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 6 Compliance and enforcement

Outline of chapter

6.1 Part 8A.6 of the new law gives ASIC additional compliance and enforcement powers for Australian passport funds and notified foreign passport funds. In addition, Schedule 2 of the Bill:

·
provides ASIC with an additional regulatory function of passport regulator under the MOC;
·
allows ASIC to accept enforceable undertakings from operators of notified foreign passport funds; and
·
authorises persons to disclose confidential information held by ASIC to other passport regulators under the MOC.

Context of amendments

6.2 Paragraph 5 of the MOC requires that participants:

·
apply and conduct reasonable checks on compliance with and, where appropriate, enforce the home economy laws and regulations for regulated CISs, in relation to passport funds registered in the participant's economy;
·
apply any host economy laws and regulations consistently with Annex 1 of the MOC in relation to passport funds registered in the economies of other participants;
·
conduct reasonable checks on compliance with and, where appropriate, enforce the Passport Rules, whether by administrative action, regulatory or supervisory function or other means, and whether directly or through another entity that is subject to supervision by the participant.

6.3 Accordingly, for example, in the event that a home regulator is of the opinion that a passport fund is not complying, or is not likely to comply, with either home economy laws and regulations, host economy laws and regulations or the passport rules, subject to meeting certain conditions it may notify the fund or its operator that it must not or must no longer offer interests in the passport fund to persons in the home or host economy (see section 10 of Annex 2 of the MOC).

Summary of new law

6.4 There are two offences for breaches of the Passport Rules:

·
A person who intentionally or recklessly breaches the Passport Rules commits an offence punishable by a fine of up to 2,000 penalty units or five years imprisonment or both. This offence may also attract a civil penalty.
·
Minor breaches of the Passport Rules are strict liability offences punishable by up to 60 penalty units. Each strict liability offence is subject to the existing penalty notice regime.

6.5 Both offences apply to Australian passport funds, notified foreign passport funds, and any person connected to such funds. Australia has jurisdiction over Australian citizens and bodies corporate irrespective of whether the physical elements of the offence occurred in Australia, or overseas, and irrespective of the laws of the foreign country. For foreign citizens and bodies corporate, a defence is available if the conduct occurs overseas and there is no equivalent offence in the laws of the foreign jurisdiction.

6.6 ASIC may also make a final or interim stop order against an Australian passport fund or a notified foreign passport fund that is not complying, or is not likely to comply, with the relevant corporations legislation or the Passport Rules for this jurisdiction. Notified foreign passport funds that are not registered as foreign companies, or fail to appoint a local agent, may also be subject to a stop order. Finally, a stop order may also be made against notified foreign passport funds from economies that have ceased to be participating economies, or have a different understanding about the application or implementation of the MOC to Australia.

6.7 The licensing and breach reporting requirements, ASIC's banning powers, and the court's power to award compensation have been extended to cover non-compliance with the Passport Rules for this jurisdiction and host economy laws.

6.8 In addition, ASIC may:

·
perform the functions and exercise the powers of a passport regulator under the MOC; and
·
accept enforceable undertakings from the operators of notified foreign passport funds.

6.9 ASIC may also disclose information that was given to it in confidence, or which is protected information, to another passport regulator to enable or assist that regulator to perform its functions as a passport regulator.

Comparison of key features of new law and current law

New law Current law
A person who intentionally or recklessly breaches the Passport Rules commits an offence punishable by a fine of up to 2,000 penalty units or five years imprisonment or both.

A person who breaches the Passport Rules commits a strict liability offence punishable by up to 60 penalty units.

The strict liability offence is subject to the existing penalty notice regime.

No equivalent.
ASIC may make a final or interim stop order against an operator who:

·
is not complying, or is not likely to comply, with the relevant corporations laws or the Passport Rules in this jurisdiction;
·
ceases to be a registered foreign company or fails to appoint a local agent; or
·
in the case of a notified foreign passport fund, is subject to any determination made by the Minister.

No equivalent.
ASIC may exercise the functions and powers of a home regulator or a host regulator under the MOC. No equivalent.
ASIC may disclose confidential information to assist or enable another passport regulator to perform its functions. No equivalent.
ASIC may accept an enforceable undertaking from the operator of a notified foreign passport fund. ASIC may accept an enforceable undertaking from the responsible entity of a MIS.

Detailed explanation of new law

Breaches of the Passport Rules in this Jurisdiction

Offences for breaching the Passport Rules

6.10 Breaches of the Passport Rules are an offence under the amendments contained in the Bill. It is generally not best practice for the content of an offence to be set out in another instrument (an arrangement known as a 'delegation of offence content'. See the Guide, section 2.3.4). The general concern is that such an arrangement may obscure the scope and effect of the offence for Parliament and those subject to the offence.

6.11 The Guide provides a number of circumstances in which it may nevertheless be appropriate for a delegation of offence content to occur, several of which apply to breaches of the Passport Rules. The first is that the Australian Government has committed to abide by the Passport Rules as an internationally agreed set of requirements, and to incorporate the Passport Rules in its domestic law. In doing so, it is necessary to support the implementation of the Passport Rules in Australia with the appropriate penalties. Secondly, the Passport Rules contain a large number of technical and detailed requirements which are inappropriate for inclusion in the Corporations Act. Finally, it is possible that the Passport Rules may have to be amended as the Passport arrangements are implemented, or to deal with unanticipated consequences and changing market circumstances. The delegation of offence content in this context is therefore justified and complies with the Guide.

6.12 Furthermore, incorporation of the Passport Rules in the domestic law of Australia will occur in the form of a legislative instrument made by the Minister, which will be subject to consideration and scrutiny by Parliament (see paragraph 2.23 of this Explanatory Memorandum). For this and the other reasons set out above, it is considered that the delegation of offence content inherent in the offences included in the Bill with regard to breaches of the Passport Rules is consistent with the Guide.

6.13 The new law sets out two offences for persons who breach the Passport Rules in this jurisdiction. [Schedule 1, item 1, section 1211B]

6.14 The first offence is a more serious offence that applies if the person acted intentionally or recklessly. As that section does not specify the fault element, the default fault element of 'intention' or 'recklessness' in section 5.6 of the Criminal Code applies. The penalty for the more serious offence is a fine of up to 2,000 penalty units or imprisonment for up to five years or both. This penalty is consistent with those for similar offences applying to MISs in the Corporations Act (for example, in the case of a person who intentionally or recklessly breaches their duties as an officer of a responsible entity- see subsection 601FD(4) and related penalty). [Schedule 1, item 1, subsection 1211B(3)]

6.15 The second, less serious, offence applies even if there is no intention or recklessness. It is a strict liability offence; that is, the prosecution does not need to prove fault elements (intention, knowledge, recklessness or negligence) for any of the physical elements of the offence. The defence of reasonable mistake of fact, and other general defences, remain available under section 6.1 of the Criminal Code. [Schedule 1, item 1, subsection 1211B(4)]

6.16 The penalty for the less serious offence is a fine of up to 60 penalty units. There is no imprisonment penalty. The amount of the fine and the absence of an imprisonment penalty are consistent with the recommended penalties in the Guide. [Schedule 1, item 1, subsection 1211B(5)]

6.17 While strict liability offences often sit uncomfortably with the presumption of innocence, they are appropriate if they pursue a legitimate aim and are proportionate to achieving that aim (see the Guide, section 2.2.6). The strict liability offence for less serious breaches of the Passport Rules is consistent with the Guide. It is designed to ensure the integrity of the new regime, protect investors, and make it easier for ASIC to prosecute an offence. The Passport Rules contain a large number of detailed rules, especially with respect to investment restrictions, and it is conceivable that there may be a significant number of minor infringements. Proof of fault is likely to be relatively easy to demonstrate, as the investment restrictions provide objective criteria which can be used to assess whether an infringement has occurred. A timely and effective means of dealing with these infringements is an essential element in preserving the integrity of the passport regime.

6.18 Both of the offences for breaches of the Passport Rules in this jurisdiction apply to Australian passport funds, notified foreign passport funds (that is, funds which are permitted to offer interests in Australia), and any person connected with one of these funds. In the case of notified foreign passport funds, the breach must also result, or be likely to result, in financial losses or other disadvantages for members of the fund in Australia. [Schedule 1, item 1, subsections 1211B(1) and (2)]

6.19 Breaches of the Passport Rules are subject to the existing penalty notice regime in the Corporations Act. For further information about the penalty notice regime, see paragraph 4.93. [Schedule 2, item 306, subparagraph 1313(8)(aa)(i)]

6.20 The penalty notice scheme follows the requirements of the Guide. Because the Passport Rules contain a large number of detailed requirements, for example with regard to investment restrictions for various asset classes, the breaches covered by the less serious offence are generally relatively minor and, as there may be a high volume of breaches, a penalty notice regime is more efficient to deal with this type of breach.

6.21 The Court has the power to make a declaration of contravention and order a person who breaches the Passport Rules to compensate another person or entity, including a passport fund, for damage suffered as a result of the breach. Damage suffered includes any diminution in the value of the fund's property and any profits made by the person who breached the Passport Rules. The court must specify the amount of compensation. [Schedule 2, items 314, 321 to 326 and 339, subsections 1317H(1) and (2), heading to subsections 1317H(3), subsections 1317H(3) and (4) and 1317HE(1) to (4) and 1317E(1) table item 45A]

Extended geographical jurisdiction

6.22 Extended geographical jurisdiction Category A as set out in section 15.1 of the Criminal Code applies to the two offences for breaching the Passport Rules. [Schedule 1, item 1, subsection 1211B(5)]

6.23 Under this category, the offences apply to Australian citizens, or bodies corporate, regardless of where the conduct giving rise to the offence occurs, whether in Australia or overseas. In contrast to the circumstances of foreign nationals and bodies corporate (see next paragraph), no defence is available if there is no equivalent offence applying to the conduct in the domestic law of the overseas jurisdiction where the conduct occurs.

6.24 The offences apply to foreign nationals and bodies corporate if the conduct giving rise to the offences occurs in Australia. They also apply if the conduct occurs abroad, provided that a result of the conduct occurs in Australia. However, under these circumstances there is a defence available if there is no equivalent offence in the domestic law of the jurisdiction where the conduct occurs.

6.25 This could, for example, apply in the case of a person connected with a notified foreign passport fund breaching the Australian Passport Rules through conduct occurring in a foreign jurisdiction, such as the fund's home economy. However, given that the Passport Rules in all participating economies are required to be substantially the same as the Passport Rules in Annex 3 of the MOC, it is expected that a breach of the Australian Passport Rules would also amount to a breach of the foreign jurisdiction's Passport Rules. The defence available under Category A to foreign citizens and bodies corporate would accordingly not be available under these circumstances.

Stop orders

Stop orders against Australian passport funds

6.26 ASIC may make a stop order against an Australian passport fund if it is satisfied that the fund, or a person associated with the fund, does not comply, or is not likely to comply, with the Corporations Act, Passport Rules for this jurisdiction, ASIC Act or the associated regulations. The stop order may:

·
prohibit the passport fund or its operator from offering interests in Australia;
·
prohibit the passport fund or its operator from offering interests in another jurisdiction; or
·
require the fund or its operator to take or cease any action reasonably necessary to give effect to the prohibition on offering interests.

The stop order must be in writing and may be for the period specified in the order or an indefinite period. [Schedule 1, item 1, subsections 1215(1) and (3)]

6.27 A stop order may specify that conduct of a particular kind will be regarded as constituting a breach of a particular provision in the Corporations Act. It must be given to the operator of the fund as soon as reasonably practicable after it is made. [Schedule 1, item 1, subsections 1215(2) and (5)]

6.28 Before making a stop order relating to an Australian passport fund, ASIC must offer procedural fairness to the operator of the fund and any interested persons, including by:

·
holding a hearing; and
·
giving the persons a reasonable opportunity to make written or oral submissions on whether an order should be made.

These are the same due process requirements as those that apply to stop orders made by ASIC under section 739 of the Corporations Act (relating to offers of securities under Chapter 6D). The legislation does not prescribe the form of the hearing, allowing it to be held by telephone, or other technological means, in order to reduce costs or afford convenience to participants. [Schedule 1, item 1, subsection 1215(4)]

6.29 A copy of the stop orders must be given to the operator of the fund. The operator of the fund as well as any other person who is aware of the order must not contravene the order. [Schedule 1, item 1, subsection 1215C(5) and section 1215D]

6.30 ASIC has the power to vary or revoke a stop order under section 33 of the Acts Interpretation Act 1901. This has been confirmed in the context of other stop order provisions in the Corporations Act, such as section 1020E.

6.31 A person may seek review of a stop order under Part 9.4A of the Corporations Act and the Administrative Appeals Tribunals Act 1975.

Stop orders against notified foreign passport funds

6.32 ASIC may, by written instrument, make a stop order prohibiting the operator of a notified foreign passport fund from offering interests in Australia. The stop order may also require the fund, or its operator, to take or cease taking any action reasonably necessary to give effect to the prohibition on offering interests. The power to order that other action be taken or not taken, as the case may be, is designed to ensure ASIC is able to require any additional steps that are necessary to ensure a stop order is effective. This includes ordering not to issue an interest where an offer has previously been made and is to be later accepted, or when an application is made without an offer. [Schedule 1, item 1, subsection 1215A(1) and paragraphs 1215A(3)(e) and (f)]

6.33 A stop order may specify that conduct of a particular kind will be regarded as constituting a breach of a particular provision in the Corporations Act. [Schedule 1, item 1, subsection 1215A(2)]

6.34 The notification requirements, right to merits review, and ASIC's variation and revocation powers are the same as for Australian passport funds (see paragraphs 6.26 to 6.31 of this Explanatory Memorandum). [Schedule 1, item 1, subsection 1215A(8)]

6.35 There are three situations where ASIC may make a stop order against a notified foreign passport fund:

·
the fund or its operators are not complying, or are not likely to comply, with certain laws and regulations in Australia or the fund's home economy;
·
the operator of the fund has ceased to be registered as a foreign company, or has not had a local agent for more than 21 days as set out in section 601CF in Division 2 of Part 5B.2 of the Corporations Act; or
·
the Minister has made a determination that applies to the fund.

[Schedule 1, item 1, paragraphs 1215A(3)(a) to (d)]

Ground 1: Non-compliance with the law

6.36 ASIC may make a stop order if the fund, or its operator, is not complying, or not likely to comply with:

·
the Corporations Act and Regulations, including the Passport Rules incorporated in Australian law;
·
the ASIC Act and Regulations; or
·
the fund's home economy laws and regulations, including the Passport Rules as incorporated into the home economy's laws.

[Schedule 1, item 1, paragraph 1215A(3)(a) and subsection 1215A(4)]

6.37 There are three additional factors that ASIC must consider before making the stop order. First, ASIC must consider the impact of the likely non-compliance on the members and prospective members of the fund. Second, ASIC must consider whether the order is necessary having regard to any action taken or that may be taken by the home regulator. Finally, if ASIC is concerned about non-compliance with the fund's home economy laws and regulations, including the Passport Rules for the home economy, ASIC must ask the home regulator for its opinion and give effect to that opinion if, and only if, it is provided within the stipulated timeframe. [Schedule 1, item 1, subsection 1215A(6) and paragraphs 1215A(7)(a) and (b)]

6.38 If ASIC uses its stop order powers because the fund or operator of the fund is not complying, or is not likely to comply, with Australia's Passport Rules, ASIC must consult the home regulator on the interpretation of the equivalent Passport Rule in the home regulator's jurisdiction. This promotes consistency between participating economies' interpretation of Annex 3 to the MOC and facilitates cooperation between passport regulators. However, in this instance, ASIC is not required to give effect to the opinion of the home regulator. [Schedule 1, item 1, subsection 1215A(5)]

6.39 Before making a stop order because Australian or home economy laws may not be complied with, ASIC is required to hold a hearing and give any interested people an opportunity to make submissions. [Schedule 1, item 1, subsection 1215A(8)]

6.40 Stop orders made against notified foreign passport funds for non-compliance with the law are similar to stop orders made against Australian passport funds for non-compliance with the law. However, the applicable laws and additional considerations are different for notified foreign passport funds. These differences are summarised below:

Table 4.1 : Stop order for non-compliance with relevant laws

Australian Passport Funds Notified Foreign Passport Funds
Conditions for making order ASIC is of the opinion that the relevant laws (being Australian laws including the Passport Rules for this jurisdiction) are not being, or are not likely to be, complied with.

·
ASIC is of the opinion that the relevant laws (being Australian and home economy laws) are not being, or are not likely to be, complied with.
ASIC is of the opinion that the order is necessary having regard to:

-
the impact on fund members and potential members; and
-
any action taken or that may be taken by the home regulator.

·
ASIC has sought, and given effect to, the home regulator's opinion with respect to non-compliance with home economy laws.

Relevant laws

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

·
Corporations Act and Regulations
·
ASIC Act and Regulations
·
Passport Rules in this jurisdiction
·
Home economy laws and regulations, including the Passport Rules for the home economy

Ground 2: Ceasing to be a registered foreign company and failure to appoint a local agent

6.41 Ceasing to be a registered foreign company or not having a local agent for more than 21 days constitute the second ground allowing ASIC to issue a stop order. The requirements in this regard are set out in Division 2 of Part 5B.2 of the Corporations Act. In this situation, ASIC is not required to hold a hearing or invite interested parties to make submissions. This differs to the procedure for stop orders made against funds which are not complying, or are not likely to comply, with the law. [Schedule 1, item 1, paragraphs 1215A(3)(b) and (c)]

Ground 3: Minister's determination

6.42 The third ground for making a stop order is if the Minister has determined that funds from a particular home economy should be prohibited from offering interests in Australia, and the fund is from that particular home economy. [Schedule 1, item 1, paragraph 1215A(3)(d)]

6.43 The Minister may make a determination because:

·
a difference has been raised under the MOC because Australia disagrees with another economy's interpretation or application of the MOC and the Minister considers the difference has not been satisfactorily resolved;
·
an economy other than Australia has ceased to be a participating economy;
·
Australia has withdrawn from the MOC; or
·
the MOC has been terminated.

[Schedule 1, item 1, section 1210B]

6.44 Further information about the Minister's power to make such determinations can be found in Chapter 3 of this Explanatory Memorandum.

6.45 In situations where the Minister has made a determination, ASIC does not need to give the operator a right to be heard before making a stop order. This differs to the procedure for stop orders made against funds which are not complying, or are not likely to comply, with the law.

6.46 ASIC's power to issue stop orders when the Minister has made a determination complements ASIC's power to reject notices of intentions when the Minister has made a determination. [Schedule 1, item 1, subsection 1213B(8)]

Interim stop orders

6.47 ASIC may make interim stop orders before or during a hearing if it considers that any delay in making a stop order would be prejudicial to the public interest. This is the same as the condition for issuing interim stop orders under subsection 739(3) of the Corporations Act. Interim stop orders may be made against Australian passport funds or notified foreign passport funds. Before making an interim stop order, ASIC must be of the opinion that one or more of the grounds for making a stop order exist, as set out in subsections 1215(3) of the new law (where the case relates to an Australian passport fund) or 1215A(3) of the new law (where the case relates to a notified foreign passport fund). [Schedule 1, item 1, subsection 1215B(1)]

6.48 An interim stop order may prohibit a fund from issuing interests in Australia or require the fund to take, or not take, any other action that ASIC considers reasonably necessary. As explained above, the power to order that other action be taken or not taken, as the case may be, is designed to ensure ASIC is able to require any additional steps that are necessary to ensure an interim stop order is effective. If the fund is an Australian passport fund, the stop order may also prohibit the issue of interests outside of Australia.

6.49 The maximum duration of an interim stop order made before a hearing is 21 days. [Schedule 1, item 1, subparagraph 1215B(2)(c)(ii)]

6.50 Stop orders made during a hearing last until the end of the hearing (unless sooner revoked), even if the hearing lasts for more than 21 days. [Schedule 1, item 1, subparagraph 1215B(2)(c)(i)]

6.51 ASIC is not required to hold a hearing or give a person the opportunity to be heard before making an interim stop order. This denial of procedural fairness is justified as an interim stop order is intended specifically to prevent the realisation or continuation of any immediate consequences that would be prejudicial to the public interest, pending a hearing about the matter. If a hearing is not undertaken within 21 days, the interim stop order is automatically revoked. This approach has been sanctioned by the Australian Law Reform Commission [11] and follows existing precedent (see, for example, section 739 of the Corporations Act). [Schedule 1, item 1, paragraph 1215B(2)(a)]

6.52 Interim stop orders must be in writing and given to the operator of the fund as soon as reasonably practicable after they are made. [Schedule 1, item 1, paragraph 1215B(2)(b) and subsection 1215B(3)]

6.53 ASIC has the power to vary or revoke an interim stop order under section 33 of the Acts Interpretation Act 1901.

Revocation of stop orders

6.54 Operators of Australian and notified foreign passport funds may apply to ASIC to have a stop order removed because the grounds on which it was issued no longer exist. [Schedule 1, item 1, subsections 1215C(1) and (2)]

6.55 Any application must be in the form prescribed by ASIC and must explain why the operator believes that the grounds for the stop order no longer exist. [Schedule 1, item 1, subsection 1215C(3)]

6.56 If ASIC, on considering an application, comes to the opinion that the grounds for the stop order no longer exist it must revoke the stop order. It is also made clear that ASIC may decide to vary or revoke a stop order for another reason. [Schedule 1, item 1, subsections 1215C(4) and (5)]

Compliance with stop orders

6.57 If the operator of a fund receives a notice from ASIC, the operator must comply with the stop order. [Schedule 1, item 1, subsections 1215D(1) and (2)]

6.58 Failure to comply is an offence attracting a penalty of 100 penalty units or imprisonment for two years or both. [Schedule 2, item 356, schedule 3 table item 328B]

6.59 The operator is also required to take reasonable steps to bring the stop order to the attention of any other person who might engage in conduct that is contrary to the order. [Schedule 1, item 1, subsection 1215D(3)]

6.60 Failure to do so is an offence, punishable by a fine of up to 100 penalty units or imprisonment for two years or both. [Schedule 2, item 356, schedule 3 table item 328C]

6.61 If the other person breaches the stop order after being given notice of it, they also commit an offence, punishable by a fine of up to 100 penalty units or imprisonment for two years or both. [Schedule 1, item 1, subsection 1215D(4) and Schedule 2, item 328, schedule 3 table item 328D]

ASIC's function as the Passport Regulator for Australia

6.62 ASIC, as regulator, has prescribed functions under sections 11 and 12A of the ASIC Act. Under the MOC and the Passport Rules, a passport regulator is responsible for matters such as regulating the activities of passport funds in their jurisdiction, either as the home regulator or the host regulator. Annex 4 of the MOC provides for arrangements for cross-border supervisory cooperation, including exchange of information between passport regulators.

6.63 To facilitate ASIC's activities as the Passport Regulator for Australia, ASIC has the functions and powers of a home regulator and a host regulator under the MOC. ASIC is not subject to directions of the Minister in relation to exercising this function or exercising any related powers. ASIC is also not under a duty to perform the function or exercise the powers. [Schedule 2, items 6 and 7, subsection 11(16A) and paragraph 11(17)(c) of the ASIC Act]

Authorising ASIC to disclose information to other passport regulators for the performance of their functions

6.64 ASIC must take all reasonable measures to protect information given to it in confidence or which is protected information. Unless the use or disclosure is authorised under section 127 of the ASIC Act, ASIC is unable to disclose such information.

6.65 A person who is authorised by the Chairperson of ASIC may disclose information given to ASIC in confidence, or which is protected information, if the disclosure is to enable or assist a passport regulator for a passport fund under the MOC in the performance of their functions or the exercise of their powers. [Schedule 2, item 17, subsection 127(3AA) of the ASIC Act]

Allowing ASIC to accept enforceable undertakings from operators of notified foreign passport funds

6.66 ASIC may accept an enforceable undertaking from an operator of a notified foreign passport fund. Such a written undertaking in connection with the fund will relate to a matter which ASIC has a power or function under the corporations legislation. Once given, the operator may only withdraw the undertaking with ASIC's consent. In the event that the undertaking is breached, ASIC may apply to the Court seeking orders requiring:

·
the operator to comply with the undertaking;
·
the operator to transfer to fund property an amount up to any financial benefit that the operator has obtained, which is attributable to the breach;
·
the operator to compensate a person who has suffered loss or damage as a result of the breach; and/or
·
the operator to do or not do any other action that the Court considers appropriate.

[Schedule 2, items 14 to 16, heading to Part 3A, heading to section 93A and subsections 93B(1) to (4) of the ASIC Act]

6.67 ASIC is required to keep a record of the undertaking and provide a copy of it to any person who requests it. Information in the undertaking that meets specified criteria, such as being commercial-in-confidence, must be redacted by ASIC. [Schedule 2, item 16, subsections 93B(5) to (7) of the ASIC Act]

6.68 Part 6 of the Regulatory Powers (Standard Provisions) Act 2014 (the Regulatory Powers Act) provides a framework for accepting and enforcing undertakings relating to compliance with provisions. However, matters in relation to which undertakings can be accepted are stated more broadly in section 93A, and the new section 93B, than they are in the Regulatory Powers Act. Under the Regulatory Powers Act, undertakings may be accepted to do or not do something to comply or ensure compliance with provisions specified in the triggering Act as enforceable. Under section 93A, ASIC would be entitled to accept an undertaking in relation to other matters.

6.69 For example, one of ASIC's functions is to monitor and promote market integrity and consumer protection in relation to the Australian financial system (see subsection 12A(2) of the ASIC Act). Thus, under subsection 93A(1), ASIC could accept an undertaking from the responsible entity for a registered scheme not to do something in relation to the scheme that might threaten the Australian financial system. That undertaking might not relate to a breach of a particular provision of the corporations legislation, so much as a course of action in relation to a fund. For this reason, section 93B has been based on 93A, rather than have it trigger the Regulatory Powers Act.

6.70 The requirements around enforceable undertakings for notified foreign passport funds replicate the requirements for enforceable undertakings for registered schemes under the ASIC Act.

Licensing obligations

6.71 Under the existing law, the operator of an Australian passport fund is carrying on a financial services business in this jurisdiction and must hold an AFSL that covers the provision of all financial services (whether or not in this jurisdiction).

6.72 Consequential amendments have been made to the general licensing obligations to ensure that operators of Australian passport funds are required to comply with the laws of each host economy for the fund. A similar requirement applies to other persons with functions and duties in relation to the fund. These persons are referred to as persons with responsibilities in relation to an Australian passport fund. [Schedule 2, items 226 to 229, paragraph 912A(1)(cb) and subsection 912A(6)]

Breach reporting and banning orders

6.73 The definition of 'financial services law' includes the Passport Rules for this jurisdiction and Chapter 8A. This has the effect of applying the breach reporting and banning orders to the new law. [Schedule 2, items 202 and 203, section 761A, definition of 'financial services law'

6.74 Consequential amendments have been made the breach reporting requirements for Australian financial services licensees so they include compliance with the laws of each host economy for the fund and the Passport Rules for this jurisdiction. This also has the effect of giving ASIC the power to ban a person for non-compliance with the licensing obligations or the financial services law. [Schedule 2, items 202, 205 and 229, section 761A, definition of 'financial services law', subparagraph 761A(e)(ii), definition of 'security' and subparagraph 912D(1)(a)(ii)]

6.75 The new law gives ASIC the power to ban an operator or person connected with an Australian passport fund if the host regulator is of the opinion that the person or fund does not comply, or is not likely to comply, with the laws of the host economy. The host regulator must notify ASIC of its concern in writing. [Schedule 2, item 233, subparagraph 920A(1)(i)(i)]

6.76 Before banning a person because of the host regulator's concern, ASIC must consider the potential impact of the failure, or potential failure, to comply with the requisite laws on members and potential members of the fund. This is in addition to the usual limitations on ASIC's power to make a banning order, including that ASIC must form the view that the public interest in exercising the banning power outweighs the detriment to the individual. [Schedule 2, item 233, subparagraph 920A(1)(i)(ii)]

6.77 ASIC may immediately suspend or cancel the AFSL of an operator of a notified foreign passport fund if the members of the fund have suffered, or are likely to suffer, loss because the fund breached the Corporations Act, Corporations Regulations or the Passport Rules for this jurisdiction. It is noted that operators of such funds may not necessarily be required to have such a licence. [Schedule 2, item 230, paragraph 915B(3)(caa)]

6.78 ASIC may also suspend or cancel an Australian financial service licence of an operator or person with responsibilities in relation to an Australian passport fund if a host regulator notifies ASIC that the person has not complied, or is not likely to comply, with the host economy's laws. ASIC may only exercise this power after having regard to the potential impact of the person's non-compliance on fund members and granting the operator or person a hearing. [Schedule 2, items 231 and 232, paragraph 915C(1)(e) and subsection 915C(5)]

6.79 A person may seek merits review by the Administrative Appeals Tribunal (AAT) of ASIC's decision to ban a person or suspend or cancel a licence under existing section 1317B. The right to merits review exists irrespective of whether the person is an Australian or foreign resident or citizen.

Officers and employees

6.80 Division 1 of Part 2D.1, which relates to duties imposed on officers, directors and employees of a corporation, does not apply to the actions or omissions of officers, directors or employees of a notified foreign passport fund or its operator. [Schedule 2, item 72, section 190C]

6.81 Directors of notified foreign passport funds or of the fund's operator are not personally liable for a liability incurred by the fund or operator acting as trustee. [Schedule 2, item 73, subsection 197(3A)]

Disqualification from managing corporations

6.82 Consequential amendments have been made to automatically disqualify a person from managing corporations if the person is disqualified from being a director of a passport fund or the fund's operator, or from being concerned with the management of a passport fund under an order made by court of a foreign jurisdiction (that is in force). Similarly, ASIC may apply to the court to disqualify a person from managing corporations, if the person is disqualified under the law of a foreign jurisdiction. [Schedule 2, items 76 to 79, paragraphs 206B(6)(b) and (c) and 206EAA(1)(a) and (3)(a)]

6.83 Except for the provisions referred to above, Part 2D.6 will only apply to people managing a notified foreign passport fund, or the fund's operator, with respect to their actions or omissions committed in this jurisdiction. [Schedule 2, item 81, section 206HAA]

6.84 An amendment changing the heading of section 206H from "Territorial application of this Part" to "Limited application of Part to foreign companies" is also made. [Schedule 2, item 80, heading to section 206H]

Declarations of contravention

6.85 The Court may make declarations of contravention if there is a breach of the Passport Rules or new reporting requirements. For further details about the new reporting requirements, please see paragraphs 4.72 to 4.84 of this Explanatory Memorandum. [Schedule 2, items 313 and 314, paragraph 1317E(1), table items 5 and 45A]

6.86 The declaration of contravention must specify the name of the relevant passport fund. This ensures that the relevant fund can be identified when the declaration of contravention applies to another entity, such as, the operator. [Schedule 2, items 315 and 316, paragraphs 1317E(2)(e) and (f)]

6.87 If an application for a declaration of contravention relates to a notified foreign passport fund, the operator of the fund may intervene in the application. The operator may make submissions on any matter, apart from whether the declaration should be made. If the application relates to an Australian passport fund, the operator can rely on analogous powers in the existing law which apply to responsibility entities of registered schemes. [Schedule 2, item 341, subsection 1317J(3)]

Pecuniary penalty orders

6.88 The Court may make pecuniary penalty orders if there is a breach of:

·
a corporations/scheme civil penalty provision (such as the new reporting requirement)
·
a financial services civil penalty provision (such as the continuous disclosure obligations or the obligations in relation to margin lending facilities); or
·
the Passport Rules for this jurisdiction.

[Schedule 2, items 317, 318 and 320, subparagraphs 1317G(1)(b)(i) and 1317G(1A)(c)(ii) and subsections 1317G(1H) and 1317G(1J))]

6.89 In order for the Court to make a pecuniary penalty order, the breach must be serious or materially prejudice the interests of the fund, its members, the acquirers or disposers of the relevant financial product, or the issuers of the relevant financial product. The Court is also required to make a declaration of contravention before it makes a pecuniary penalty order. [Schedule 2, items 317, 318 and 320, subparagraphs 1317G(1)(b)(i) and 1317G(1A)(c)(ii) and subsection 1317G(1H)]

6.90 The maximum penalty for a breach of the Passport Rules is $200,000 for an individual and $1 million for a body corporate. This is the same as the maximum penalty for a breach of a financial services civil penalty provision under the existing law. These penalties are imposed to deter misconduct and reflect the severe potential consequences for passport fund investors in the event of a breach of the Passport Rules. [Schedule 2, item 320, subsection 1317G(1J))]

6.91 The operator of a notified foreign passport fund may intervene in an application for a pecuniary penalty in relation to the fund and make submissions. This parallels the operator's rights in applications for declarations of contraventions that relate to the fund (see paragraphs 6.85 to 6.87 above). [Schedule 2, item 341, subsection 1317J(3)]

Compensation orders

6.92 The Court's power to make compensation orders for breaches of a civil penalty provision also applies in the context of notified foreign passport funds. This ensures that persons who suffer damage as a result of a notified foreign passport fund breaching a corporations/scheme or financial service civil penalty provision are able to access compensation from the operator of the fund. [Schedule 2, items 321 to 325 and 327 to 331, subsections 1317H(1) to (3) and 1317HA(1) to (3)]

6.93 Compensation orders may also be made for breaches of the Passport Rules and the market integrity rules. [Schedule 2, items 75, 333 to 339, sections 1317HB and 1317HE and note 1 to subsection 199A(3)]

6.94 The operator of the notified foreign passport fund and a person who has suffered damage as a result of a breach of the Passport Rules (in addition to ASIC and the operator of an Australian passport fund) may apply for a compensation order. [Schedule 2, items 340 and 342, subsections 1317J(2) and (3AA)]

6.95 If the operator of the fund is ordered to compensate the fund, the operator must transfer the compensation to fund property. If another person is ordered to pay the compensation, it should be paid to the operator who holds it on behalf of the fund. [Schedule 2, items 326, 332, 338 and 339, subsection 1317H(4A), 1317HA(4A), 1317HB(4B) and 1317HE(5)]

6.96 Compensation orders may be enforced as if they were a judgment of the court. The court has the same powers to grant relief from liability for contraventions of the new compensation order as for existing compensation powers. [Schedule 2, items 20, 339 and 343, section 9, definition of 'civil penalty order', subsection 1317HE(6) and subsection 1317S(1), definition of 'eligible proceedings']

6.97 A company or a related body corporate must not indemnify a person against liability for a compensation order, including a compensation order relating to a contravention of the Passport Rules. [Schedule 2, items 25 and 74, section 9, definition of 'entity' and paragraph 199A(2)(b)]

Other Court orders

6.98 The Court has a general power to make other orders (for example, an order varying part of a contract or an order requiring money to be refunded) if a party to the proceedings or person on whose behalf an application is made suffers loss as a result of a breach of the Passport Rules for this jurisdiction. [Schedule 2, items 344 to 347, section 1325]

Review by the Administrative Appeals Tribunal

6.99 An operator, notified foreign passport fund or other interested person may apply to the Administrative Appeals Tribunal for merits review of any decision made by the Minister or ASIC. The process for applying for review is governed by the existing framework for seeking merits review in Part 9.4A of the Corporations Act.

6.100 Review by the Administrative Appeals Tribunal is not available for decisions by ASIC to give, withdraw or not withdraw a penalty notice for:

·
for breaching the Passport Rules;
·
misusing information on the register of members;
·
failing to lodge a register of members (where required by ASIC); or
·
failing to provide a copy of the constitution, register of members or report to which members are entitled under the home economy laws.

[Schedule 2, item 307, paragraphs 1317C(gf))]

6.101 The exclusion of these decisions from merits review only applies to decisions to give, withdraw or not withdraw a notice made after the new law commences. It does not affect any unresolved matters currently before the Administrative Appeals Tribunal. [Schedule 3, item 2]

6.102 It is also consistent with the Guide. Parts 6.7 and 6.8 of the Guide explicitly state that decisions to issue or withdraw infringement or penalty notices should not be subject to merits review. This is because penalty notices are not final or operative determinations of substantive rights, and a person may elect to challenge the penalty notice in court. The exclusion of these types of decisions from merits review is also consistent with the treatment of other similar decisions in the Corporations Act (see, for example, existing paragraphs 1317C(i) and (j)).

Miscellaneous consequential amendments

6.103 Consequential amendments have been made to include the new penalties in the list of general penalty provisions in existing section 1311. A note has also been corrected so that it uses the defined term 'registered schemes'. [cs 305 and 350, paragraph 1311(1A)(dd) and note to subsection 1378(1)]

6.104 Consequential amendments have been made to clarify rules pertaining to overseas branch registers for Australian passport funds. Under existing law, a company may keep a branch register of members of the company at a place outside Australia. The new law provides that an Australian passport fund may also keep a branch register of members of the fund outside Australia in the same way a company may. That is, the fund must:

·
keep the branch register in the same manner as it is required to keep the principal register of the fund;
·
enter in the principal register the details contained in the branch register; and
·
distinguish interests registered in the branch register from those registered in the principal register.

[Schedule 2, items 69 to 71, heading to section 178, subsection 178(1) and section 178AA]

Application and transitional provisions

6.105 There are no application and transitional provisions for this Part.


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