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 5 Notified foreign passport funds: Australian regulation of the fund's other activities in Australia

Outline of chapter

5.1 Aspects of Australia's corporations legislation that relate to the notified foreign passport fund's activities in Australia generally parallel the treatment of Australian MIS.

5.2 This Chapter covers matters such as:

·
clarifying that Australia's takeovers framework does not apply in relation to takeovers of a notified foreign passport fund;
·
disclosures of substantial holdings in notified foreign passport funds that are listed in Australia;
·
materials that notified foreign passport funds may or are required to give to ASIC; and
·
the rules that apply to other financial services and markets activities of the fund in Australia, which are outside the ordinary activities of a notified foreign passport fund.

Context of amendments

5.3 As indicated in Chapter 4 of this Explanatory Memorandum, the MOC allows for host economies to generally regulate investor-facing requirements, such as disclosure, the distribution arrangements for interests in the foreign passport funds and member complaints (section 2 of Annex 1 of the MOC).

5.4 Additional requirements (see subsection 3(1) of Annex 1) may be imposed by the host economy 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

5.5 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. However, the operator will always be responsible for the obligations owed by an issuer of an interest in a notified foreign passport fund, regardless of whether it would otherwise be considered the issuer.

5.6 Notified foreign passport funds are subject under the new law to the obligations in Chapter 7 that apply to MISs, such as the requirement to be licensed to operate a clearing and settlement facility or a market. The regulation of derivative transactions will apply to notified foreign passport funds to the extent that the activities of the fund fall within scope of the requirements. Except where noted below, amendments are not required to give effect to this outcome.

5.7 The review date for a notified foreign passport fund is the anniversary of the day on which the fund first became a notified foreign passport fund. However, the operator of a notified foreign passport fund may choose a different review date with ASIC's approval.

5.8 Within two weeks after each review date for a notified foreign passport fund, ASIC must give the operator of the fund an extract of particulars for the fund. If the extract of particulars either contains a particular that is not correct or includes a requirement to provide a specific particular, then the operator must respond by providing the correct particular(s) or required particular.

5.9 ASIC may give to the operator of a notified foreign passport fund a return of particulars if it suspects or believes that the fund's particulars are incorrect. The operator must respond to a return of particulars that it receives within two months after the date of issue of the return, with the response such that the particulars set out in the return, taken together with the response, are correct, as well as provide any particular that ASIC may require.

5.10 A document lodged with ASIC with respect to a notified foreign passport fund must be signed by the appropriate representative of that fund.

5.11 A notified foreign passport fund must comply with Australia's takeover rules when it acquires, or intends to acquire securities in a company, body or scheme that is subject to Australia's takeovers rules.

5.12 Some matters and activities of notified foreign passport funds will not be regulated by Australia as a host economy. The new law makes amendments to existing provisions as required to achieve this outcome. In particular, the acquisition of a notified foreign passport fund will not be subject to Australia's takeovers rules; however such an acquisition may be subject to takeovers rules in the fund's home economy.

5.13 The takeover rules in Chapter 6 already apply to Australian passport funds in their capacity as a company, body or scheme registered in Australia.

5.14 The operator of a notified foreign passport fund will not require an AFSL in the ordinary course of operating a notified foreign passport fund. Separate exemptions are provided in respect of operating the fund, holding the fund assets, investing the fund assets and disposing of those investments, and issuing derivatives or foreign exchange contracts to manage the financial risks of the fund. If the operator or other persons provide other financial services, they will be subject to the same financial services laws (including licensing) as other financial services providers.

5.15 As foreign passport fund products are financial products, insider trading provisions, hawking and other prohibited conduct provisions apply in their ordinary manner.

5.16 The ASIC Act consumer protections, including the prohibition on unconscionable conduct, apply to notified foreign passport fund products and financial services in respect of those products.

5.17 Notified foreign passport funds will be subject to Australia's anti-money laundering and counter terrorism financing regime in the same way as managed investment schemes are.

Comparison of key features of new law and current law

New law Current law
A notified foreign passport fund may not offer debentures in Australia in situations where a trustee would need to be appointed. A CIS may offer debentures in Australia.
The Minister may, by legislative instrument, require notified foreign passport funds from a particular participating economy, to prepare and audit their financial statements in accordance with Australian financial reporting and audit standards. No equivalent.
The review date for a notified foreign passport fund is the anniversary of the day on which the fund first became a notified foreign passport fund. With ASIC's approval, the operator of a notified foreign passport fund may choose a different review date. The review date for a company or registered scheme is the anniversary of the day on which it first became a company or registered scheme. With ASIC's approval, the company or responsible entity of the registered scheme may choose a different review date.
Within two weeks after each review date for a notified foreign passport fund ASIC must give the operator of the fund an extract of particulars for the fund. If the extract of particulars either contains a particular that is not correct or includes a requirement to provide a specific particular, then the operator must respond by providing the correct particular(s) or required particular, as the case may be. Within two weeks after each review date for a company or registered scheme, ASIC must give to the company or responsible entity of a registered scheme an extract of particulars in relation to it. If the extract of particulars either contains a particular that is not correct or includes a requirement to provide a specific particular, then it must respond by providing the correct particular(s) or required particular, as the case may be.
ASIC may give the operator of a notified foreign passport fund a return of particulars if it suspects or believes that the fund's particulars are incorrect. The operator must respond to a return of particulars within two months after the date of issue of the return, with the response such that the particulars set out in the return, taken together with the response, are correct, as well as provide any particular that ASIC may require. ASIC may give to a company or responsible entity of a registered scheme a return of particulars if it suspects or believes that the fund's particulars are incorrect. The company or responsible entity of the registered scheme must respond to a return of particulars two months after the date of issue of the return, with the response such that the particulars set out in the return, taken together with the response, are correct, as well as provide any particular that ASIC may require.
A document lodged with ASIC by, or on behalf of, a notified foreign passport fund or its operator must either be signed by a director or secretary of the operator of the fund, or the local agent for the operator of the fund, or if the local agent is a company - a director or secretary of that company. A document lodged with ASIC in writing by, or on behalf of, a body or a registered scheme must be signed by a director or secretary of the body or of the responsible entity of the registered scheme. If the body is a foreign company, it may be signed by its local agent; or if the local agent is a company - a director or secretary of the company.
The takeover of a listed notified foreign passport fund is not subject to Chapter 6. No equivalent.
The operator of a notified foreign passport fund are responsible for the obligations owed by the issuer of an interest in a notified foreign passport fund. The issuer is responsible for the obligations owed by the issuer of an interest in a financial product.
The operator a notified foreign passport fund or holding fund assets are not required to hold a licence. The responsible entity of a registered scheme must hold a licence but persons holding the assets of registered schemes are not required to be licensed.
The operator of a notified foreign passport fund or a person acting on the direction of the operator or its agents is not required to hold a licence to acquire financial products as an investment of the fund assets or to dispose of those investments. Persons acquiring and disposing of assets on behalf of the members of a registered scheme are required to be licensed. This may include the custodian of a scheme who holds and deals in the fund assets at the direction of the responsible entity.
The operator of a notified foreign passport fund or a person acting on the direction of the operator or its agents is not required to hold a licence to issue or dispose of derivative or foreign exchange contracts where the issuance or disposal is for the purpose of financial risk management. Persons issuing or disposing of derivatives or foreign exchange contracts on behalf of the members of a MIS are required to be licensed.
Unconscionable conduct and other consumer protections apply to notified foreign passport fund products and financial services in respect of such products. Unconscionable conduct and other consumer protections apply to financial services and financial products.
The issue or sale of an interest in a notified foreign passport fund in the course of carrying on a business of issuing or selling securities or derivatives is a 'designated service' under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. The issue or sale of an interest in a MIS in the course of carrying on a business of issuing or selling securities or derivatives is a 'designated service' under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

Detailed explanation of new law

5.18 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).

Notified foreign passport funds and Australian markets

5.19 Where a notified foreign passport fund is a participant in an Australian licensed market, the operator of the fund is subject to the market's operating rules. [Schedule 2, items 213 to 217, paragraph 793C(2)(b) and subsections 793C(3) to (4A)]

5.20 A notified foreign passport fund whose operator is a related body corporate of the market licensee may be included in a market's official list. While, it is possible for a notified foreign passport fund to be quoted on an Australian licensed market, the Passport Rules contained in Annex 3 of the MOC may make it impractical to list a passport fund. This is because clause 48 of the Passport Rules requires that redemptions occur at a price that is not materially different from the net asset value per interest while listed funds generally trade at the market price. [Schedule 2, items 218 to 222, subsection 798C(1), paragraph 798C(1)(ca), note to subsection 798C(1) and subsection 798C(6)]

5.21 Many of the provisions in Chapters 6 to 7 of the Corporations Act have been extended to apply to notified foreign passport funds or their operators (see also Chapter 4 of this Explanatory Memorandum). ASIC has the power to exempt funds included in a market's official list from these requirements or omit, modify or vary their application. [Schedule 2, items 223 to 224, paragraphs 798D(1)(a) and (b) and subsections 798D(4) and (5)]

Prohibition on offering debentures

5.22 A notified foreign passport fund may not offer debentures in Australia in situations where the borrower would need to enter into a trust deed and appoint a trustee under existing Chapter 2L. This captures offers of debentures which fall under existing Chapter 6D, offers which are excluded from Chapter 6D because the borrower has already made disclosures which are comparable to those in a prospectus, certain debenture rollovers, and offers made as consideration for shares acquired under an off-market takeover bid. This prohibition is consistent with the restrictions on borrowing in Annex 3 of the MOC. Failure to comply with this prohibition is an offence punishable by a penalty of up to 60 penalty units. [Schedule 1, item 1, section 1213H]

Matters that may be subject to regulation

5.23 Under the MOC, a host economy can require foreign passport funds admitted to its economy to prepare and audit their financial statements in accordance with the host economy's financial reporting and audit standards. However, consistent with the spirit of the MOC being to minimise regulatory duplication, participants have generally agreed that they will not require this where accounting and auditing standards of other participants are of an equivalent standard.

5.24 The new law provides the Minister with the power to make a legislative instrument that requires notified fund passport funds from one or more participant economies to prepare and audit financial statements in accordance with Australian financial reporting and audit standards. [Schedule 2, item 116, section 343A]

5.25 For example, if another participant economy, as a host economy, were to require incoming passport funds from Australia to prepare and audit their financial statements in accordance with host economy financial reporting and audit standards, the Minister may consider exercising the power to impose reciprocal requirements on notified foreign passport funds from that participant economy.

Materials to be lodged with ASIC or that ASIC may require to be lodged

ASIC power to require lodgment of register of members

5.26 ASIC may, by written notice given to the operator of a notified foreign passport fund, require the operator to lodge a copy of the whole or a specified part of the register of members of the fund. [Schedule 1, item 1, subsection 1213P(2)]

5.27 Failure to comply 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. ASIC may issue a penalty notice to an operator who fails to lodge a register of members. For further information about the penalty notice regime, see paragraph 4.93. [Schedule 1, item 1, subsections 1213P(1) and (7) and Schedule 2, item 306, subparagraph 1313(8)(aa)(vi)]

5.28 ASIC may require the copy of the whole or the specified part of the register to be lodged in English. [Schedule 1, item 1, subsections 1213P(3) and (6)]

5.29 The operator must lodge a copy of the register with ASIC electronically within seven days after being given notice to do so. [Schedule 1, item 1, subsection 1213P(4)]

5.30 ASIC may allow a longer period for the operator to lodge a copy of the register. [Schedule 1, item 1, subsection 1213P(5)]

Lodging of annual financial reports with ASIC

5.31 The operator of a notified foreign passport fund must provide members in Australia 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, as prepared in accordance with the financial reporting requirements that apply to the fund in its home economy under the Passport Rules (see Chapter 4 of this Explanatory Memorandum). [Schedule 2, item 91, paragraph 314(A)(a)]

5.32 As the operator of a notified foreign passport fund is responsible for the performance of the fund's obligations under Chapter 2M, the operator is also required to lodge the above reports with ASIC within three months of the end of the financial year. This is an extension of the existing obligation that applies to companies, registered schemes and reporting entities. [Schedule 2, items 97 to 99, subsections 319(1AA) and (1A) and paragraph 319(3)(a)]

5.33 The existing obligation on companies, registered schemes and reporting entities is a strict liability offence that carries a maximum penalty of 60 penalty units or imprisonment for one year, or both. This offence provision is extended so that it also applies to the requirement for operators of notified foreign passport funds to lodge financial reports with ASIC. [Schedule 2, items 97, 98 and 352, subsections 319(1) and (1A) and schedule 3 table item 112]

5.34 ASIC may also direct the operator of a notified foreign passport fund to lodge these reports with ASIC. This extends ASIC's existing power to direct companies, registered schemes and reporting entities to lodge reports with ASIC. [Schedule 2, items 100 and 101, subsections 321(1AA) and (1A)]

5.35 A failure to comply with a direction from ASIC is an offence of strict liability that carries a maximum penalty of 10 penalty units or imprisonment for three months, or both.

5.36 If a report is amended after it is lodged with ASIC, the operator of the notified foreign passport fund must lodge with ASIC the amended report within 14 days of it being amended. If a member of the fund requests a copy of the amended report, the operator must provide this to the member free of charge. If the amendment to the report is material, the operator must notify members of this. The notification to members must be made as soon as practicable after the amendment and include the nature of the amendment and inform members that they have a right to obtain a copy of the amended report free of charge. This extends the existing requirements in section 322 concerning relodgment of amended financial statements and directors reports that apply to companies, registered schemes and disclosing entities. [Schedule 2, items 102 to 105, heading to subsection 322(1), subsections 322(1A) and (2) and paragraph 322(2)(b)]

5.37 The existing obligation on companies, registered schemes and reporting entities is a strict liability offence that carries a maximum penalty of 10 penalty units or imprisonment for 3 months, or both. This offence provision is extended so that it also applies to the requirement for operators of notified foreign passport funds to lodge financial reports with ASIC. [Schedule 2, items 106, 107 and 351, heading to subsection 322(3), subsection 322(3) and schedule 3 table item 108A)]

Updating ASIC information about notified foreign passport funds

Review date

5.38 As with a registered scheme, the review date for a notified foreign passport fund is the anniversary of the day on which the fund first became a notified foreign passport fund. [Schedule 2, item 121, subsection 345A(3)]

5.39 The operator of a notified foreign passport fund may choose a different review date, subject to ASIC's approval. If ASIC approves the choice, ASIC must notify the operator in writing. [Schedule 2, items 121 to 124, sections 345A and 345B and subsections 345B(2A) and (3)]

5.40 If ASIC notifies the operator of the passport fund of its approval, the choice has effect either at the time that ASIC notifies its approval or immediately after the next review date for the fund. [Schedule 2, items 125 and 126, section 345C and paragraphs 345C(a) and (b)]

5.41 Review fees imposed on notified foreign passport funds are due two months after the review date. As with registered schemes, a review fee for that year is not payable if it was paid in a previous year. [Schedule 2, Items 349A to 349C, subsection 1351(3), table item 2A and paragraph 1351(4)(b)]

Extract of particulars

5.42 In the context of notified foreign passport funds, the extract of particulars refers to the particulars about the fund held in a register maintained by ASIC or the Register of Passport Funds. [Schedule 2, items 27 and 28, section 9]

5.43 As with a company or registered scheme, within two weeks after each review date for a notified foreign passport fund ASIC must give to the operator of the fund (or its local agent, where relevant) an extract of particulars for the fund. If an agreement is already in place with the operator to lodge electronically, ASIC may do this by either electronic or postal means. [Schedule 2, item 127, subsections 346A(1) and (2)]

5.44 ASIC may ask questions in an extract of particulars for a notified foreign passport fund by including a requirement that the operator of the fund provide a particular prescribed by the regulations. [Schedule 2, item 128, section 346B]

5.45 An operator of a notified foreign passport fund must respond to an extract of particulars that it receives if any particular in the extract is not correct. It must also respond to an extract of particulars that it receives if it includes a requirement from ASIC to provide a particular, by providing the required particular. The response must be lodged within 28 days after the date of issue of the extract, be in the prescribed form and signed or authenticated. [Schedule 2, items 129 and 130, subsections 346C(1) to (3)]

Return of particulars

5.46 As with a company or registered scheme, ASIC may give to the operator of a notified foreign passport fund (or its local agent, where relevant) a return of particulars for the fund if it suspects or believes that particulars recorded in relation to the fund in specific registers that it maintains are incorrect. In the context of notified foreign passport funds, a return of particulars refers to the statement given by ASIC which contains the fund's particulars, and a requirement to provide further particulars or a solvency resolution. [Schedule 2, items 45, 46, 131 and 132, section 9 definition of 'return of particulars' and subsections 348A(1A) to (2A)]

5.47 ASIC may make the return of particulars available electronically, if the operator has agreed. The process for the operator formally agreeing to electronic communication is the same as under the existing corporations law (see subsection 352(1) of the Corporations Act). This process expands on the general requirements for when information may be provided by electronic means in the Electronic Transactions Act 1999.

5.48 ASIC may ask questions in a return of particulars for a notified foreign passport fund by including a requirement that the operator of the fund provide a particular prescribed by the regulations. [Schedule 2, item 133, section 348B]

5.49 The operator of a notified foreign passport fund must respond to a return of particulars that it receives. The response must be such that the particulars set out in the return, taken together with the response, are correct, as well as provide any particular that ASIC may require. The response must be lodged with ASIC within two months after the date of issue of the return, be in the prescribed form, and be signed or authenticated. [Schedule 2, items 134 to 136, subsections 348D(1) and (2) and paragraph 348D(2)(e)]

5.50 A relevant heading and cross-reference are also updated to refer to notified foreign passport funds, in addition to companies and registered schemes. [Schedule 2, items 67 and 120, heading to Chapter 2N and subsection 111L(1), table item 11]

Lodgments with ASIC

5.51 Similar to a body or registered scheme, a document lodged with ASIC by, or on behalf of, a notified foreign passport fund or its operator, must either be signed by a director or secretary of the operator of the fund, or the local agent for the operator of the fund, or if the local agent is a company - a director or secretary of that company. [Schedule 2, item 137, subsection 351(1A)]

5.52 An amendment unrelated to notified foreign passport funds is also made to clarify that liability for late lodgment fees or continuing offences is not affected if ASIC accepts a telephone notice of a change to a particular in respect of telephone notices made by registered schemes, in addition to companies as currently provided. [Schedule 2, item 138, subsection 354(2)]

Sanctions and exemption orders relating to Part 2M.3 Financial reporting

5.53 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. See paragraph 4.84 for further details concerning the extension of this offence provision to notified foreign passport funds. [Schedule 2, items 117 to 119 and 313, note to subsection 344(1), subsections 344(1) and (2) and subsection 1317E(1) table item 5]

5.54 Exemption orders in relation to the application of all or specified requirements under Part 2M.3 to notified foreign passport funds are discussed at paragraphs 7.29 to 7.34.

Process for inspecting books

5.55 The existing law gives persons a right to inspect any document lodged with ASIC. In the context of notified foreign passport funds, documents lodged with ASIC include PDSs, financial statements and audit reports.

5.56 Any book that the Act requires to be made available for inspection may be inspected by attending the registered Australian office of the operator of the fund at any time when the office is open to the public. [Schedule 2, item 304, section 1300]

5.57 A member or former member of the fund who acquired an interest in Australia or is ordinarily resident in Australia may also apply to the Court for an order that the operator of the fund provide them with an electronic copy of the books that relate to the fund or an English translation of those books. These books may also be copied, unless the Court orders otherwise. An application by a person seeking books will only be granted if the person acts in good faith and for a proper purpose. [Schedule 1, item 1, section 1213N]

Takeovers

Securities and registered schemes

5.58 The definition of 'securities' for the purposes of Chapters 6 to 6CA is repealed and replaced with a revised definition. [Schedule 2, item 57, subsection 92(3)]

5.59 To ensure that the acquisition of interests in a notified foreign passport fund will not be subject to Australia's takeovers rules, the meaning of securities in Chapters 6 to 6B and 6CA excludes interests in all notified foreign passport funds. Takeovers of notified foreign passport funds are more appropriately regulated in the fund's home economy. [Schedule 2, item 57, paragraph 92(3)(i)]

5.60 For the purposes of Chapter 6C, the meaning of 'securities' includes interests in a listed notified foreign passport fund, and the definition of 'substantial holding' is also extended. Only interests in a listed notified foreign passport fund are 'securities' for the purposes of Chapter 6C, and not interests in unlisted notified foreign passport funds. This means that a person who holds a substantial interest in a listed notified foreign passport fund (and a listed notified foreign passport fund itself) will be subject to the information and disclosure requirements set out in Chapter 6C. These disclosure requirements are applied to notified foreign passport funds as they represent important protections for Australian investors. [Schedule 2, items 47, 57 and 153, section 9 and paragraph 92(3)(d), section 608]

5.61 The definition of 'relevant financial market' has also been updated to include any financial market on which a notified foreign passport fund is listed. The definition of 'relevant operator' has been expanded to include the operator of these markets. [Schedule 2, items 40 to 43, section 9, definitions of 'relevant financial market' and 'relevant market operator']

5.62 In addition, references to 'registered managed investment scheme' generally in Chapters 6 to 6CA are replaced with references to 'registered scheme'. This clarifies that these provisions only apply to registered schemes and not more generally to MISs (including notified foreign passport funds). [Schedule 2, items 57, 149 to 152, 154, 155, 160 to 161, paragraph 92(3)(c), subparagraph 602(a)(iii), sections 602A and 604 paragraph 636(1)(d), subparagraphs 636(1)(ga)(i) and (ii), and section 660B]

5.63 Similarly, notified foreign passport funds are excluded from references to 'listed body' for the purposes of Chapter 6. This is because takeovers of notified foreign passport funds are covered by home economy laws. [Schedule 2, item 148, subparagraph 602(a)(ii)]

5.64 The Court may give directions to the directors of the operator of a notified foreign passport fund where a person contravenes a rule made by the Takeovers Panel. Investment restrictions in the Passport Rules will effectively prohibit a notified foreign passport fund from using the Chapter 6 takeovers provisions to acquire a controlling interest in an entity. However, it is possible that the Takeovers Panel could nonetheless make rules that would apply to the operator of a notified foreign passport fund under section 658C. These amendments ensure that any such rules are enforceable by a court. To date, the Takeovers Panel has not made any rules under section 658C. [Schedule 2, items 158 and 159, paragraphs 658C(5)(b) and (c)]

Prohibition on certain acquisitions

5.65 The general prohibition on certain acquisitions in Chapter 6 does not apply if the acquisition is of a relevant interest in a notified foreign passport fund. This is because the definition of 'securities' for the purposes of Chapters 6 to 6CA (inclusive, but not Chapter 6C) excludes interests in a notified foreign passport fund (see paragraphs 5.57 to 5.59 of this Explanatory Memorandum). [Schedule 2, item 57, subsection 92(3)]

5.66 Paragraph 36 of Annex 3 of the MOC prohibits a Passport Fund from holding sufficient voting shares in an entity that would allow the fund or its operator to exert significant influence on the management of the business of the entity. Paragraph 37 of the Passport Rules provides additional limits on the non-voting securities of an entity. Together, these limits mean that a notified foreign passport fund will not be able to take over another entity. As such, Chapter 6 does not allow for notified foreign passport funds to make takeover bids.

Information about ownership of listed notified foreign passport funds

5.67 Chapter 6C is amended to apply the information and disclosure requirements to persons who hold interests in a listed notified foreign passport fund (and the listed notified foreign passport fund itself). To give effect to this, the definitions of 'securities', 'substantial holding', and 'relevant interest' are extended to ensure that the Chapter 6C obligations apply. [Schedule 2, items 47, 57 and 153, sections 9, subsection 92(3), and 608]

5.68 In particular, if a person acquires a 'substantial holding' in a listed notified foreign passport fund, that person is required to disclose that fact to the fund's operator. The obligation also applies where a person's substantial holding in the fund changes (with a movement of at least 1 per cent in their holding). [Schedule 2, items 165 to 172, paragraphs 671B(1)(a) to (c), subsection 672(2), paragraphs 672(3)(b) to (d) and subparagraph 671B(6)(b)(i)]

5.69 ASIC or the operator of a listed notified foreign passport fund may direct a person to disclose their relevant interest in the fund. ASIC must also direct a person to make such a disclosure, if requested by a member of the fund, unless it considers that it would be unreasonable to do so in all the circumstances. [Schedule 2, items 173 to 177, subsections 672A(1) and (2), paragraphs 672B(1)(a) and (2)(c) and subsection 672B(3)]

5.70 If ASIC does receive information in response to a direction to a person about their interests in a listed notified foreign passport fund, it may pass on that information to the operator of the fund. If the disclosure was made under a request by another member of the fund under subsection 672A(2), ASIC must also pass on that information to the member who made the request for that information, unless it considers it unreasonable to do so in all the circumstances. [Schedule 2, items 178 and 179, section 672C and paragraph 672C(a)]

5.71 The regulations may prescribe fees that the operator of a listed notified foreign passport fund is required to pay to persons for complying with a direction to disclose information in relation to their relevant interests. [Schedule 2, items 180 to 182, subsections 672D(1) and (2)]

5.72 An operator of a listed notified foreign passport fund is not taken to have notice of a person's right in relation to an interest in the fund because of anything done under Part 6C.2. An amendment is not strictly required to achieve this result because the former provision applied to listed MISs (notified foreign passport funds are treated as MISs as outlined in paragraphs 3.71 to 3.73 of this Explanatory Memorandum). However, for the avoidance of doubt, the reference to a listed MIS is replaced with a reference to a listed registered scheme or a listed notified foreign passport fund. [Schedule 2, item 197, section 672E]

5.73 The operator of a listed notified foreign passport fund must keep a register of information about interests in a listed notified foreign passport fund. This register must include:

·
details of the nature and extent of a person's relevant interest in the fund and the circumstances that give rise to members' interests;
·
the name and address of a person who has a relevant interest in the fund; and
·
details of instructions that a person has given about matters relating to their interests in the fund, including the acquisition or disposal of their interests and the voting or other rights attached to their interests.

[Schedule 2, items 68 and 184, note 1A to subsection 168(1), subsection 672DA(1)]

5.74 The register must be kept at the operator's registered office, their principal place of business or another place in this jurisdiction approved by ASIC. The operator of the fund must notify ASIC of changes to the location of the register in the same circumstances as for listed registered schemes. [Schedule 2, items 183 and 185 to 187, section 672DA and subsections 672DA(3) to (4)]

5.75 A failure to comply with the requirements relating to the register is a strict liability offence with a maximum penalty of 10 penalty units. [Schedule 2, items 188 and 353, subsection 672DA(5) and schedule 3 table item 229AA]

5.76 Minor amendments are also made to replace the references to scheme in Chapter 6C with the words 'scheme or fund', and insert a reference to 'operator' or 'fund operator' after the word 'responsible entity'. This ensures that the other provisions in Chapter 6C apply to notified foreign passport funds in the same way that they apply to registered schemes. [Schedule 2, items 166 and 189 to 196, section 671B, subsections 672DA(6) to (9) and section 672E]

Provision of financial services

Who is responsible for obligations owed by the issuer of an interest in a notified foreign passport fund?

5.77 Various obligations in the financial services regime apply to the issuer of a financial product, including certain product disclosure obligations. To provide clarity and to ensure consistency for all foreign passport funds, the operator of a notified foreign passport fund is taken to be responsible for the obligations owed under the terms of the financial product that is an interest in the fund. The operator will therefore always be considered the issuer of the financial product. [Schedule 2, item 207, subsection 761E(4A)]

Definition of 'provides a financial service'

5.78 Several amendments are made to the definition of 'provides a financial service' to capture activities associated with notified foreign passport funds. Current section 766A defines 'provides a financial service' to include 'providing financial product advice', 'dealing in a financial product', 'making a market for a financial product', 'operating a registered scheme' and 'providing a custodial or depositary service'.

5.79 First, the definition of providing financial product advice is expanded to include providing advice about an interest in a foreign passport fund product. For the definition of a foreign passport fund product, see paragraph 4.22 of this Explanatory Memorandum. [Schedule 2, items 204 and 208, section 761A and paragraph 764A(1)(bb)]

5.80 Interests in unregistered schemes and other similar interests continue to be specifically excluded from the definition of a financial product but only if they do not relate to a notified foreign passport fund. [Schedule 2, item 209, paragraph 765A(1)(s)]

5.81 The definition of dealing in a financial product is also expanded to include underwriting securities or interests in foreign passport fund products. [Schedule 2, item 210, paragraph 766C(1)(c)]

5.82 An amendment is made to the definition of 'makes a market' to clarify that a person does not make a market by stating the prices for foreign passport fund products. [Schedule 2, item 211, paragraph 766D(2)(b)]

5.83 Finally, the definition of 'providing a custodial or depositary service' is amended to exclude operating a notified foreign passport fund or holding its assets. This is consistent with excluding from the definition persons holding the assets of a registered scheme. [Schedule 2, item 212, paragraphs 766E(3)(ba) and (bb)]

Licensing requirements

5.84 A number of licensing exemptions are provided to entities associated with a notified foreign passport fund so that AFSLs are not required in the ordinary course of operating a notified foreign passport fund. Operators and others who carry on a financial services business in this jurisdiction that do not fall within these exemptions will continue to require a licence.

5.85 The new licensing exemptions are designed to operate broadly because the MOC is based on the principle that notified foreign passport funds are primarily regulated by their home economy. Further, there are restrictions on the activities of notified foreign passport funds in the Passport Rules contained in Annex 3 of the MOC.

5.86 The new law grants a licensing exemption for custody of assets of notified foreign passport funds regardless of the location of the assets. The MOC provides host economies the choice of whether to require the passport fund or its operator be licensed for services provided in the host economy related to assets in the host economy (see subparagraph 2(2)(c)(i) of Annex 1 of the MOC). Nevertheless, the new law includes this optional licensing exemption as it is consistent with the policy intention of promoting market access. [Schedule 2, item 212, paragraph 766E(3)(bb)]

5.87 Similarly, the new law provides a licensing exemption for the operator and persons acting on the direction of the operator when acquiring and disposing of the property of the fund. This addresses a concern that the operators or custodians of funds that are not separate legal persons could, depending on the structure of the fund, be considered to be acquiring or disposing of financial products on behalf of the members of the fund. The assets of the fund are those required by subsection 13(6) of the Passport Rules in Annex 3 of the MOC to be held separately from other assets or in a clearly recorded omnibus account. The term 'investment' takes its ordinary meaning and does not rely on the definition of that word in section 9 (which only applies to investments in registered schemes). [Schedule 2, item 225, paragraphs 911A(2)(eh) and (ei)]

5.88 The new exemption relating to investments also covers operators (or persons acting on the direction of the operator) investing fund assets in unlisted derivatives or foreign exchange contracts. This is because each party to a derivative is considered to be both issuing and acquiring that derivative.

5.89 The new law also provides an exemption for the issuance, acquisition or disposal of derivatives and foreign exchange contracts for the purposes of financial risk management. This allows notified foreign passport funds to hedge their exposure to risk without requiring a licence or an Australian distributor. It also allows them to enter netting arrangements to manage, for example, the default risk of a counterparty where those arrangements constitute a derivative. [Schedule 2, item 225, paragraph 911A(2)(ej)]

5.90 The exemption for the issuance of derivatives and foreign exchange contracts automatically covers their acquisition. This is because the person who issues a derivative or foreign exchange contract also acquires it (see subsections 761E(1) and (3) and Note 1 to subsection 761E(5) in the existing law).

5.91 The MOC provides that a notified foreign passport fund and its operator shall not be required to be licensed in a host economy to issue, redeem or sell interests in a notified foreign passport fund through a qualified distributor (see paragraphs 2(2)(b) and (d) of Annex 1 of the MOC). Without a licensed distributor, the operator would require an AFSL to issue, redeem or sell these interests. Under existing exemptions in paragraphs 911A(2)(b) and (ba), passport operators are able to enter an intermediary authorisation with a licensed distributor to issue, vary or dispose of interests in a notified foreign passport fund without requiring a licence. The disposal of financial products, as defined in section 761A, includes the redemption of an interest in a notified foreign passport fund. As such, no separate exemption is required to give effect to this provision of the MOC.

Hawking of foreign passport fund products

5.92 The prohibition on hawking interests in MISs in existing section 992AA is extended to foreign passport fund products. This is achieved by treating notified foreign passport funds as MISs. It ensures that the same consumer protections apply to both managed investment products and foreign passport fund products. [Schedule 1, item 1, section 1213E]

5.93 An amendment is made to the heading of current section 992AA (which prohibits hawking of interests in MISs). This amendment clarifies that the section applies to all MISs, rather than merely registered schemes. It does not alter the effect of the section because the text of the section applies to all MISs and section headings have less weight than the substantive text under established principles of statutory interpretation. [Schedule 2, item 252, heading to section 992AA]

5.94 Foreign passport fund products are excluded from the section in the Corporations Act which applies to hawking products other than interests in MISs. [Schedule 2, item 251, subsection 992A(2)]

Insider trading and other prohibited conduct

5.95 Part 7.10 of the Corporations Act generally applies to notified foreign passport funds in the ordinary manner as foreign passport fund products are financial products (see paragraph 4.25 of this Explanatory Memorandum). The existing requirements relating to representations made, that induce persons to deal in financial products using false, misleading or deceptive information, as outlined in section 1041F, also apply to representations made in this jurisdiction about interests in notified foreign passport funds.

5.96 An interest in a foreign passport fund is a Division 3 financial product and hence is subject to the insider trading prohibitions. This is because interests in a MIS are Division 3 financial products under existing section 1042A and a foreign passport fund product is to be treated as a MIS. [Schedule 1, item 1, section 1213F]

5.97 The insider trading provisions in Division 3 of Part 7.10 apply to dealings in interests in notified foreign passport funds in their ordinary manner. Existing section 1043B, which creates an exception from the use of inside information for withdrawals from registered schemes, applies to notified foreign passport funds the same way as it does for registered schemes. [Schedule 2, items 291 to 292, heading to section 1043B and section 1043B]

5.98 Similarly, existing section 1043C, which provides an exception from restrictions on communicating inside information for underwriters, applies to foreign passport fund products the same way as it does for managed investment products. [Schedule 2, items 293 and 294, paragraphs 1043C(1)(a), (1)(c), (2)(a) and (2)(b)]

5.99 Minor amendments have been made to the compensation arrangements to ensure that amounts recovered by operators of notified foreign passport funds are held by the operator on behalf of members at the relevant time. Similarly, amounts recovered by ASIC on behalf of operators are to be held on behalf of the persons who have interests in the fund at the relevant time. [Schedule 2, items 44, 295 to 302, section 9, definition of 'responsible holding party', heading to subsection 1043L(8), paragraphs 1043L(8)(a) and (b), subsections 1043L(8), paragraph 1043L(8)(c), heading to subsection 1043L(9), paragraphs 1043L(9)(a) and (b), subsection 1043L(9) and paragraph 1043L(9)(c)]

5.100 Off-market transfers of notified foreign passport fund interests in Australia are subject to home economy laws and existing Part 7.11 does not regulate these transactions. Listed or quoted notified foreign passport fund interest transfers on the Australian market are also subject to home economy laws, rather than the requirements in Part 7.11.Prohibition of unconscionable conduct and other ASIC Act consumer protections

Consumer protections in the ASIC Act

5.101 The ASIC Act includes important consumer protections, in addition to establishing ASIC's regulatory and other functions. Under subsection 5(2)(b) of the ASIC Act, an expression has the same meaning in the ASIC Act as in the Corporations Act where the expression is used in both Acts and not defined in the ASIC Act.

5.102 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. This means that a notified foreign passport fund will also be a MIS for the purposes of the ASIC Act.

Financial products and financial services for the purposes of the ASIC Act

5.103 Division 2 of Part 2 of the ASIC Act establishes a framework for consumer protection and unconscionable conduct in relation to financial products and financial services. Amendments clarify the operation of this Part with respect to MIS's and notified foreign passport funds. Clarifying notes provide certainty that protections against unconscionable conduct operate in relation to interests in a notified foreign passport fund.

5.104 Subsection 12BAA(7) of the ASIC Act lists specific things that are financial products for the purposes of the ASIC Act. This includes interests in a MIS, and subsequently interests in a notified foreign passport fund. This means that interests in a notified foreign passport fund, or rights or interests in such an interest, or an option over those interests are financial products.

5.105 Subsections 12BAB(1) and (7) of the ASIC Act provide that dealing in interests in a MIS constitutes a financial service under the ASIC Act. Dealing in an interest in a notified foreign passport fund also therefore constitutes providing a financial service. A minor amendment replaces the phrase 'managed investment interests' with 'interests in a managed investment schemes' in paragraph 12BAB(7)(c) to provide consistency across the corporations legislation. [Schedule 2, items 8-11, notes to subsections 12BAA(7) and 12BAB(7), and paragraph 12BAB(7)(c) of the ASIC Act]

5.106 The operation of a notified foreign passport fund and the holding of the assets of such a fund are excluded from the definition of custodial or depository services. This is consistent with amendments to the definition of custodial or depository services in the Corporations Act. [Schedule 2, item 12, paragraphs 12BAB(14)(ba) and (bb) of the ASIC Act]

5.107 The amendments also clarify that the unfair contract terms protections in the ASIC Act do not apply to a contract that is the constitution of a notified foreign passport fund (as it is treated as a MIS for the purposes of the ASIC Act). [Schedule 2, item 13, section 12BL of the ASIC Act]

Anti-Money Laundering and Counter-Terrorism Financing

5.108 The AML/CTF Act imposes obligations on entities that provide 'designated services' in section 6 of the AML/CTF Act. Entities that provide one or more designated services are defined as 'reporting entities'. The obligations on reporting entities include enrolment with AUSTRAC, maintaining a compliance program, conducting customer due diligence, record keeping and lodging transaction and suspicious matter reports with AUSTRAC. These amendments will ensure that Australia's AML/CTF regime will apply to notified foreign passport funds in the same way that it currently applies to MISs (including Australian passport funds).

5.109 Amendments include new definitions of the terms 'managed investment scheme' and 'notified foreign passport fund' to provide that these terms mean the same in the AML/CTF Act as in the Corporations Act. In addition, notes are amended and inserted to confirm that a notified foreign passport fund is treated as a MIS for the purposes of the Corporations Act, and therefore the AML/CTF Act. [Schedule 2, items 1-4, section 5, definitions of 'managed investment scheme', 'notified foreign passport fund', 'security', notes to subsection 6(2)]

Minor amendments to other Acts

5.110 An amendment to the Financial Sector (Collection of Data) Act 2001 is made to give the Australian Prudential Regulation Authority (APRA) the power to set reporting standards relating to the financial products and other property in which a notified foreign passport fund has invested. This mirrors APRA's existing powers to set reporting standards for managed investment schemes. [Schedule 2A, item 3, paragraph 13(4A)(c) of the Financial Sector (Collection of Data) Act 2001]

5.111 The definition of 'associate' in the Foreign Acquisitions and Takeovers Act 1975 is amended so that it excludes the situation where one person holds a substantial interest in a notified foreign passport fund and the other is the operator of the fund. Amendments also clarify that the exception relating to persons with a substantial interest in a scheme and the responsible entity of the scheme refers to registered schemes and adopts the meaning of 'responsible entity' in the Corporations Act. [Schedule 2A, items 4-6, paragraphs 6(3)(f) and (fa) of the Foreign Acquisitions and Takeovers Act 1975]

5.112 The Pooled Development Funds Act is also amended to prevent pooled development funds from issuing or making available an interest in a notified foreign passport fund. [Schedule 2A, Item 10, paragraph 30(1)(e) of the Pooled Development Funds Act 1992]

5.113 Amendments are also made to the notes to various sections of the Competition and Consumer Act 2010 which cross-reference the prohibitions on hawking in the Corporations Act and list the types of products that are covered by the prohibitions. The amendments extend this list to include interests in notified foreign passport funds. [Schedule 2A, items 1 and 2, notes to sections 95 and 187 of Schedule 2 to the Competition and Consumer Act 2010]

5.114 Finally, various amendments are made to preserve the existing meaning of 'financial year' in the Insurance Act 1973, and 'securities' in section 128AE of the Income Tax Assessment Act 1936 and section 5 of the Payment Systems and Netting Act 1998. [Schedule 2A, items 7 to 9, subparagraph 128AE(2)(e)(iii) of the Income Tax Assessment Act 1936, subsection 3(1) of the Insurance Act 1973 (definition of 'financial year') and section 5 of the Payment Systems and Netting Act 1998 (paragraph (a) of the definition of 'financial property')]


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