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 3 Becoming a passport fund

Outline of chapter

3.1 Schedule 1 to the Bill inserts a new Chapter 8A into the Corporations Act. Parts 8A.3, 8A.4 and 8A.5 set out the processes for Australian and foreign passport funds to offer interests in Australia and for a register of passport funds. Part 8A.8A sets out the rules and processes governing deregistration of Australian passport funds and denotification of foreign passport funds.

3.2 Schedule 2 to the Bill includes consequential amendments to extend the existing laws governing deregistration of registered schemes for registered schemes that are also Australian passport funds.

Context of amendments

3.3 The MOC establishes that a regulated CIS wishing to passport to another participating economy must first register as a passport fund in its home economy and sets out the application process that should be followed for registration. The MOC also sets out the processes that a host economy may adopt to facilitate the entry of a foreign passport fund into its economy (see Part 2 of Annex 2 of the MOC).

3.4 Each passport regulator must maintain a Register of Passport Funds for which it is the home regulator (section 7 of Annex 2 of the MOC).

3.5 The MOC also sets out the requirements for deregistration as a passport fund in its home economy as well as deregistration as a regulated CIS (sections 14 and 15 of Annex 2).

Summary of new law

3.6 Registered schemes may apply to become passport funds by lodging an application in the prescribed form with ASIC. ASIC must register the scheme as an Australian passport fund if ASIC is of the opinion that the Operator of the scheme meets the eligibility criteria in the MOC and ASIC is satisfied that the scheme will comply with the corporations legislation in Australia, including the Passport Rules for this jurisdiction. ASIC registers a scheme by assigning it a unique Australian Passport Fund Registration Number (APFRN) and ensuring that its details are entered on the Register.

3.7 Funds registered in another participating economy must lodge a notice of intention with ASIC if they intend to offer interests in Australia. ASIC generally has 15 business days consideration period to consider the notice. ASIC may reject the notice for various reasons, including that the fund is unlikely to comply with the home or host economy's laws and regulations, that the entry is not in the public interest, or if the name of the fund is unavailable. If the notice of intention is not rejected, the fund becomes a notified foreign passport fund on the day after the end of the consideration period.

3.8 Nonetheless, the Minister may consent in writing to a name being available to a foreign passport fund in this jurisdiction even if the name would not otherwise be available.

3.9 The Minister may also determine that all funds (or all funds from a particular economy) are to be rejected if there is a difference of opinion about the proper interpretation of the MOC, Australia withdraws from the MOC, another economy withdraws from the MOC or the MOC is terminated.

3.10 Where Australia is regulating notified foreign passport funds as a host economy, the new law generally provides for the same or similar treatment as applies to MISs.

3.11 Similarly to the process for deregistration as a registered scheme, an Australian passport fund may lodge an application for deregistration as a passport fund. ASIC may also deregister the fund as a passport fund on its own initiative if the fund is not complying with relevant Australian laws.

3.12 A notified foreign passport fund may likewise lodge an application to be denotified as a notified foreign passport fund. ASIC must also denotify a fund as a notified foreign passport fund if the fund has been deregistered as a passport fund in its home economy.

3.13 A series of consequential amendments are made to extend the existing laws governing deregistration of registered schemes that are also Australian passport funds.

Comparison of key features of new law and current law

New law Current law
Australian funds

Funds that are registered schemes under the Corporations Act may apply to become an Australian passport fund by lodging an application in the prescribed form with ASIC.

ASIC must register the fund if the Operator of the fund (the responsible entity) meets the eligibility criteria in the MOC and ASIC is of the opinion that the fund will comply with the corporations legislation in Australia.

An Australian passport fund may lodge an application for deregistration as a passport fund. ASIC may also deregister the fund as a passport fund on its own initiative if the fund is not complying with relevant Australian laws

No equivalent.

Foreign passport funds

Foreign passport funds may lodge a notice of intention to offer interests in Australia with ASIC by using the prescribed form.

ASIC may request further information from the operator of the foreign passport fund.

ASIC must consider a notice within 15 business days of receiving it, unless a longer period is agreed by ASIC and the applicant.

ASIC may reject the notice if:

·
ASIC is of the opinion that the fund does not comply, or is not likely to comply, with the home or host economy's laws and regulations;
·
ASIC is of the opinion that rejecting the notice is in Australia's public interest;
·
Australia has imposed sanctions against another economy and ASIC is of the view that allowing the passport fund to operate in Australia would breach those sanctions;
·
ASIC does not consent to an exemption or modification that has been granted to the fund or its associated entities, by its home economy;
·
the name that the passport fund intends to use is not available; or
·
the Minister determines that ASIC is not to accept applications from the passport fund's home economy.

Notified foreign passport funds may lodge an application to be denotified. ASIC must also denotify a notified foreign passport fund if the fund has been deregistered as a passport fund in its home economy.

No equivalent.

Detailed explanation of new law

Registration of Australian funds

3.14 An Australian fund may only be registered as a passport fund if it is a MIS registered under section 601EB of the Corporations Act. [6] [Schedule 1, item 1, section 1212]

3.15 The Australian fund does not need to be a registered scheme at the time that it lodges an application to become a passport fund. This ensures that a new fund is able to lodge an application to become both a registered scheme and a passport fund at the same time. In this case, ASIC would complete registration of the fund as a registered scheme first, and would only decide the application for registration as a passport fund after registration as a registered scheme is complete. This satisfies the requirement in the MOC for a passport fund to be a regulated CIS, which for Australia means a CIS registered under the Corporations Act. [Schedule 1, item 1, subsection 1212(1)]

3.16 It is open to the responsible entity of a registered scheme to lodge an application with ASIC through another person acting as the agent of the responsible entity.

3.17 An application may also be withdrawn by lodging a further notice with ASIC in the prescribed form. [Schedule 1, item 1, subsection 1212(3)]

3.18 The existing law exempts certain schemes from the requirements to register (see subsection 601ED(2)). These schemes are mainly wholesale funds or small funds with no more than 20 members. Such funds are unlikely to wish to become passport funds. Nevertheless, if an unregistered scheme wished to apply to ASIC to become a passport fund, it must first register with ASIC as a registered scheme under section 601EB. [Schedule 1, item 1, subsection 1212(1)]

3.19 ASIC has the power to prescribe the form of the application, including the required information and supporting documentation under section 350 of the Corporations Act. Applications must be in the prescribed form and accompanied by any fee prescribed under the Corporations (Fees) Regulations 2001. [Schedule 1, item 1, subsection 1212(2)]

3.20 The applicant must also provide ASIC with the PDS that it must prepare before it can offer interests to retail clients. This PDS must comply with the PDS requirements in the Corporations Act and must set out relevant information about the passport fund. [Schedule 1, item 1, paragraph 1212(2)(b)]

3.21 An applicant is not required to include their APFRN in documents given to ASIC before registration as a passport fund. This means that the PDS provided to ASIC as part of the fund's application for registration does not need to include the APFRN. [Schedule 1, item 1, section 1212B]

3.22 Applicants are not required, as set out in existing section 601EC, to state the APFRN in the PDS that is submitted with the application because this identifier may not be known by new funds at the time of lodging an applications with ASIC. The APFRN only needs to be included on documents after the CIS is registered as a passport fund (See paragraph 3.15 for an explanation of how a new fund can lodge its application to become a registered scheme and a passport fund at the same time.)

3.23 The requirement to provide a PDS at the time of applying for registration differs from other registration processes under the Corporations Act. The requirement is designed to assist ASIC in determining whether the fund is likely to comply with the PDS requirements should it be registered as an Australian passport fund. Only funds which are likely to comply with the Corporations Act and the ASIC Act may be registered as an Australian passport fund.

3.24 ASIC may, by legislative instrument, determine which parts of the application are to be public. This power could be used, for example, to protect information that is commercially sensitive and confidential. [Schedule 1, item 1, subsection 1212(4) and Schedule 2, item 303, subparagraph 1274(2)(a)(iab)]

3.25 ASIC must register the registered scheme as a passport fund if ASIC is satisfied that the registered scheme meets two conditions, namely:

·
the registered scheme is likely to comply with the Corporations Act, ASIC Act, and the Passport Rules for this jurisdiction; and
·
the responsible entity for the registered scheme meets the eligibility requirements in subsection 3(4) of Annex 2 of the MOC. These eligibility requirements are that the operator:

-
is responsible for operating a CIS with assets of at least US$500 million or has discretionary management powers over at least the same amount of client money;
-
has its principal place of business in Australia;
-
has officers with the qualifications specified in section 6 of the Passport Rules;
-
meets the financial resources test in section 7 of the Passport Rules (that is, the Operator has between US$1 million and US$21 million in equity, depending on the value of the assets under management);
-
meets the organisational arrangements test in section 8 of the Passport Rules, including by establishing internal control mechanisms, adequate risk monitoring and adequate procedures for managing conflicts of interest;
-
meets the track record test in section 9 of the Passport Rules by having at least five years of relevant experience; and
-
meets the good standing test in section 10 of the Passport Rules by not being subject to a notice that brings into question its integrity or competence. [Schedule 1, item 1, subsection 1212A(1)]

3.26 ASIC is required to form a positive opinion about these matters, that is, it is not sufficient for ASIC to not form the view that the MIS is unlikely to comply with the relevant laws.

3.27 In order for ASIC to be able to form its opinion, it may, where reasonable to do so, rely on specific assertions or representations made in the application. For example, in completing the application, an applicant may answer in the affirmative when asked whether the assets held by the passport fund comply with the Passport Rules. The applicant gives this answer knowing that making a false or misleading statement in the application is a criminal offence. In the absence of any facts which are sufficient to suggest to a reasonable person the answer is false, it is reasonable for ASIC to rely on this statement to form its opinion that the Corporations Act (including the Passport Rules) is likely to be complied with.

3.28 ASIC is not required to process applications within any specific period of time. ASIC registers a registered scheme as a passport fund by assigning it a unique APFRN and ensuring that its details are recorded on the Register of Passport Funds (the Register). [Schedule 1, item 1, section 1210 and subsection 1212A(2)]

3.29 The passport fund must include its APFRN on all documents subsequently lodged with ASIC. [Schedule 1, item 1, subsection 1212B]

Table 3.1 Registration process for Australian passport funds

Stage Requirements
Application

·
Registered scheme or application as registered scheme
·
ASIC prescribed form
·
Copy of PDS

ASIC consideration Two conditions:

·
Likely to comply with Corporations Act (including Passport Rules for this jurisdiction) and ASIC Act
·
Complies with eligibility requirements in section 3 of Annex 2 of the MOC

Registration ASIC assigns APFRN and includes details on the Register

3.30 If an Australian passport fund uses a different name in another participating economy it must notify ASIC within seven days after it begins offering interests in the fund under that name by lodging a notice in the prescribed form. If a fund uses different names in several other participating economies, it must advise ASIC of all the different names that it uses. This information will be entered on the Register kept by ASIC. [Schedule 1, item 1, section 1212C]

3.31 A fund may have to use a different name because the name it uses in Australia is not available in the other jurisdiction. A failure to notify ASIC under this provision carries a penalty of 60 penalty units. [Schedule 1, item 1, section 1212C and Schedule 2, item 356, schedule 3 table item 328A]

Notification of funds from other participating economies

3.32 Funds which have been registered as a passport fund in another participating economy must notify ASIC of their intention to offer interests in Australia before they may offer interest in Australia. This notification process is designed to be a streamlined process whereby notices of intention are considered within 15 business days of the day after the lodgment of the notice, subject to any extensions to the consideration period. The streamlined process acknowledges that applicants are regulated CISs in the other jurisdiction and have already been approved as a passport fund in that jurisdiction. ASIC may therefore only reject a notice of intention on limited grounds. For a discussion of the grounds for rejecting a notice of intention, see paragraphs 3.41 to 3.65 below.

3.33 The notification process involves the operator of the foreign passport fund lodging a notice of intention, in the prescribed form, with ASIC. In order to be able to do this, the operator must be registered as a foreign company in Australia. A notified foreign passport fund does not have to be registered as a registered scheme. [Schedule 1, item 1, section 1213 and Schedule 2, items 139 and 140, subsections 601ED(1) and (2)]

3.34 It is open to the operator of the foreign passport fund to lodge a notice of intention with ASIC through another person acting as the agent of the operator.

3.35 The consideration period begins on the day after a complete notice is lodged with ASIC. Section 25C of the Acts Interpretation Act 1901 provides that the lodged form must be in substantial compliance with the prescribed form to be considered complete.

3.36 The operator is also required to provide ASIC with a PDS. This is intended to assist ASIC in determining whether the fund is likely to comply with Australia's product disclosure requirements. The PDS must comply with the PDS requirements in the Corporations Act and must set out relevant information about the passport fund. The PDS that accompanies the notice of intention does not need to include a unique identifier because this will only be assigned after the notification process is complete. This mirrors the requirements for Australian funds applying for registration as Australian passport funds, and contrasts with the registration of Australian funds as registered schemes, where a PDS is not required to be provided on registration. [Schedule 1, item 1, subsection 1213(2)]

3.37 As with applications from Australian funds, ASIC may determine by legislative instrument that information lodged as part of a notice of intention is not publicly available for inspection or copying. This power is designed to ensure that commercial-in-confidence information included in the notice is given appropriate protection [Schedule 1, item 1, subsection 1213(4) and Schedule 2, item 303, subparagraph 1274(2)(a)(iab)]

3.38 The operator must pay any fee prescribed under the Corporations (Fees) Regulation 2001.

Requests for further information

3.39 If ASIC is of the opinion that information required under the prescribed form has not been provided, it may seek this information by notifying the operator of the foreign passport fund in writing. [Schedule 1, item 1, section 1213A]

3.40 The new law states that ASIC must make a request for further information within the consideration period that extends for 15 business days beginning on the day after a notice in the prescribed form is lodged. [Schedule 1, item 1, section 1210 and paragraph 1213D(1)(a)]

Grounds for rejecting notices of intention

3.41 ASIC may (or, in some cases, must) prohibit a fund from offering interests in Australia if:

·
ASIC is of the opinion that the fund does not comply, or is not likely to comply, with the relevant laws in Australia or its home economy;
·
ASIC is of the opinion that rejecting the notice is in Australia's public interest;
·
ASIC does not consent to an exemption or modification that has been granted to the fund, or its associated entities, by its home economy;
·
the name that the passport fund intends to use is not available;
·
Australia has imposed sanctions on the home jurisdiction of the fund and the Minister has made a determination against the jurisdiction; or
·
the Minister determines that operators of passport funds or a class of passport funds from a home economy must not offer interests in Australia.

[Schedule 1, item 1, subsections 1213B(1), (5) and (8)]

Ground 1: Not likely to comply with relevant laws

3.42 ASIC may reject a notice if the fund is not complying with the relevant laws in Australia or its home economy that are administered by the passport regulator. ASIC may also reject a notice if the fund is unlikely to comply with these laws in the future. [Schedule 1, item 1, paragraph 1213B(1)(a)]

3.43 The relevant Australian laws are the Corporations Act and the ASIC Act, but not the Passport Rules for this jurisdiction (as given effect to in Australian law). The reason for not including the Passport Rules for this jurisdiction is that until the foreign passport fund is permitted to offer interests in Australia, compliance with the Passport Rules is enforced solely by the foreign passport regulator. [Schedule 1, item 1, subparagraphs 1213B(1)(a)(i) and (ii)]

3.44 When determining the likelihood of a foreign passport fund complying with its home economy laws (including the Passport Rules for that jurisdiction), ASIC must request the opinion of the fund's home regulator. ASIC must give effect to the home regulator's opinion if, and only if, it is provided within the stipulated timeframe. [Schedule 1, item 1, subsection 1213B(2)]

3.45 As set out above, ASIC also considers compliance with the relevant Australian laws with respect to Australian funds seeking registration as passport funds. However, for foreign passport funds, ASIC also considers compliance with foreign laws and applies a negative test.

Table 3.2 : Comparison of ASIC's consideration of likely compliance with the law for foreign and Australian passport fund

Australian CISs Foreign passport funds
Relevant laws

·
ASIC Act and Corporations Act
·
The Passport Rules in this jurisdiction

·
ASIC Act and Corporations Act
·
Laws in the fund's home economy administered by the home regulator (including the home economy's Passport Rules)

State of mind Positive test - ASIC considers whether the fund is likely to comply with the relevant laws Negative test - ASIC may consider whether the fund is not complying or is not likely to comply with the relevant laws

Ground 2: Public interest

3.46 The second ground for rejecting a fund's notice of intention requires ASIC to weigh the public interest in allowing the passport fund to operate in Australia against any potential detriments or risks for Australian investors. In some circumstances, this may be similar to the balancing exercise that ASIC undertakes when it considers whether it is in the public interest to disqualify persons under existing section 206F of the Corporations Act. [Schedule 1, item 1, paragraph 1213B(1)(b)]

3.47 Benefits to the public may include greater competition, increased investment opportunities for Australian investors, and the strengthening of Australia's relationship with the host economy.

3.48 Harm to public interest may result from concerns that the fund will breach Australian laws or expose Australian investors to unacceptable risk. When considering the harm to the public interest, ASIC must not take into account any negative consequences of greater competition to Australia's fund management industry. [Schedule 1, item 1, subsection 1213B(3)]

3.49 ASIC is not required to conduct an assessment of the public interest in every case. It is likely that such an assessment will only be required in exceptional circumstances. [Schedule 1, item 1, subsection 1213B(4)]

Ground 3: ASIC does not consent to an exemption or modification

3.50 The third ground for rejecting notices is if ASIC does not consent to an exemption or modification from the Passport Rules granted by the home economy to the fund, or an entity connected to the passport fund. Entities connected to the passport fund may include its directors, custodian, or auditor. [Schedule 1, item 1, paragraph 1213B(1)(c)]

3.51 This ground only applies to exemptions or modifications to the Passport Rules, reflecting the requirement that host regulators must consent in writing to exemptions and modifications of the Passport Rules (but not to the home economy laws and regulations) under subsection 13(2) of Annex 2 of the MOC.

3.52 However, under subsection 13(4) of Annex 2 of the MOC, home regulators are required to ensure that there are publicly available records of any exemptions and modifications of both the Passport Rules, and the home economy laws and regulations. In some situations, the Joint Committee may partly exempt a particular home regulator from this requirement. In rare or extreme cases, an exemption or modification to a passport fund's home economy laws and regulations, may be relevant to the public interest ground for rejecting a notification of intention. This may be because the modification or exemption means that Australian consumers would be inadequately protected in some respect by the home economy laws and regulations.

Ground 4: Unavailability of the name of the passport fund

3.53 ASIC may also reject notices if the name that the passport fund proposes to use in Australia is unavailable. This is similar to the process for Australian funds applying for registration under existing section 601EA and subregulation 5C.1.01. [Schedule 1, item 1, paragraph 1213B(1)(d)]

3.54 A name might be unavailable to a passport fund for a number of reasons, including because:

·
another entity has registered the same name, as set out in regulations;
·
another entity has reserved the same name;
·
the name is identical to the name of a new MIS, which has lodged an application with ASIC for registration under section 601EB of the Corporations Act;
·
the name is identical to the name of a foreign passport fund in relation to which a notice of intention has already been lodged;
·
the name is identical (under rules set out in the Corporations Regulations 2001 (Corporations Regulations)) to the name of an individual, managed investment scheme or other body that is not the operator of the fund and whose name is held or registered on the Business Names Register; or
·
the name is unacceptable in Australia because it is offensive, or suggests a misleading connection with the government (see Schedule 6 of the Corporations Regulations).

[Schedule 1, item 1, subsection 1213B(5)]

3.55 To ascertain whether a given name is unavailable, ASIC intends to conduct names determination checks against a number of registers listing existing names of bodies such as MISs, businesses, companies and other foreign passport funds. Other registers may be added to this list in future if necessary (for example, to account for the existence of new forms of CISs). If the name that a foreign passport fund uses in its home economy is unavailable in Australia, the passport fund must advise ASIC and its home regulator, in writing, that it will adopt an alternative name in Australia. [Schedule 1, item 1, subsection 1213B(5)]

3.56 The Minister may consent in writing to a name being available to a foreign passport fund in Australia even if the name would not otherwise be available. The Minister may delegate this power, by signed instrument, to an ASIC officer who is of a rank equivalent to or higher than Executive Level 1. The consent may be subject to conditions. [Schedule 1, item 1, subsections 1213B(6) and (7) and schedule 2, items 348 and 349, subsection 1345A(1A)]

3.57 For consistency, the new law also requires all future delegations of the Minister's power to consent to a name being made available for a company registered in Australia, foreign company or registrable Australian body to be to an ASIC officer of Executive Level 1 or equivalent or higher rank. This amendment does not affect the validity of any existing delegations to ASIC which continue in force. [Schedule 2, item 131(349, paragraph 1345A(1A)(b), Schedule 3, item 1]

Ground 5: Minister's determination

3.58 ASIC must reject the foreign passport fund if the Minister has made a determination that applies to the fund. [Schedule 1, item 1, subsection 1213B(8)]

3.59 The Minister may make a determination that relates to:

·
all (or a class of) passport funds from a particular economy; or
·
all passport funds, irrespective of their home economy.

[Schedule 1, item 1, subsection 1210B(1)]

3.60 Determinations which relate to passport funds from a particular economy, may only be made if there are grounds for making the determination under the MOC, and the processes set out in the MOC have been followed. The MOC grants power for an economy to prohibit foreign passport funds from offering interests in two main situations:

·
A difference has been raised between Australia and the home economy in accordance with the process set out in paragraph 8 of the MOC.
·
The foreign passport fund's home economy has ceased to be a participating economy and it has formally withdrawn from the MOC by following the process set out in paragraph 14 of the MOC.

[Schedule 1, item 1, subsection 1210B(2)]

3.61 Paragraph 8 of the MOC requires each participating economy to attempt to resolve disputes amicably, consult the Joint Committee on any questions relating to the interpretation of the MOC, form the reasonable opinion that its interests are being prejudiced, and give seven days' notice of its intention to decline applications. Paragraph 14 of the MOC requires the economy to give 28 days' notice and take steps to ensure that existing funds, their members and operators, are not unduly affected by the withdrawal.

3.62 A further reason for making a determination relating to all passport funds from a specified jurisdiction would be the imposition of broad sanctions against the jurisdiction that include such a prohibition within their scope. Once the Minister has made such a determination ASIC must reject all applications submitted by passport funds from the jurisdiction.

3.63 The Minister may also make a determination that relates to all passport funds, irrespective of their home economy, if the MOC is terminated or Australia withdraws from the MOC. Again, the process set out in paragraph 14 of the MOC (described above) must be followed. [Schedule 1, item 1, subsection 1210B(2)]

3.64 If the Minister makes a determination because Australia withdraws from the MOC or the MOC is terminated, the regulations may deal with transitional matters relating to the withdrawal or termination. [Schedule 1, item 1, subsection 1210B(3)]

3.65 This delegation of power to the Minister is appropriate because it will only be used in exceptional situations where urgent regulation is necessary to protect Australia's interests. Further, the Minister's determinations are legislative instruments and are disallowable by Parliament. [Schedule 1, item 1, subsection 1210B(1)]

Procedural fairness

3.66 If ASIC rejects a notice of intention, it must notify the operator of the fund in writing. [Schedule 1, item 1, subsection 1213B(9)]

3.67 A foreign passport fund may seek merits review before the Administrative Appeals Tribunal of ASIC's decision to refuse a notice under Part 9.4A of the Corporations Act.

The consideration period and authority to offer interests in Australia

3.68 ASIC has only a limited period to consider the notice. This period is referred to as the consideration period and lasts, as explained above, for 15 business days after the day the notice is lodged with ASIC. If ASIC does not refuse the notice or request further information from the fund within the consideration period, and the notice is not withdrawn by the operator, the fund becomes a notified foreign passport fund on the first day after the end of the consideration period for the notice of intention. A notified foreign passport fund may start offering interests in Australia. [Schedule 1, item 1, section 1213C]

3.69 The MOC states that the consideration period should be 21 days (subsection 6(2) of Annex 2). However, the Joint Committee has since agreed that in order to account appropriately for public holidays, the consideration period may be expressed in terms of 15 business days. The 15 business day consideration period is marginally longer than the 14 day registration period for schemes under section 601EB. A longer period was considered appropriate because there may be additional complexity involved in reviewing applications from foreign passport funds and regulators need sufficient time to make any necessary enquiries with the applicant's home regulator or other host regulators. [Schedule 1, item 1, subsection 1213D(1)]

3.70 ASIC and the operator may agree in writing to extend the consideration period for up to five business days at a time. There is no cap on the number of times that the two parties may agree to extend the period. [Schedule 1, item 1, subsection 1213D(2)]

Treatment of notified foreign passport funds

3.71 A notified foreign passport fund is to be treated as a MIS for the purposes of the Corporations Act, even if it would not otherwise be treated as a MIS because of the way in which that term is defined in section 9. Similarly, rights issues in a notified foreign passport fund are treated as rights issues of managed investment schemes. This does not affect the other legal characteristics of a notified foreign passport fund. For example, if a notified foreign passport fund is a body corporate, it remains a body corporate for the purposes of the Corporations Act. [Schedule 1, items 6, 34 to 23 and items 49 to 54, section 9, note at the end of the definition of 'managed investment scheme', section 9 definition of 'voting interest' and subsections 9A(2) to (3A) and 1213E(1)]

3.72 To avoid doubt, neither the operator of a notified foreign passport fund nor the fund itself is to be treated as a company for the purposes of the corporations legislation, merely because the operator or the fund is registered as a foreign company under Division 2 of Part 5B.2. [Schedule 1, item 1, subsection 1213F (1)]

3.73 Furthermore, a reference in the corporations legislation to a share does not include an interest in a notified foreign passport fund unless the fund is also a company. [Schedule 1, item 1, subsection 1213F(2)]

Register of passport funds

3.74 ASIC must ensure that a Register of Passport Funds is maintained. The Register must include details of Australian passport funds and notified foreign passport funds (that is, funds permitted to offer interests in Australia), must include the prescribed details of funds that have been deregistered as Australian passport funds and foreign funds that have been denotified, and may also include details of other passport funds. The details to be included in the Register can be specified in the regulations. [Schedule 1, item 1, subsections 1214(1) and (3)]

3.75 The Register may be established and maintained by ASIC, or a third party on behalf of ASIC. If the register is kept by a third party, it will still be taken to be a Register kept by ASIC for the purposes of the Corporations Act. ASIC may decide the form in which the Register is kept. [Schedule 1, item 1, subsections 1214(1), (2) and (4)]

Deregistration of Australian passport funds

Voluntary deregistration

3.76 The operator of an Australian passport fund may lodge an application with ASIC for deregistration of the fund as an Australian passport fund. The application must be in the prescribed form. This mirrors the existing arrangements under section 601PA which allow the responsible entity of a registered scheme to lodge an application with ASIC for deregistration of the scheme. [Schedule 1, item 1, section 1216]

3.77 ASIC must deregister the fund if there are no members of the fund (whether in Australia or any host economy) who became members after the fund became an Australian passport fund or on the expectation that it would do so (excluding any member who is or has been the operator of the fund or a 'related party' of the operator). The purpose of this condition is to ensure that members who joined the fund on the basis that it was a passport fund are not disadvantaged as a consequence of the fund being deregistered. 'Related party' is defined for the purposes of the provisions relating to deregistration of registered schemes that are not Australian passport funds so as to align it with the definition in the Passport Rules. [Schedule 1, item 1, section 1216A and Schedule 2, item 39, section 9 definition of 'related party']

3.78 A person becomes a member of a fund on the expectation that it would become an Australian passport fund if the person acquires an interest in the fund on the basis of a representation that the fund intended to become an Australian passport fund. Such a representation could be made in any document or other communication that might reasonably be expected to be available to persons considering acquiring an interest in the fund. [Schedule 1, item 1, section 1216B]

3.79 The definition of when a person has an 'expectation' only applies to the provisions governing deregistration of Australian passport funds and denotification of foreign passport funds. The word, 'expectation', continues to have its ordinary English meaning when used in other parts of the corporations law. [Schedule 2, item 26, section 9]

Deregistration initiated by ASIC

3.80 ASIC may decide to deregister an Australian passport fund if it is of the opinion that one or more of the following has not been, is not being or is not likely to be complied with (whether in Australia or in any other place):

·
the Corporations Act and Regulations, including the Passport Rules incorporated in Australian law;
·
the ASIC Act and Regulations;

This is similar to the existing power that ASIC has to deregister a registered scheme in section 601PB. [Schedule 1, item 1, subsection 1216C(1)]

3.81 However, ASIC can only proceed with deregistration of the fund if it is of the opinion that to do so would not be contrary to the interests of members of the fund, whether in Australia or any host economy for the fund, who became members after the fund became an Australian passport fund, or on the expectation that it would do so. Any member who is or has been the operator of the fund or a related party of the operator is excluded from consideration when ASIC is forming its opinion. [Schedule 1, item 1, subsection 1216C(2) and (3)]

3.82 This requirement is intended to reflect the obligation in subsection 15(2) of Annex 2 of the MOC requiring ASIC to form an opinion about whether deregistration would not be in the interests of members who joined the fund after it became a passport fund or on the expectation that it would become a passport fund, prior to deregistering a registered scheme.

'Show cause' process

3.83 The new law introduces a 'show cause' process as a means of giving procedural fairness to the operator of an Australian passport fund which ASIC proposes to deregister. This process is modelled on existing processes that apply in relation to the cancellation of derivative trade repository licensees (see existing section 905J). Before deciding to deregister a fund as an Australian passport fund, ASIC must give the operator of the fund a written notice that requires the operator to show cause, at a hearing before a specified person, why the fund should not be deregistered. [Schedule 1, item 1, subsection 1216C(4)]

3.84 The written notice must specify the grounds on which it is proposed to deregister the fund as an Australian passport fund as well as a reasonable time and place at which the hearing is to be held. If the operator consents, the person conducting the hearing may fix a different time or place. [Schedule 1, item 1, subsection 1216C(5)]

3.85 The person conducting the hearing must give the operator an opportunity to be heard at the hearing and give ASIC a report about the hearing and a recommendation about the grounds in the notice on which it is proposed to deregister the fund. After considering the report and recommendation, ASIC may decide to take no further action in relation to the matter and give written advice of that decision to the operator, or deregister the fund as an Australian passport fund. If the operator does not attend the hearing, the person conducting the hearing may still prepare and give ASIC a report and a recommendation about the fund's deregistration. [Schedule 1, item 1, subsections 1216C(6) and (7)]

3.86 Neither a notice given by ASIC requiring the operator of the fund to show cause nor a written report about the hearing is to be considered a legislative instrument. [Schedule 1, item 1, subsection 1216C(8)]

Process for deregistration as an Australian passport fund

3.87 If ASIC proposes to deregister a fund as an Australian passport fund (whether subsequent to an application from the operator or ASIC's initiative), ASIC must give written notice setting out the date on which it proposes to do so to both the operator of the fund and each host regulator for the fund. The notice must be given at least 5 business days before the fund is deregistered. [Schedule 1, item 1, subsections 1216D(1) and (2)]

3.88 A fund is deregistered as an Australian passport fund by ASIC including an annotation on the Register of Passport Funds that the fund has been deregistered. The fund ceases to be an Australian passport fund on the day on which the annotation is made. Within five business days of the fund's deregistration, ASIC must give written notice of the deregistration as well as the date of deregistration to the operator of the fund and each host regulator for the fund. This is similar to the process in place for deregistration as a registered scheme under existing sections 601PA or 601PB. [Schedule 1, item 1, subsections 1216D(3), (4) and (5)]

Denotification of notified foreign passport funds

Voluntary denotification

3.89 In the same way as an operator of an Australian passport fund may lodge an application for deregistration as a passport fund, the operator of a notified foreign passport fund may lodge an application for denotification. The application must be in the prescribed form. [Schedule 1, item 1, subsections 1216E(1) and (2)]

3.90 If there are no Australian members of the fund who became members after the fund became a notified foreign passport fund or on the expectation that it would do so, then ASIC must denotify the fund as a notified foreign passport fund. As with deregistration of Australian passport funds, the purpose of this condition on members is to ensure that members who joined the fund on the basis that it was a notified foreign passport fund are not disadvantaged as a consequence of the fund being denotified. However, any member who is or has been the operator of the fund or a related party of the operator is excluded for the purposes of this requirement. [Schedule 1, item 1, subsections 1216F(1) and(2)]

3.91 A person becomes a member of a fund on the expectation that it would become a notified foreign passport fund if they acquire an interest in the fund on the basis of a representation that the fund intended to become a notified foreign passport fund. Such a representation could be any document or other means of communication that might reasonably be expected to be available to persons considering acquiring an interest in the fund. [Schedule 1, item 1, section 1216GB]

Notified foreign passport fund deregistered in the fund's home economy

3.92 ASIC must denotify a fund as a notified foreign passport fund if the fund's home regulator informs ASIC that it has been deregistered as a passport fund in its home economy. While subsection 12(5) of Annex 3 of the MOC (corresponding to the Passport Rules) establishes that the operator of the notified foreign passport fund must also notify ASIC that it has been deregistered as a passport fund, this requirement has not been included in the Australian law. This is because the home regulator is considered the authoritative source for confirming that a notified foreign passport fund has been deregistered in its home economy. [Schedule 1, item 1, section 1216H]

Process for denotification

3.93 As with deregistration as an Australian passport fund, if ASIC proposes to denotify a fund as a notified foreign passport fund (whether subsequent to an application from the operator or ASIC's initiative), ASIC must give a written notice setting out the date on which it proposes to denotify the operator of the fund, the home regulator and each other host regulator for the fund. The notice must be given at least 5 business days before the fund is denotified. [Schedule 1, item 1, subsections 1216J(1) and (2)]

3.94 As with deregistration as an Australian passport fund, a notified foreign passport fund is denotified from the day when an annotation is made on the Register of Passport Funds to that effect. ASIC must, within five business days of the fund's denotification, give written notice including the date of denotification to the operator of the fund, the home regulator and each other host regulator for the fund. [Schedule 1, item 1, subsections 1216J(3), (4) and (5)]

Consequences of deregistration on status as an Australian passport fund

3.95 The new law provides that a registered scheme ceases to be an Australian passport fund at the same time as it ceases to be a registered scheme. This is because being an Australian passport fund is conditional on being a registered scheme (although it is envisaged that when a legislative framework is established for corporative collective investment vehicles, these will also be able to register as Australian passport funds). Thus ASIC must either annotate the Register of Passport Funds to indicate that such a scheme is no longer a registered scheme or an Australian passport fund or if the Register is maintained by another body, require the other body to make the necessary annotations on the Register. [Schedule 2, item 146, section 601PBE]

Voluntary and ASIC-initiated deregistration of a scheme as a registered scheme, if the scheme is also an Australian passport fund

3.96 ASIC may only deregister a registered scheme that is also an Australian passport fund if, in addition to satisfying the usual grounds on which a registered scheme can be voluntarily deregistered (outlined in existing paragraphs 601PA(2)(a), (b) and (c)), there are no members of the fund (whether in Australia or any host economy for the fund) who became members after the fund became an Australian passport fund or on the expectation that it would do so (excluding any member who is or has been the operator of the fund or a related party of the operator). The application for deregistration must be in the form prescribed by the regulations. This mirrors the requirement on Australian passport funds wishing to deregister as passport funds (considering, as indicated above, that deregistration as a registered scheme implies deregistration as a passport fund). [Schedule 2, item 146, subsections 601PBB(1) to (4)]

3.97 In contrast, ASIC may only initiate the deregistration of a registered scheme that is an Australian passport fund if ASIC is of the opinion that deregistration would not be contrary to the interests of members of the fund who became members after the fund became an Australian passport fund or on the expectation that it would do so. ASIC is not required to consider the interests of any member who is or has been the operator of the fund or a related party of the operator. ASIC must also satisfy itself of all the usual grounds that it considers when deciding to deregister a registered scheme. As with the equivalent provision covering ASIC-initiated deregistration of a fund as an Australian passport fund, this provision is designed to implement the requirement in subsection 15(2) of Annex 2 of the MOC. [Schedule 2, item 146, subsections 601PBC(1) to (3)]

'Show cause' process

3.98 A 'show cause' process applies as a means of giving procedural fairness to the operator (that is, the responsible entity) of a registered scheme that is also an Australian passport fund in the event ASIC proposes to deregister the scheme. Under this process, ASIC must give the operator of the scheme a written notice that requires the operator to show cause, at a hearing before a specified person, why the fund should not be deregistered as a registered scheme. Such a notice must specify the grounds on which it is proposed to deregister the fund as a registered scheme as well as a reasonable time and place at which the hearing is to be held. If the operator consents, the person conducting the hearing may fix a different time or place. [Schedule 2, item 146, subsections 601PBC(4) and (5)]

3.99 The person conducting the hearing must give the operator an opportunity to be heard at the hearing and give ASIC both a report about the hearing and a recommendation about the grounds in the notice on which it is proposed to deregister the fund as a registered scheme. After considering the report and recommendation, ASIC may decide to take no further action in relation to the matter and give written advice of that decision to the operator, or deregister the fund as a registered scheme. [Schedule 2, item 146, subsections 601PBC(6) and (7)]

3.100 Neither a notice given by ASIC requiring the operator of the fund to show cause why the fund should not be deregistered or a written report about the hearing is to be considered a legislative instrument. [Schedule 2, item 146, subsection 601PBC(8)]

Notices relating to deregistration process

3.101 If ASIC proposes to deregister a registered scheme that is an Australian passport fund, it must give written notice setting out the date on which it proposes to deregister the registered scheme on the national database, to the operator and to each host regulator for the Australian passport fund. The notice must be given at least 5 business days before the fund is deregistered as a registered scheme. [Schedule 2, item 146, subsections 601PBD(1) and (2)]

3.102 If ASIC subsequently deregisters the registered scheme, it must give written notice that the scheme has been deregistered and the date on which it has been deregistered on the national database, to the operator and to each host regulator for the Australian passport fund. The notice must be given within 5 business days after the fund is deregistered as a registered scheme. [Schedule 2, item 146, subsections 601PBD(3) and (4)]

Effect of reinstatement of a registered scheme that was an Australian passport fund

3.103 Reinstatement does not result in the scheme becoming an Australian passport fund, even if the scheme was an Australian passport fund immediately before its deregistration. Accordingly, such a scheme would need to reapply to become an Australian passport fund. [Schedule 2, item 147, subsection 601PC(5)]

Consequential amendments

3.104 When referring to registered schemes, the Corporations Act currently refers to both 'registered managed investment schemes' and 'registered schemes'. Noting that a notified foreign passport fund is generally treated as a MIS, but is neither a registered scheme nor generally to be treated as a registered scheme, references to registered MISs are now standardised to refer to registered schemes to avoid confusion. [Schedule 2, items 21, 47, 82 to 84, 142, 166 to 168 and 350, sections 9 definitions of 'consolidated entity' and 'substantial holding', section 247A, subsection 247A(1), heading to Part 2G.4, paragraph 601JB(4)(b), subsection 671B(1) and note to subsection 1378(1)]

3.105 A consequential amendment clarifies that the existing provisions governing deregistration of a registered scheme only apply to registered schemes that are not Australian passport funds. A series of consequential amendments are also made to provide separately for deregistration of a registered scheme that is an Australian passport fund. This separate process is designed to allow for a fund to be deregistered as an Australian passport fund and as a registered scheme through a single integrated process. [Schedule 2, items 143 to 146, section 601PBA]


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