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 4 Notified foreign passport funds: Relationship with members and prospective members in Australia

Outline of chapter

4.1 Items 213 to 257 of Schedule 2 of the Bill amend Parts 7.7, 7.7A and 7.9 of the Corporations Act to set disclosure and other requirements applicable to financial products and services, particularly when parties make offers in Australia to solicit investors to invest in notified foreign passport funds.

4.2 Items 65 to 89 of Schedule 2 of the Bill amends Chapter 2M of the Corporations Act to require the operator of a notified foreign passport fund to provide annual financial reports of the fund and periodic statements of a member's investment in a fund, to fund members in Australia.

4.3 The Bill also extends certain existing disclosure requirements and the obligations to provide information on request that apply to MISs and companies to operators of notified foreign passport funds. For example, certain persons have a right to request a copy of a notified foreign passport fund's constitution or its register of members.

4.4 Where the use of the information received is currently subject to restrictions, similar restrictions apply to the information received from operators of notified foreign passport funds.

Context of amendments

4.5 Section 2 of Annex 1 of the MOC, allows for host economies to regulate disclosure, distribution, member complaints and other similar investor protections.

4.6 In addition to the above matters, additional requirements may be imposed by the host economy, as per section 3 of Annex 1 of the MOC, so long as the requirements are:

·
not unduly burdensome for the foreign passport fund in comparison to the requirements applying to CISs in the host jurisdiction; and
·
are reasonable to promote retail investors' confidence in the funds.

Summary of new law

4.7 An offer of interests, or an option to acquire an interest, in a notified foreign passport fund (a foreign passport fund product ) requires a PDS. In addition to the standard requirements, the PDS must include key information about the fund including its home economy and members' main rights and remedies under the home economy's laws.

4.8 Retail clients must also be provided with a Statement of Advice if they receive personal advice on a foreign passport fund product. There is no requirement to provide retail clients with a Financial Services Guide if the financial service relates only to the operation of the fund.

4.9 The existing prohibitions on short-selling financial products and giving conflicted remuneration have been extended to foreign passport fund products. These products are also subject to the existing requirements relating to dealing with money received and the cooling-off period.

4.10 Operators of notified foreign passport funds must provide Australian members [7] with a copy of the annual financial report for the fund and the auditor's report for the financial report within three months after the end of the financial report. The copies must be in English, unless the member has elected to receive the reports in an official language of the home economy of the fund. Members may elect to receive the reports either in hard copy or electronically. If the member makes no election, the member may access the English copies of the reports on a specified website. In this case, the operator makes English copies of the reports available on a website and notifies in writing all Australian members that have not made an election of the availability of the reports and the website address for accessing them.

4.11 Operators of notified foreign passport funds must provide retail members in Australia with a periodic statement for each reporting period during which the holder holds interests in the fund.

4.12 Operators of notified foreign passport funds must provide certain information in relation to their fund in response to requests from specified persons. These include prospective, current, and former members of notified foreign passport funds and, depending on the requirement, to other persons that meet applicable conditions.

4.13 There are certain circumstances where investors or other parties may request other information in relation to a notified foreign passport fund from the operator of the fund. Fees may apply and the use of the information received may be subject to limitations. For example, a party may request a copy of the register of members or additional information more generally.

4.14 The new law provides certain persons with the right to obtain a copy of the register of members and the constitution of a notified foreign passport fund. It also restricts the purposes for which the register of members may be used.

4.15 An Australian member or former member of the fund who acquired an interest in the fund in Australia, or is ordinarily resident in Australia may request a copy of the constitution. Furthermore, any person meeting these criteria, as well as any person in Australia, may request a copy of the register of members from the operator of a notified foreign passport fund. The operator must provide a copy in English or in an official language of the home economy of the fund within seven days after receiving the application. The applicant must pay the reasonable costs of providing the copy.

4.16 Information obtained from a register of members cannot be used to contact, or send material to members, other than in accordance with the law.

4.17 ASIC may require the operator of a notified foreign passport fund to lodge a copy of the whole or a specified part of the register of members of the fund.

4.18 The operator of a notified foreign passport fund must provide Australian members of the fund with a copy of any reports that it makes available to members in the home economy without charge, as well as a summary in English where the language is not English.

4.19 Where notified foreign passport funds meet specified requirements, such as number of members in Australia, they will be subject to the existing enhanced disclosure requirements that apply to certain body corporates and schemes.

4.20 ASIC may destroy documents lodged in relation to a notified foreign passport fund that it is no longer required to retain and no longer deems necessary to retain.

Comparison of key features of new law and current law

New law Current law
An offer of a foreign passport fund product generally requires a PDS. An offer of a managed investment product generally requires a PDS.
A Statement of Advice must be provided to a retail client for a foreign passport fund product. A Statement of Advice must be provided for most financial products, including managed investment products.
The operator of a notified foreign passport fund does not need to provide a retail client with a Financial Services Guide to merely operate the fund. A responsible entity does not need to provide a Financial Services Guide if the financial service merely relates to operating the fund.
A person is prohibited from recommending or offering an interest in a foreign passport fund which is not a notified foreign passport fund. Short sales are only permitted where the person has a right to vest the product in the buyer. A person is prohibited from recommending or offering an interest in an unregistered scheme which is required to be registered. Short sales of managed investment products are only permitted where the person has a right to vest the product in the buyer.
New members of notified foreign passport funds have a 14 day cooling-off period. New members of registered schemes have a 14 day cooling-off period and their money must be held in designated accounts before they receive their interest.
The operator of a notified foreign passport must provide Australian members, free of charge, with a copy of the annual financial report for the fund and the auditor's report for the financial report.

There is no option for this to be provided as a concise financial report.

Subject to any member election to either not receive a report or receive the report in a particular manner, reports may be provided in hard copy or electronically, or if a member has not elected to receive a hard copy, then by accessing the report on a specified website.

The report is to be provided within three months of the end of the financial year.

Reports are provided in English unless a member has elected to receive a report in an official language of the fund's home economy other than English.

Companies, registered schemes and disclosing entities must provide to members, free of charge, specified reports including the annual financial report and the auditor's report for the financial report.

If conditions are met, they can provide a concise financial report in lieu of a full financial report.

Subject to any member election to either not receive a report or receive the report in a particular manner, reports may be provided in hard copy or electronically, or if a member has not elected to receive a hard copy, then by accessing the report on a specified website.

For registered schemes, the report is to be provided within three months of the end of the financial year.

Reports are provided in English.

Retail members of a notified foreign passport fund who are in Australia are provided by the operator of a fund with periodic statement in relation to their investment in the fund. Issuers of financial products with an investment component must provide retail investors with a periodic statement in relation to their investment.
An Australian member or former member of the fund who acquired an interest in the fund in Australia, or is ordinarily resident in this Australia may request a copy of the constitution. They must pay the required fee. A member of an Australian registered scheme may request a copy of the constitution. They must pay the required fee.
An Australian member or former member of the fund who acquired an interest in the fund in Australia, or is ordinarily resident in this Australia, as well as anyone in Australia, may request a copy of the register of members. They must pay the required fee. Anyone may request a copy of the register of members of an Australian registered scheme. They must pay the required fee.
Copies of the constitution or register of members must be sent (but not necessarily received) within seven days unless ASIC allows a longer period. Copies of the register of members must be provided within seven days. ASIC may allow a longer period for requests for copies of the register.
The information in the register of members of a notified foreign passport fund or Australian scheme must not be used, or disclosed for the purpose of using, it to:

·
contact or send material to members, unless the material relates to the member's interest or has been approved by the fund; or
·
any other purpose specified in regulations.

The information in a register of members for an Australian scheme must not be used or disclosed for the purpose of using it to:

·
contact or send material to members, unless the material relates to the member's interest or has been approved by the fund; or
·
any other purpose specified in regulations.

ASIC may require the operator of a notified foreign passport fund to lodge a copy of the whole or a specified part of the register of members of the fund. A company or registered scheme must set up and maintain a register of members. A company or registered scheme must allow anyone to inspect the register.
The operator of a notified foreign passport fund must provide Australian members of the fund with a copy of any reports that it makes available to members in the home economy without charge, as well as a summary in English where the language is not English. No equivalent.
Notified foreign passport funds meeting with 100 or more members holding interests of a class in Australia may be subject to enhanced disclosure. Bodies or MISs with 100 or more members may be subject to enhanced disclosure.
ASIC may destroy or otherwise dispose of documents lodged in relation to a notified foreign passport fund that it is no longer required to retain and no longer deems necessary to retain. ASIC may destroy or otherwise dispose of documents that it is no longer required to retain and no longer deems necessary to retain that were lodged under or for the purposes of a provision of Chapter 7.
The operator of a notified foreign passport fund may be required to compensate the fund if the operator breaches the prohibition on paying conflicted remuneration to a financial services licensee. A person may be required to compensate another person or registered scheme if the first person breaches a financial services civil penalty provision and damage results.
A platform operator is prohibited from accepting volume-based shelf-space fees from a notified foreign passport fund. A platform operator is prohibited from accepting volume-based shelf-space fees from a financial services licensee or a Registrable Superannuation Entity (RSE) licensee.

Detailed explanation of new law

4.21 A notified foreign passport fund is to be treated as a MIS for the purposes of the Corporations Act. However, this does not affect the other legal characteristics of a notified foreign passport fund (see treatment of notified foreign passport funds in Chapter 3 of this Explanatory Memorandum).

Foreign passport fund products and investments in notified foreign passport funds

4.22 A foreign passport fund product is an interest, legal or equitable right in an interest or an option to acquire an interest in a notified foreign passport fund. [Schedule 2, item 204, section 761A]

4.23 This definition is equivalent to the existing definition of managed investment products (which covers interests, rights in interests and options in registered schemes). A specific definition is required for foreign passport fund products because, while notified foreign passport funds are deemed to be MISs, they are not registered schemes and will not be captured by the definition of managed investment product. The definition of managed investment product only captures interests etc. in 'registered schemes', not 'managed investment schemes'.

4.24 For all parts of the Corporations Act except Chapters 6 to 6D and 7, the definition of securities includes interests in a notified foreign passport fund, a legal or equitable right in an interest in notified foreign passport fund or an option to acquire an interest in a notified foreign passport fund. [Schedule 2, item 56, subsection 92(2A]

4.25 Foreign passport fund products are financial products for the purposes of Chapter 7. [Schedule 2, item 208, paragraph 764A(1)(bb)]

4.26 Rights to acquire foreign passport fund products by way of issue under a rights issue are securities for the purposes of Chapter 7. All foreign passport fund products are included in the definition of security for the purposes of Part 7.11. [Schedule 2, items 205 and 206, section 761A definition of 'security']

Example 4.1 : Circumstances where foreign passport fund products are securities for the purposes of Chapter 7 Amanda has an interest in The Foreign Fund. Bob has a right to acquire an interest in The Foreign Fund by way of issue under a rights issue.Both Amanda and Bob hold a foreign passport fund product and this is a type of 'financial product'.Amanda's interest is a security for the purpose of Part 7.11, only. Bob's right is a security for the purpose of the entirety of Chapter 7.

4.27 An investment in a notified foreign passport fund is an interest in a notified foreign passport fund, a legal or equitable interest in an interest in the fund (for example, a beneficial interest in a share of a corporate fund), a derivative which derives its value from an interest in the fund, or an option to dispose or acquire an interest in the fund. Investments in the operator of a notified foreign passport fund are also treated as investments in the fund. This mirrors the definition of an investment in a registered scheme under the existing law. [Schedule 2, item 32, section 9, definition of 'investment']

Disclosure obligations

PDSs

When a PDS is required

4.28 The operator of a foreign passport fund must provide a copy of the PDS for the fund when notifying ASIC of its intention to offer interests in Australia.

4.29 The PDS requirements in existing Part 7.9 automatically apply to most offers and recommendations that are received in this jurisdiction and relate to foreign passport fund products.

4.30 The only exception is for rights to acquire an interest in a foreign passport fund product under a rights issue. These rights are exempt from the PDS requirements because they are securities for the purposes of Chapter 7 and the PDS requirements do not apply to securities.

4.31 The issue of all foreign passport fund products is taken to occur in the course of a business of issuing financial products. This ensures that regulated persons cannot take advantage of the exemption from the PDS requirements which apply to financial products not issued in the course of a business of issuing financial products. It parallels the existing requirements for managed investment products. [Schedule 2, item 253, paragraph 1010B(2)(aa)]

4.32 Existing exemptions from the requirement to provide a PDS that apply to managed investment products are extended to foreign passport fund products. [Schedule 2, items 254 to 258, subparagraphs 1012D(5)(b)(ia) and 1012D(7)(ia), subsections 1012D(9C) and (9D), and paragraphs 1012D(10)(a) and (b)]

4.33 Sections 1012DAA and 1012DA of the existing law exempt issuers from the PDS requirements for certain indirect issues and rights issues of quoted securities if they provide a notice with certain disclosures. For foreign passport fund products, the notice must state that the issuer has complied with the new financial reporting requirements and continuous disclosure requirements for notified foreign passport funds. [Schedule 2, items 262 to 267 , paragraphs 1012DAA(7)(da) and 1012DA(2)(a), (2)(b), (5)(d) and (6)(e)]

4.34 The existing law grants ASIC the power to require exempt issuers to prepare a PDS if they contravene certain provisions in the Corporations Act. These provisions are expanded to include the new financial reporting requirements and continuous disclosure requirements for notified foreign passport funds. [Schedule 2, items 260 and 261, paragraphs 1012DAA(3)(aa) and (ba)]

4.35 A correction has been made to fix a grammatical error in the definition of 'responsible person'. [Schedule 2, item 268, subsection 1013A(3)]

Content requirements for PDSs

4.36 PDSs for foreign passport fund products must include the same content as those for other financial products. Foreign passport fund products are taken to have an investment component and, accordingly, the PDS must also state whether the fund considers any labour standards or environmental, social or ethical considerations when making investment decisions. [Schedule 2, item 269, subsection 1013D(2A)]

4.37 The PDS does not need to include any of the general information required under existing sections 1013D, 1013E or 1013F if the foreign passport fund interest is a continuously quoted security (as defined in section 111AE) and the information is included in the most recent financial report (prepared in accordance with the home economy's reporting requirements), the accompanying auditor's report or a continuous disclosure notice lodged before the date of the PDS. These provisions apply in the ordinary way to interests in a notified foreign passport fund, as continuously quoted securities are considered to have been on the market for a sufficient period such that the full PDS requirements are not needed to ensure that the market is appropriately informed. If the preparer of the PDS seeks to rely on this exemption, the PDS must state that regular reporting requirements apply to the fund and inform people of their right to request a copy of the relevant document free of charge. [Schedule 2, items 270 to 272, paragraphs 1013FA(2)(a) and (aa) and subparagraph 1013FA(2)(b)(ii)]

4.38 In addition to the general content requirements applying to other financial products, PDSs for foreign passport fund products must also make certain disclosures aimed at clarifying for Australian investors the regulatory framework that applies to the fund, and the investors' rights and remedies under that framework. Specifically, the PDS for the fund must clarify:

·
the fund's home economy;
·
that the fund, the operator of the fund and the fund custodian are regulated by the fund's home economy laws and that members' rights and remedies may differ from those available to members of registered schemes;
·
that information may be posted on the fund's website and details about how this information can be accessed by members;
·
members' main rights and remedies under the fund's home economy laws.

[Schedule 2, item 273, section 1013GA]

4.39 An issue may only be made on the basis of an application form that is accompanied by a PDS. This is achieved by amending the definition of 'relevant financial product' so that it includes foreign passport fund products. [Schedule 2, item 278, paragraph 1016A(1)(aa)]

4.40 If the foreign passport fund product is an ED security [8] , the PDS must also state that the fund is subject to regular reporting and disclosure obligations and that documents lodged with ASIC are available from ASIC. The PDS must either include copies of the financial statement and auditor's report for the most recent financial year, or inform people of their right to obtain a copy of these documents from the issuer or the seller. [Schedule 2, item 274, subsections 1013IA(1) to (3)]

4.41 If the PDS does not include copies of the most recent financial statement and auditor's report, a person may request a copy in English. The copy must be handed, mailed, emailed or faxed to the person or their agent free of charge and within five days after the request is received. The penalty for contravening this requirement is 100 penalty units or imprisonment for two years or both. [Schedule 2, items 274 and 354, subsections 1013IA(5) and (6) and schedule 3 table item 291BA]

Lodgment with ASIC

4.42 PDSs and supplementary PDSs for foreign passport fund products and Australian passport funds must be lodged with ASIC. [Schedule 2, items 275, paragraph 1015B(1)(ba)]

4.43 The operator of the fund or the responsible person (as defined in subsection 1013A(3)) must consent to the lodgment. This mirrors the requirements for Australian passport funds. It also allows all passport funds to streamline their disclosures in another participating economy by using a 'wrapper' (that is, the original disclosure and a covering note containing any special disclosures required in the particular jurisdiction). [Schedule 2, items 244 to 277, paragraph 1015B(1)(ba) and subsections 1015B(2) and (3)]

Requests for additional information

4.44 A person who is entitled to a PDS, a licensee or an authorised representative may request additional information about a foreign passport fund product from the issuer under existing section 1017A. This provision applies to all financial products and the new law includes foreign passport fund products in the definition of 'financial products' (see paragraphs 4.22 to 4.25 of this Explanatory Memorandum).

4.45 The issuer may provide the requested information by making a document available for inspection at a suitable place in this jurisdiction during normal business hours or in any other way agreed by the parties. [Schedule 2, item 280, subparagraph 1017A(4)(a)(i)]

Financial Service Guides and Statements of Advice

4.46 A Financial Services Guide is generally required to be provided to retail clients by an entity providing financial services and includes information on the services offered, fees charged and complaints procedures. The operator of a notified foreign passport fund does not need to provide a retail client with a Financial Services Guide if they issue an interest in the fund or provide any other financial service that relates only to the operation of the fund. This exemption mirrors the exemption for responsible entities of registered schemes and is appropriate as the relevant information is contained in the PDS. [Schedule 2, item 234, subsection 941C(3A]

4.47 Existing offences apply if a financial services provider or licensee fails to provide a disclosure document or provides a defective document. Notes to the offence provisions confirm that the defendant bears the evidential burden in relation to proving that an exemption applies. These notes are updated to also include references to new subsection 941C(3A), which applies to the operator of a notified foreign passport fund. [Schedule 2, items 239 to 248 , notes to subsections 952C(1), 952C(3), 952D(1), 952D(2), 952E(1), 952E(3), 952I(1), 952I(3) and 952J(1) and note to section 952K]

4.48 The existing law requires a licensee or a representative of the licensee to provide a Statement of Advice to a retail client if they provide the client with personal advice on a financial product. Financial products include foreign passport fund products (see paragraphs 4.22 to 4.25 of this Explanatory Memorandum).

4.49 Existing exemptions from the requirements to provide a Statement of Advice that apply to managed investment products are extended to foreign passport fund products. [Schedule 2, items 19, 235 to 238, section 9, definition of 'cash management trust interest', paragraph 946B(1)(c) and subsection 946B(2) definitions of 'able to be traded on a licensed market', 'cash management facility' and 'cash management facility advice']

Ongoing disclosure requirements

4.50 The ongoing disclosure requirements in Division 3 of Part 7.9 for interests in a notified foreign passport fund that are ED securities do not apply to foreign passport fund products that are subject to the continuous disclosure obligations in Chapter 6CA. This replicates the exemption for managed investment products. [Schedule 2, items 281 and 282, subsection 1017B(2) and note to subsection 1017B(2)]

Dispute resolution systems

4.51 Where the issue or sale of certain kinds of financial products is not covered by an AFSL, the issuer and any person required to provide a Product Disclosure Statement must have a dispute resolution system in place. This requirement is ensures that retail clients still have access to adequate dispute resolution systems where the AFSL regime does not apply.

4.52 Amendments are made to section 1017G to clarify that, as the issuer of a notified foreign passport fund product, the Operator of the fund must have external dispute resolution arrangements in place in respect of the operation of the fund. [Schedule 2, item 285, subparagraphs 1017G(2)(a)(ii) and (b)(ii)]

Continuous and enhanced disclosure for notified foreign passport funds

4.53 If any interests in a notified foreign passport fund are ED (enhanced disclosure) securities, then the notified foreign passport fund is the disclosing entity in relation to those interests. Interests in a notified foreign passport fund are ED securities when:

·
included in the official list of a prescribed financial market and subject to that market's listing rules; or
·
the interests in the fund are held by more than 100 or more people in Australia.

[Schedule 2, items 33, 58 to 65, section 9 definition of 'listing market', paragraph 111AD(1)(a), heading to section 111AE, paragraph 111AE(1)(a), new subsection 111AE(1B), new section 111AFB, heading to section 111AH, subsections 111AH(1A) and (2)]

4.54 A person holds securities in a notified foreign passport fund if they are registered as the holder of the securities in a register maintained by the operator of the fund or entitled to be registered in the register. [Schedule 2, item 64, subsection 111AH(1A)]

4.55 A prescribed financial market [9] will be a listing market for a notified foreign passport fund when the operator of the notified foreign passport fund has agreed to listing the fund on the market and to the market rules that apply. The definitions that relate to ED securities apply consistently to interests in notified foreign passport funds and interests in managed investment schemes to ensure similar application of disclosure provisions. [Schedule 2, item 61, subsection 111AE(1B)]

4.56 If a notified foreign passport fund has a listed market and ED securities under subsection 111AE(1B), then those securities are also quoted ED securities under section 111AM. A notified foreign passport fund with quoted ED securities is a listed disclosing entity.

4.57 Chapter 6CA continuous disclosure provisions apply to any notified foreign passport fund that is a listed disclosing entity. In particular, if the listing rules of a fund's listing market apply to a listed notified foreign passport fund, then the operator of the fund must notify the market operator of certain information that is expected to materially affect the price of their securities and is not generally available in accordance with the provisions of the listing rules. This mirrors the requirements for listed registered schemes. [Schedule 2, items 198 and 199, subsections 674(3A) and (5)]

4.58 Additional disclosure rules apply if the listing rules of the listing market (or listing markets) do not contain provisions that require a notified foreign passport fund that is either a listed disclosing entity or an unlisted disclosing entity to disclose information to the market operator. If the operator of that notified foreign passport fund becomes aware of certain information that is expected to materially affect the price of ED securities of the fund (that has not been disclosed in a PDS), the operator must lodge a document with ASIC containing that information. [Schedule 2, items 200 and 201, subsections 675(2) and (4)]

4.59 The existing infringement notice regime for alleged contraventions of continuous disclosure obligations, contained in Part 9.4AA, applies to alleged contraventions of the new continuous disclosure provisions for listed notified foreign passport funds. The operator of the fund is taken to be the disclosing entity for the purposes of applying the regime. This ensures notified foreign passport funds are given equivalent treatment to listed registered schemes. [Schedule 2, items 308 to 312, subsections 1317DAA(1) and (3) and paragraphs 1317DAA(2)(f), 1317DAE(3)(e), 1317DAE(5)(c) and 1317DAG(5)(c)]

Restrictions on offering foreign passport fund products

4.60 A person is prohibited from recommending or offering an interest in a foreign passport fund product if the fund is not a notified foreign passport fund. This mirrors the prohibition on recommending or offering an interest in a managed investment product which is required to be registered under Chapter 5C but has not been registered. It does not affect the making of recognised offers under the mutual recognition arrangements in place between Australia and New Zealand as reflected in existing Chapter 8 of the Corporations Act. [Schedule 2, item 288, section 1020BAA]

4.61 The maximum penalty for contravening this prohibition is 200 penalty units or imprisonment for five years or both. [Schedule 2, item 355, schedule 3 table item 300BA]

Short-selling

4.62 The Passport Rules prohibit notified foreign passport funds from short-selling foreign passport fund products.

4.63 Other parties may short-sell foreign passport fund products but only if the person has, or believes on reasonable grounds, that the person has a presently exercisable and unconditional right to vest the products in the buyer. This replicates the restrictions on short-selling managed investment products. [Schedule 2, items 289 and 290, heading to section 1020B and paragraph 1020B(1)(ba)]

4.64 If the short sale is supported by a securities lending arrangement, the seller of the foreign passport fund product and the AFS licensee must make the disclosures in existing Division 5B. [Schedule 2, item 287, subsection 1020AA(1)]

Conflicted remuneration

4.65 The operator of a notified foreign passport fund is prohibited from giving an Australian financial services licensee conflicted remuneration (that is, remuneration that could reasonably be expected to influence what financial products are recommended or the financial product advice that is given to a consumer). This is by virtue of existing prohibitions on issuers or sellers of financial products giving conflicted remuneration at section 963K. The operator of a notified foreign passport fund is the issuer of the fund's products (see paragraph 5.76 of this Explanatory Memorandum).

4.66 A person may be ordered by a Court to compensate a notified foreign passport fund if the person breached a financial services civil penalty provision, including the prohibition on an issuer or seller of a financial product giving a financial services licensee conflicted remuneration. [Schedule 2, item 327, subsection 1317HA(1)]

4.67 For further information about compensation orders, see paragraphs 6.92 to 6.97.

4.68 The prohibition on a financial services licensee accepting a volume-based shelf-space fee is extended to notified foreign passport funds by applying Subdivision A of Division 5, Part 7.8 to the operator of a notified foreign passport fund. This ensures that a financial services licensee cannot accept a volume-based shelf-space fee from the operator of a notified foreign passport fund. [Schedule 2, item 249, paragraph 964(1)(b)]

Acquiring a foreign passport fund product

4.69 The existing law requires issuers and sellers to hold money received for financial products in a designated account before they issue the product. However, these requirements do not apply to money received to acquire an interest or increase an existing interest in a foreign passport fund product. [Schedule 2, item 284, subsection 1017E(1A)]

4.70 New retail clients of foreign passport fund products are entitled to a 14 day cooling-off period. The cooling-off period operates in the same way as for managed investment products, even if redemptions are subsequently suspended. In other words, if redemptions are suspended under section 51 of the Passport Rules, new members may still return their product within 14 days. [Schedule 2, item 286, subparagraph 1019A(1)(a)(iiia)]

4.71 It is appropriate to apply the cooling-off provisions to foreign passport fund products as this is an aspect of distribution and paragraph 2(1)(c) of Annex 2 of the MOC allows the host economy to apply its own laws in relation to distribution.

Providing reports and periodic statements to Australian members [10]

Annual financial reports to Australian members

Obligation on the operator

4.72 The operator of a notified foreign passport fund is responsible for the performance of the fund's financial reporting obligations under Chapter 2M of the Corporations Act, including providing copies of the fund's annual financial report and audit statements to members in this jurisdiction, as well as reporting to ASIC on financial matters. [Schedule 2, items 85 to 88, heading to subsection 285(1) and subsections 285(1A) and (4)]

4.73 For the purposes of Chapter 2M, debts incurred in operating the fund are taken to be debts of the fund. [Schedule 2, item 88, paragraph 285(4)(b)]

Requirement to provide copies of annual financial reports to members

4.74 Operators of notified foreign passport funds must provide Australian members with a copy of the financial report for the fund for the financial year and each auditor's report that relates to the financial report. The copies are to be provided within three months after the end of the financial year and the operator is taken to have complied with this once it has met all the necessary requirements. This replicates the existing law in relation to MISs. [Schedule 2, items 89 to 93, heading to section 314 and subsections 314A(1) and 315(3A) and (6)]

4.75 The financial report is prepared in accordance with the financial reporting requirements that apply to the fund in its home economy under the Passport Rules. The Passport Rules set out the specific financial reporting requirements that apply to passport funds from each home economy. For example, Australian passport funds must prepare financial reports according to the requirements set out in Chapter 2M of the Act, and under the accounting standards made by the Australian Accounting Standards Board. [Schedule 2, item 91, paragraph 314A(1)(a)]

4.76 For a notified foreign passport fund, the financial year is a 12 month period in relation to which the operator must prepare a report for the fund in its home economy under the Passport Rules. This may be either a shorter or longer period than 12 months if an exception under the home economy law of the fund allows for this. [Schedule 2, items 29 and 109, section 9 definition of 'financial year' and section 323DAA]

4.77 An example of when a shorter period or longer period may apply is when a fund is established part-way through a financial year.

4.78 A consequential amendment is made to clarify that section 323D, which establishes rules for financial years and half-years, refers to financial years and half-years only for companies, registered schemes and disclosing entities. [Schedule 2, item 108, heading to section 323D]

How a report may be provided

4.79 If an Australian member has made an election to have the reports of a notified foreign passport fund sent to them in a particular manner, that is, in hard copy or electronically, the operator of the fund must provide the report in the manner specified in the election. The operator must at least once directly write to each Australian member notifying the member that they may elect to receive, free of charge, either a hard copy or an electronic copy of the reports for each financial year. If they do not make such an election, the member may access the reports on a specified website. An election will be treated as a standing election for each later financial year until the member changes their election. Where the operator is required to send the reports either in hardcopy or electronically, an Australian member of the fund may request the operator not to send one or more of the required reports, either for a particular financial year or on an ongoing basis. [Schedule 2, items 91 and 94 to 96, subsections 314A(2) to (6), heading to section 316, and section 316AA]

4.80 Note that paragraph 9(1)(d) of the Electronic Transactions Act 1999 also provides that information that is required to be given to a person who is neither a Commonwealth entity nor a person acting on behalf of a Commonwealth entity may be given by electronic means if the person to whom the information is required to be given consents to the information being given by that means. However, the detailed and prescriptive nature of section 314A, which is modelled on the existing section 314 applicable to managed investment schemes, implies that electronic communication of the annual financial reports is intended to be dealt with only by that section, rather than under the Electronic Transactions Act 1999.

4.81 The default language for copies of reports is English. However, when making an election, a member may elect instead to receive the copies in an official language of the home economy of the fund. [Schedule 2, item 91, paragraphs 314A(2)(b) and (3)(d) and subsection 314A(7)]

4.82 Failure to provide a copy of the annual financial report and the auditor's report relating to the financial report; to provide a notice at least once informing the member they may elect to receive a hard copy or electronic copy of the reports; and to provide the reports in English or in an official language of the home economy of the fund (if the member so elects) are offences of strict liability that carry a maximum penalty of 10 penalty units or 3 months imprisonment, or both. This is consistent with the existing strict liability offences that attach to the requirements for annual financial reporting to members of companies, registered schemes and disclosing entities in section 314. [Schedule 2, items 91 and 351, subsection 314A(9) and schedule 3 table item 108A]

4.83 By making a contravention of the reporting requirements a strict liability offence, the amendments mean that it will not be necessary for the prosecution to prove fault as part of the offence. A strict liability offence is appropriate in these circumstances because of the central role financial reporting plays in ensuring members are fully informed about the operation and financial position of the fund into which they have invested. This provides a strong deterrent for directors of operators of notified foreign passport funds against contravening the reporting requirements. It is also important that that this deterrent effect is no less strong than it is for directors of Australian companies, responsible entities of registered schemes and disclosing entities, hence equivalent penalties have been imposed for these offences. The Part 2M.3 reporting requirements are also civil penalty provisions, which reflects the importance of the requirements for investors in passport funds. These civil penalties will deter non-compliance, consistent with the approach taken for Australian funds.

4.84 The existing offence in subsection 344(1) for directors of a company, the responsible entity of a registered scheme or a disclosing entity who fail to take all reasonable steps to comply with Parts 2M.2, 2M.3 and certain provisions of Part 2M.4 is also extended to directors of the operator of a notified foreign passport fund. The offence is a civil penalty provision under section 1317E. Under subsection 344(2), it is also a criminal offence if the person who has contravened subsection 344(1) has done so dishonestly. A contravention of subsection 344(2) carries a maximum penalty of 2,000 penalty units or five years imprisonment, or both. An amendment is also made to the note to subsection 344(1) to ensure it contains the correct legislative reference. [Schedule 2, items 117 to 119 and 313, note to subsection 344(1), subsections 344(1A) and (2) and column 1 of table item 5 of subsection 1317E(1)]

Periodic statements

4.85 The issuer must provide retail clients in Australia who hold a foreign passport fund product with a periodic statement on their investment for each reporting period. [Schedule 2, item 283, subparagraph 1017D(1)(b)(ia)]

4.86 The statement must be given within six months after the end of the period to which it relates and include information that the issuer has reason to believe is required for the member to understand their investment in the fund, including if applicable, each matter specified in subsection 1017D(5).

4.87 Consistent with the existing offence for an issuer failing to provide a periodic statement to a retail investor holding a financial product with an investment component, the offence for operators of notified foreign passport funds carries a penalty of 100 penalty units or imprisonment for two years, or both (see schedule 3 table item 297C).

Obtaining a copy of the constitution

Persons who may request a copy

4.88 An Australian member, or former member, of a notified foreign passport fund who either acquired an interest in the fund in Australia or is ordinarily resident in Australia may request a consolidated copy of the fund's constitution from the operator of the fund, subject to meeting certain requirements that are explained below. [Schedule 1, item 1, subsection 1213J(1)]

4.89 This new right only applies to notified foreign passport funds, not to Australian passport funds. Members of Australian passport funds have a right to a copy of the constitution under existing subsection 601GC(4).

4.90 Failure by an operator of a notified foreign passport fund to provide a consolidated copy of the fund's constitution as requested is an offence of strict liability carrying a penalty of 60 penalty units. This offence is given extended geographical jurisdiction - Category A as set out in section 15.1 of the Criminal Code.

4.91 The imposition of strict liability means it will not be necessary for the prosecution to prove fault as part of the offence. This is appropriate as it ensures there is a strong incentive for operators of notified foreign passport funds to comply with the requirement to provide members with a fund's constitution so that members can be informed about the arrangements under which a fund into which they have invested operates. The penalty for the offence complies with the requirements for strict liability offences as set out in the Guide as:

·
the offence is not punishable by imprisonment;
·
the penalty does not exceed the maximum allowable for strict liability offences;
·
and the implications of a contravention is significant enough to warrant such a penalty.

4.92 Applying extended geographical reach - Category A to this offence is critically important given that operators of notified foreign passport funds will be located in another jurisdiction. Category A ensures that the offence can apply to conduct that occurs wholly or partly in Australia, or where the result of the conduct occurs wholly or partly in Australia (even if the conduct takes place wholly in another country). However, where the conduct takes place wholly in another country, it is a defence if there is no offence in the country where the conduct occurred corresponding to the Commonwealth offence charged. [Schedule 1, item 1, subsections 1213J(1) and (8)]

4.93 A contravention may also attract a penalty notice under the existing penalty notice regime contained in section 1313. This is consistent with the Guide, which holds that infringement notice regimes should only apply to relatively minor offences of strict or absolute liability and where a penalty must be imposed immediately to be effective. [Schedule 2, item 306, subparagraph 1313(8)(aa)(ii)]

Process for making a request

4.94 Requests for a copy of the constitution must be provided in writing to the operator of the fund and the costs to the operator of providing the copy must be paid. [Schedule 1, item 1, paragraph 1213J(1)(c) and subsection 1213J(2)]

4.95 The amount that can be charged by the operator for providing a copy of the constitution is determined by the operator, but it must be reasonable and cannot exceed an amount prescribed in the Regulations. An amount is reasonable if it reflects the operator's reasonable costs, for example, of processing the request, making a copy and any postage, but not of translating the document into English. The restrictions on the amount that can be charged are designed to ensure that there is no unreasonable barrier to investors obtaining a copy of the constitution. [Schedule 1, item 1, paragraph 1213J(1)(c)]

4.96 A copy of the constitution may be provided electronically or in hard copy. Different amounts may be prescribed depending on whether the copy is provided electronically, or in hard copy. [Schedule 1, item 1, subsections 1213J(3) and (4)]

Processing the request

4.97 The operator must provide the copy of the constitution that has been requested in English, unless the applicant requests a copy in an official language of the fund's home economy. [Schedule 1, item 1, subsections 1213J(6) and (7)]

4.98 The copy of the constitution should be provided electronically, unless the applicant expressly requests a paper copy. This is designed to reduce the costs for the applicant and is consistent with the general trend towards 'digital by default'. [Schedule 1, item 1, subsections 1213J(3) and (4)]

4.99 Electronic copies of the constitution must be provided within seven days after the application is made. There are rules in Part 6 of the Acts Interpretation Act 1901 which govern when applications are taken to be given or made. [Schedule 1, item 1, subsection 1213J(4)]

4.100 If the person expressly requested a hard copy, the copy of the constitution must be posted within seven days. However, it may not be received by the applicant for several days or even weeks after it is posted. [Schedule 1, item 1, subsection 1213J(3)]

4.101 ASIC may allow an operator a longer period to provide a copy of the constitution. [Schedule 1, item 1, subsection 1213J(5)]

Obtaining a copy of the register of members

Persons who may request a copy

4.102 Anyone in Australia may request a copy of the register of members of a notified foreign passport fund, subject to meeting certain conditions that are described below. An Australian member, or a former member of the fund who either acquired an interest in the fund in Australia or is ordinarily resident in Australia, may also request a copy. [Schedule 1, item 1, subsection 1213K(1)]

4.103 This new right only applies to notified foreign passport funds and not to Australian passport funds. A person may already inspect and obtain copies of registers of members of registered schemes under existing section 173 of the Corporations Act.

4.104 As with the requirements outlined above concerning fund constitutions, failure by an operator of a notified foreign passport fund to provide a copy of the register of members upon request is an offence of strict liability carrying a penalty of 60 penalty units. This ensures there is a strong incentive to comply with this requirement, and is consistent with the Guide. The offence is given extended geographical reach - Category A as set out in section 15.1 of the Criminal Code, to ensure it is effective given that operators of notified foreign passport funds will be located in another jurisdiction. See paragraph 4.92 for further information about extended geographical reach - Category A. [Schedule 1, item 1, subsections 1213K(1) and (8)]

4.105 Similarly, a contravention of the strict liability offence may also attract a penalty notice under the existing penalty notice regime contained in section 1313. For further information, see paragraph 4.93. [Schedule 2, item 306, subparagraph 1313(8)(aa)(iii)]

Process for making a request

4.106 As with a copy of the constitution, requests for a copy of the register of members must be provided in writing to the operator of the fund and the operator's cost of providing the copy must be paid. [Schedule 1, item 1, paragraphs 1213K(1)(c) and (2)(a)]

4.107 Similarly, the amount charged for providing a copy of the register is determined by the operator, but it must be reasonable and cannot exceed the amount prescribed. [Schedule 1, item 1, paragraph 1213K(1)(c)]

4.108 A copy of the register may be provided electronically or in hard copy. Different amounts may be prescribed depending on whether the copy is provided electronically, or in hard copy. [Schedule 1, item 1, subsections 1213K(3) and (4)]

4.109 These costs should be minimal where the copy of the register is provided electronically.

4.110 A request for a copy of a registers of members must also state the purpose for which the information is intended to be used. This purpose must not be a prohibited purpose. The prohibited purposes may be set out in regulations. This protection is designed to ensure that the information is only used for appropriate purposes, such as for providing members with relevant information in advance of a meeting of members. [Schedule 1, item 1, paragraphs 1213K(2)(b) and (c)]

Processing the request

4.111 As with a copy of the constitution, the operator must provide the copy of the register that has been requested in English, unless the applicant requests a copy in an official language of the fund's home economy. [Schedule 1, item 1, subsections 1213K(6) and (7)]

4.112 Similarly, the copy of the register of members may be provided electronically, unless the applicant expressly requests a paper copy. [Schedule 1, item 1, subsections 1213K(3) and (4)]

4.113 Electronic copies of the register of members must be provided within seven days after the application is made. [Schedule 1, item 1, subsection 1213K(4)]

4.114 But if the person expressly requested a hard copy of the register of members, it must be posted within seven days. [Schedule 1, item 1, subsection 1213K(3)]

4.115 ASIC may allow an operator a longer period to provide a copy of the register of members. [Schedule 1, item 1, subsection 1213K(5)]

Restrictions on the use of information from the register of members

4.116 While it is in many circumstances beneficial to members that third parties can access their contact and other information on member registers, restrictions on third party access are necessary to ensure information that is contained on a register of members is not used for inappropriate purposes. Generally, persons are not permitted to request, or use, copies of the register of members to contact or send material to members. They are also prohibited from disclosing the information to another person if they know that the other person is likely to use the information to contact or send material to members. The regulations may prescribe additional prohibited purposes. This power is included as an additional safeguard; in the event circumstances arise where the safeguards provided in the primary law are not sufficient to deal with other purposes that are deemed inappropriate. This reflects a similar power in the existing member register regime in Part 2C (subsection 177(1AA)), which to date has not been put to use. [Schedule 1, item 1, subsections 1213L(1) and (3)]

4.117 The restrictions on the use of information in the register of members are designed to protect the privacy of members of the fund and prevent their details being used for soliciting donations, advertising, or other improper purposes. The same restrictions apply to the use of registers of companies and registered schemes under section 177 of the existing law.

4.118 There are two exceptions where the information in a register may be used to contact fund members. These are:

·
if the material is relevant to the holding of an interest in the fund or the rights attaching to the interests; or
·
where the operator of the foreign passport fund has approved the person contacting the members.

[Schedule 1, item 1, subsection 1213L(2)]

4.119 As discussed above, these exceptions would allow actions (including the provision of information) that are in the members' best interest, such as mailing out of invitations to support convening a meeting of members. [Schedule 1, item 1, subsection 1213L(2)]

4.120 Under the Criminal Code, a defendant wishing to rely on an exception bears the evidential burden of providing evidence that 'suggests a reasonable possibility' that the exception applies (subsection 13.3(3) of the Criminal Code). The new law does not amend the evidential burden of proof and the note is merely included for the avoidance of doubt. The rationale for the defendant bearing the evidential burden of proof for all exceptions is that the information is peculiarly within the defendant's knowledge. In this case, the defendant is best placed to show that the material was relevant to the member's interests, or the fund had approved the person contacting the members. [Schedule 1, item 1, note to subsection 1213L(2)]

4.121 A breach of the prohibitions on using information contained on a register to contact members is a strict liability offence that is punishable by a fine of up to 60 penalty units and is also subject to the existing penalty notice regime in the Corporations Act. A strict liability offence means it will not be necessary for the prosecution to prove fault as part of the offence. This, combined with the availability of the penalty notice regime, creates a strong incentive to comply with the prohibitions and is consistent with the Guide. Assessing whether a breach has occurred is straightforward and can be decided on a review of the facts in the case. The offence is given extended geographical reach - Category A as set out in section 15.1 of the Criminal Code, to ensure it is effective given that persons who may contravene the prohibitions may be located in another jurisdiction. See paragraph 4.93 for further information about the application of strict liability for minor offences being introduced by the new law and the application of the existing penalty notice regime, and paragraph 4.92 for further information about the application of extended geographical reach - Category A. [Schedule 1, item 1, subsections 1213L(1), (4) and (5) and Schedule 2, item 306, subparagraph 1313(8)(aa)(iv)]

4.122 A person who breaches the prohibition on using the information in a register to contact members may also have to compensate any member who suffers loss or damage because of the breach. Any profits made by the person committing the breach may be recovered by the fund as a debt owed to the fund. These provisions could be used for example against persons making offers to purchase interests from members at below market prices. [Schedule 1, item 1, subsections 1213L(6) to (8)]

Obtaining a copy of reports required under the law of the home economy

Right to a copy of reports

4.123 Unless the operator of a notified foreign passport fund is otherwise required under the Corporations Act to lodge a report with ASIC or provide a report to Australian members, the operator must provide Australian members of the fund a copy of any reports that it makes available to members in its home economy without charge. [Schedule 1, item 1, subsections 1213M(1) and (6)]

4.124 A contravention of this requirement is an offence of strict liability carrying a penalty of 60 penalty units. This offence is given extended geographical reach - Category A as set out in section 15.1 of the Criminal Code. This ensures there is a strong incentive to comply with this requirement, and is consistent with the Guide. Extended geographical reach ensures the offence provision is effective, given that operators of notified foreign passport funds will be located in another jurisdiction. See paragraph 4.92 for further information about extended geographical reach - Category A. A contravention of the strict liability offence may also attract a penalty notice under the existing penalty notice regime contained in section 1313. For further information, see paragraph 4.93 [Schedule 1, item 1, subsections 1213M(1) and (7) and Schedule 2, item 306, subparagraph 1313(8)(aa)(v)]

Process for obtaining a copy of the report

4.125 The report must be given to Australian members of the fund within seven days after the first day on which the report is made available to a member of the fund in the home economy without charge. [Schedule 1, item 1, subsection 1213M(2)]

4.126 The operator gives the report to Australian members of the fund by making it available on its website for members to access. If the operator notifies members of the fund in the home economy that the report is available or how to access it, it must similarly also notify Australian members of the fund. This ensures that Australian members are given equivalent notice of a report's availability as members of the fund in the home economy. [Schedule 1, item 1, subsection 1213M(3)]

4.127 The report must be given without charge. [Schedule 1, item 1, subsection 1213M(4)]

4.128 If all or part of the report is not in English, the operator must also give Australian members of the fund a summary of the report, or that part of the report, in English. [Schedule 1, item 1, subparagraph 1213M(c)(ii) and subsection 1213M(5)]

Requests for additional information

4.129 Members of a notified foreign passport fund may request additional information. See paragraph 4.44 to 4.45 of this Explanatory Memorandum. [Schedule 2, item 280, subparagraph 1017A(4)(a)(i)]

Destruction of records by ASIC

4.130 ASIC may destroy or otherwise dispose of any document that is lodged in relation to a notified foreign passport fund, if it is of the opinion it is no longer necessary or desirable to retain it and it has been in its possession for such period as is specified in the regulations. [Schedule 1, item 1, section 1213Q]

Consequential amendments

4.131 Annex 3 of the MOC uses the term constituent documents, rather than the term constitution, to identify the governing documents establishing and setting out the rules for a fund. The constituent documents for each home economy are listed in section 4 of Annex 3 of the MOC.

4.132 For the avoidance of doubt, a note has been added to the definition of 'constitution' in section 9 of the Corporations Act to clarify that the constituent documents of a notified foreign passport fund are taken to be its constitution. [Schedule 2, items 22 and 23, section 9 and Schedule 1, item 1, subsection 1213E(2)]

4.133 An amendment is also made to allow the court to take into account the effect of a contravention on a notified foreign passport fund's financial position when determining whether a contravention is significant. [Schedule 2, item 141, subsection 601HG(10)]

4.134 Record keeping requirements that currently apply to financial licensees in relation to managed investment products will also apply in relation to foreign passport fund products. [Schedule 2, item 250, paragraphs 988E(e) and (f)]

4.135 The jurisdictional reach of any offence, in the new or existing law, that relates to the operation of a notified foreign passport fund and occurs wholly in a foreign country has also been limited by inserting an extra requirement into the physical element of the offence. This additional element requires the 'result' to occur in Australia, that is, a person in Australia must suffer financial or other disadvantage. [Schedule 1, item 1, section 1213G]

Application and transitional provisions

4.136 There are no application and transitional provisions for this Division.


View full documentView full documentBack to top