator in this economy is referred to as the home regulator. No equivalent.
The host economy is any participating economy where the fund subsequently applies, or is permitted, to offer interests. The regulator in the host economy is referred to as the host regulator. No equivalent.

Detailed explanation of new law

Participating economies

2.9 A participating economy is an economy that:

·
is a signatory to the MOC;
·
has not withdrawn from the MOC; and
·
has been listed on the Joint Committee's website as an economy that has successfully implemented the MOC at or before the time in question.

[Schedule 1, item 1, section 1210]

2.10 The MOC is defined by the term 'Memorandum of Cooperation'. The definition makes it clear that the expression includes future changes made to the MOC as allowed under paragraph 9 of the MOC. [Schedule 1, item 1, section 1210 and Schedule 2, item 38, section 9, definition of 'Memorandum of Cooperation']

2.11 The Joint Committee established under paragraph 6 of the MOC plays an important role in interpreting and co-ordinating implementation of the MOC among Passport economies. Its functions include monitoring the Passport Arrangements and their operation as well as publishing guidelines on the operation of the Passport. It may assume any other functions it considers necessary or desirable for the effective implementation and operation of the Passport.

2.12 The term participating economy is designed to capture all economies that have both signed and implemented the MOC. Signing is just the first step to becoming a participating economy: an economy that has signed the MOC must also implement the MOC by amending its domestic laws so that they are consistent with the MOC and the Passport Rules.

2.13 The Joint Committee is required to publish a list of all of the signatories that have successfully implemented the MOC on its website. Inclusion in this list is taken to be conclusive evidence that an economy has implemented the MOC and is a participating economy. [Schedule 1, item 1, section 1210]

2.14 Economies will cease to be participating economies if they formally withdraw from the MOC by giving at least 28 days' notice to the Joint Committee Chair and other participating economies in accordance with subparagraph 14.2 of the MOC.

2.15 An economy does not cease to be a participating economy if it amends its domestic laws so that they are inconsistent with the MOC but does not formally withdraw from the MOC. Nevertheless, in this situation, the Minister may make a determination that funds from that economy must not offer interests in Australia (see Chapter 3 of this Explanatory Memorandum).

2.16 If the MOC is terminated, no economies will be participating economies. [Schedule 1, item 1, section 1210]

2.17 The Minister is required to publish a list of participating economies by notifiable instrument, which must include the date each economy became a participating economy or withdrew from the MOC. The list of participating economies that is published by the Minister confirms Australia's recognition of economies participating in the Passport. [Schedule 1, item 1, subsection 1210A(1) and paragraphs 1210A(2)(a) and (b)]

2.18 The inclusion of the date will make it easier to determine whether an economy was a participating economy at a particular point in time and remove the need for people to consult historical versions of the list.

2.19 This list must be updated as soon as is reasonably practicable after an economy:

·
becomes a participating economy, that is, the Joint Committee lists the economy as successfully implementing on its website; or
·
ceases to be a participating economy because it withdraws from the MOC or the MOC is terminated.

[Schedule 1, item 1, paragraph 1210A(2)(c)]

2.20 The list published by the Minister is not conclusive evidence of whether an economy is a participating economy. The criteria set out above are the critical factors in this regard: that is, the economy must have signed the MOC, been listed on the Joint Committee's website and not have withdrawn from the MOC, and the MOC must not have been terminated.

Passport Rules

2.21 The requirements for passport funds are generally set out in the Passport Rules contained in Annex 3 of the MOC. The Passport Rules cover:

·
the matters that must be included in a passport fund's constituent documents;
·
the eligibility requirements for operators of passport funds (including their experience, qualifications, financial resources, good standing and organisational arrangements);
·
the responsibilities of operators of passport funds and limitations on their right to delegate;
·
requirements for operators of passport funds to report breaches;
·
a requirement for funds to have an independent party responsible for holding the assets, and that party's duties;
·
a requirement for funds to have an independent oversight entity, such as a compliance committee;
·
a requirement for funds to undertake annual implementation reviews or audits;
·
extensive permissions, restrictions and limits with regard to asset classes, counterparties and investment limits;
·
redemption and valuation of assets;
·
the effect of deregistration; and
·
a requirement for funds to prepare financial statements.

2.22 Australia, together with the other signatories to the MOC, agreed to give effect to the rules in Annex 3 of the MOC. However, the MOC does not amend domestic laws and Annex 3 does not have any force in Australia unless it is incorporated into Australian law.

2.23 Part 8A.2 of the new law provides the mechanism for incorporating Annex 3 of the MOC into Australian law. It provides that the Minister may make a legislative instrument that sets out the rules for passport funds. [Schedule 1, item 1, subsection 1211(1)]

2.24 The rules made by the Minister (taken together with the other provisions of the Corporations Act) must have substantially the same effect as the rules in Annex 3 to the MOC. There may be minor differences, for example, to adapt the Passport Rules to existing legislative frameworks in this jurisdiction, such as the AFSL framework. [Schedule 1, item 1, subsections 1211(2) and 1211(3)]

2.25 Some aspects of Annex 3 of the MOC are incorporated directly into the Act where this is appropriate. These instances are specifically noted in this Explanatory Memorandum.

2.26 The legislative instrument will be subject to Parliamentary scrutiny and disallowance in the same way as other legislative instruments. It must also be published on Federal Register of Legislation established under the Legislation Act 2003 (FRL).

2.27 The Passport Rules for this jurisdiction are the Passport Rules set out in the legislative instrument made by the Minister.

2.28 The Passport Rules for a participating economy other than Australia are the rules for passport funds respectively in force in each of the other economies that have signed and implemented the MOC, provided that those rules are substantially the same as Annex 3 of the MOC. [Schedule 1, item 1, subsection 1211A(2)]

2.29 The phrase 'the Passport Rules for a participating economy other than Australia' may not necessarily designate identical rules when used in relation to different participating economies. This situation would arise if a participating economy adopts a version of Annex 3 which includes minor differences from the rules adopted in another participating economy even though both sets of rules are substantially the same as Annex 3. Such differences may arise because of the need to incorporate the rules in Annex 3 of the MOC within the structure of domestic law in each participating economy.

Amendments to the MOC

2.30 The Joint Committee may recommend amendments to Annex 3 of the MOC from time to time. A recommended amendment will only have effect and amend Annex 3 if all participating economies accept the recommendation and make any necessary amendments to their domestic law. If one or more participating economies disagree with the recommendation or fail to implement the changes within the agreed time period, the recommendation has no effect and must be further considered at the next Joint Committee meeting (paragraph 9 of the MOC).

2.31 To incorporate a recommended amendment into Australian law, the Minister must make a new legislative instrument. The legislative instrument will be disallowable. This ensures that both the Minister and Parliament have the opportunity to consider the proposed amendment before there is any change to Australian law. [Schedule 1, item 1, section 1211]

2.32 If the Minister does not make a legislative instrument which incorporates the recommended amendment, Australia's domestic law remains unchanged. This would also mean that the participating economies do not unanimously accept and implement the recommended amendment. Accordingly, the proposed amendment would need to be reconsidered at the next Joint Committee meeting.

Example 2.1 : Proposed amendment supported by all participating economies The Minister makes a legislative instrument which replicates the rules in Annex 3 of the MOC.The Joint Committee recommends a substantial amendment to Annex 3 of the MOC. All participating economies support the amendment and agree to give effect to it by 31 December.On 1 August, the Minister in Australia makes a legislative instrument to incorporate the proposed amendment into Australian law. The legislative instrument will commence on 31 December but the commencement is conditional on all participating economies giving effect to it by that date.All participating economies take the necessary steps to incorporate the recommended amendment into their domestic laws by 31 December. As a result:

·
Annex 3 of the MOC is amended; and
·
the condition in the legislative instrument is satisfied and the amended rules commence in Australia on 31 December.

Example 2.2 : Amendments to Annex 3 of the MOC that are not supported by all participating economies The Joint Committee recommends another amendment to Annex 3 of the MOC. All participating economies agree to give effect to it by 1 July.

·
In Australia, the Minister makes a legislative instrument to implement the amendment. The legislative instrument is to commence on 1 July and it contains a conditional commencement in similar terms to the commencement clause in the legislative instrument in the previous example.
·
There is a change of government in one of the participating economies and the new government decides against implementing the recommended amendment. As a result, Annex 3 of the MOC is not amended.
·
Australia's legislative instrument does not commence and 'the Passport Rules for this jurisdiction' is not amended.
·
If Australia's legislative instrument did not contain a commencement provision and the proposed amendment was substantial, the Minister's act of making the legislative instrument may be beyond power. This is because the Minister only has power to make rules which are substantially the same as Annex 3 of the MOC.

2.33 The Joint Committee may make recommendations for other changes to the MOC, including the date when the amendment should take effect (paragraph (f) of subparagraph 6.2 of the MOC). The change will only take effect if it is agreed to by all participating economies and implemented by the time recommended by the Joint Committee (paragraph 9 of the MOC).

CISs and regulated CISs

2.34 A CIS is an arrangement where:

·
members contribute money or money's worth for the right to benefits;
·
contributions are pooled to produce financial benefits or an interest in property for the members;
·
not all the members, in their capacities as members, take part in day-to-day management of the scheme; and
·
the pool is managed as a whole for the benefit of the members collectively (section 55 of Annex 3 of the MOC).

2.35 CISs are not restricted to vehicles which meet the definition of a 'managed investment scheme' in Australia. Instead, the definition of a CIS captures a range of investment vehicles including superannuation funds, partnerships and other contractual relationships, MISs and corporate collective investment vehicles.

2.36 The new law uses the definition of regulated CIS in the Passport Rules for this jurisdiction and this definition must be substantially the same as the definition in Annex 3 of the MOC. [Schedule 1, item 1, section 1210 and subsection 1211(2)]

2.37 Under the MOC, a regulated CIS is basically a CIS which is regulated by the corporations legislation in the participating economy. Section 56 of Annex 3 of the MOC set this out as:

·
in relation to Australia, a CIS registered under the Corporations Act 2001;
·
in relation to Japan, a scheme under the Investment Trusts and Investment Corporations Act of Japan;
·
in relation to Korea, a CIS under the Financial Investment Business and Capital Markets Act of Korea;
·
in relation to New Zealand, a MIS registered under the Financial Markets Conduct Act 2013 of New Zealand;
·
in relation to Singapore [4] , a CIS authorised under the Securities and Futures Act of Singapore; and
·
in relation to Thailand, a CIS under the Securities and Exchange Act of Thailand.

Passport funds, foreign passport funds and operators

2.38 An entity is a passport fund if it is:

·
a regulated CIS or a sub-fund of a regulated CIS; and
·
registered as a passport fund in a participating economy.

[Schedule 1, item 1, section 1210]

2.39 The first requirement restricts passport funds to regulated CISs and their sub-funds. For the definition of a regulated CIS, see paragraph 2.8 above.

2.40 Sub-funds has the same definition as in the Passport Rules in this jurisdiction, and this definition must be substantially the same as in Annex 3 of the MOC. [Schedule 1, item 1, sections 1210 and 1211]

2.41 Sub-funds are basically distinct compartments of a CIS which are segregated in a way that prevents the assets of one sub-fund being used to discharge the liabilities of another sub-fund. Sub-funds may have different legal forms in each participating economy and they may or may not have their own legal personality.

2.42 In relation to the second requirement, each participating economy will have its own procedures for registering regulated CISs and sub-funds as passport funds. The procedures which apply in Australia are set out in Chapter 3 of this Explanatory Memorandum. The procedures that apply in other economies will be set out in their regulatory frameworks, but they will be based on the MOC and must be broadly similar to the procedures in Australia.

2.43 Australian passport funds are registered schemes that are also registered as passport funds in Australia using the process set out in Part 8A.3 of this Bill. [Schedule 2, item 18, section 9]

2.44 Foreign passport funds are regulated CISs and sub-funds of regulated CISs that are registered as passport funds by participating economies other than Australia. They may take a variety of legal forms and, accordingly, the word 'entity' takes its ordinary meaning when used in provisions relating to passport funds in the new Chapter 8A. [Schedule 2, items 30 and 55, sections 9 and 64A]

2.45 Foreign passport funds are only permitted to offer interests in Australia if they lodge a notice with ASIC and the notice is not rejected. The special streamlined application process that applies to foreign passport funds is discussed in Chapter 3 of this Explanatory Memorandum.

2.46 A notified foreign passport fund is a foreign passport fund that has submitted a notice to offer interests in Australia and has not been rejected within the prescribed period. Notified foreign passport funds are a subset of foreign passport funds. In other words, all notified funds will be foreign passport funds, but only those foreign passport funds that may offer interests in Australia will be notified foreign passport funds. [Schedule 1, item 1, subsection 1213C(2)]

2.47 An Australian member of a notified foreign passport fund is defined as a person who either holds an interest in the fund that was acquired in Australia or is ordinarily resident in Australia and holds an interest in the fund. [Schedule 2, item 18, section 9]

2.48 The new law adopts for this jurisdiction the definition of an operator in the Passport Rules, and those rules must be substantially the same as Annex 3 of the MOC. The MOC contains a table that lists the operator in each participating economy (section 56 of Annex 3). The operator is the person or entity who is responsible for managing the overall operations of the CIS. In Australia, the operator is the 'person licensed to operate the CIS under the Corporations Act', which will be the responsible entity for a registered scheme. In some cases, the operator may be the same entity as the fund. [Schedule 1, item 1, sections 1210 and 1211]

Home and host economies

2.49 All passport funds have a home economy and they may also have one or more host economies.

2.50 The home economy for a passport fund is the participating economy where the passport fund is registered or approved as a regulated CIS, regardless of the exact name given to the registration or approval process. If the fund is registered or approved in more than one participating economy, then the home economy is the one where the fund is first registered or approved. This is substantially the same as the definition of home economy in Annex 3 of the MOC. [Schedule 1, item 1, section 1210 and Schedule 2, item 30, section 9, definition of 'home economy']

2.51 The host economy is any other participating economy (apart from the home economy) where the passport fund is permitted to offer interests or has submitted an application to offer interests. The passport fund may have more than one host economy. Australia acts as a host economy to foreign passport funds that have submitted notices of intention to offer interests, or are permitted to offer interests in Australia having become 'notified' (see Chapter 3 of this Explanatory Memorandum). [Schedule 1, item 1, section 1210 and Schedule 2, item 30, section 9, definition of 'host economy']

2.52 If a fund is deregistered as a passport fund in its home economy, it will no longer meet the definition of a passport fund and it will not have a home economy. It will also fail to meet the prerequisites for being permitted to offer interests in any other economy. Nonetheless, the Passport Rules (section 54 of Annex 3 of the MOC) specify that a regulated CIS or a sub-fund of a regulated CIS that has been deregistered as a passport fund must be operated in accordance with these rules until such point as certain conditions are met (see Chapter 3 of this Explanatory Memorandum).

Home and host regulators

2.53 'Passport Regulator' (as used in the definitions of 'home regulator' and 'host regulator') has the meaning as in the Passport Rules for this jurisdiction, and those rules must be substantially the same as Annex 3 of the MOC. Under the MOC, the Passport Regulator is the entity in each participating economy which performs the regulatory functions under the relevant legislation (as defined under the term passport regulator in section 55 of Annex 3). [Schedule 1, item 1, sections 1210 and 1211]

2.54 The Passport Regulators in each of the economies that initially signed the MOC are shown in the table below. If the entity responsible for the regulatory functions changes, the new entity will become the Passport Regulator.

Table 2.1 : Passport Regulator in each participating economy

Participant Regulator
Australia ASIC
Japan Financial Services Agency
Korea Financial Supervisory Service and Financial Services Commission
New Zealand Financial Markets Authority
Singapore [5] Monetary Authority of Singapore
Thailand Securities and Exchange Commission

2.55 The home regulator for a passport fund is the Passport Regulator in the fund's home economy. The host regulators for a passport fund are the Passport Regulators in each of the fund's host economies. While these definitions use the word 'entity', 'entity' takes its ordinary meaning and does not draw on the definition in section 64A. See paragraphs 2.49 to 2.52 for an explanation of the definitions of home and host economy. [Schedule 1, item 1, section 1210 and Schedule 2, item 30, section 9, definition of 'home regulator' and 'host regulator']

Consequential amendments

2.56 Consequential amendments have been made to the definition sections in the Corporations Act to include the Passport Rules for this jurisdiction in the definition of 'this Act' and ensure that 'entity' has the same definition in the new chapter as in Chapter 2E. [Schedule 2, items 48 and 55, sections 9 and 64A]


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