Senate

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)

Chapter 7 Exemptions and modifications

Outline of chapter

7.1 Part 8A.8 of the new law gives ASIC the power to exempt entities from the provisions in Chapter 8A and the Passport Rules, or modify any such provision as it applies to an entity. It also allows the regulations to provide an exemption from any provisions in the Corporations Act applying to passport funds, and for any such provisions to be modified as specified in the regulations. Division 3 of Part 8A.8A of the new law provides both that regulations can be made and that ASIC may declare that the Corporations legislation continues to apply to funds that have been deregistered as passport funds or removed as notified foreign passport funds.

7.2 ASIC also has the power to exempt notified foreign passport funds, their operators and the directors of the operators from Part 2M.3 financial reporting obligations. The new law extends the existing power for the regulations to modify the operation of Chapter 2M in relation to companies, registered schemes and disclosing entities to notified foreign passport funds.

Context of amendments

7.3 The MOC, under subsection 13(1) of Annex 2, allows a passport regulator to exercise any powers it has to:

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exempt a passport fund for which it is the home regulator from the home economy laws and regulations, or modify those laws and regulations with respect to the fund; or

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exempt a passport fund for which it is the host regulator from the home economy laws and regulations that apply to the passport fund in its economy or subject to Annex 1 of the MOC, or modify those laws and regulation with respect to the fund.

7.4 Subsection 13(2) of Annex 2 allows a home regulator to exempt a passport fund from a passport rule or modify a passport rule with respect to such a fund, provided that all host regulators of the passport fund consent in writing to the exemption or modification of the passport rule.

7.5 Section 54 of Annex 3 of the MOC imposes requirements on funds that have been deregistered as passport funds, including that they continue to be operated in accordance with the Passport Rules until certain conditions are met.

Summary of new law

7.6 Part 8A.8 of the new law grants ASIC the power to exempt entities from the provisions in Chapter 8A and the Passport Rules in this jurisdiction, or to modify, omit or vary these provisions. ASIC may also impose conditions on such exemptions.

7.7 ASIC may exempt from, or modify, omit or vary the Passport Rules in this jurisdiction for Australian passport funds only if all the host regulators of the fund have agreed to the proposed exemption or modification. Exemptions and modifications that relate to the Passport Rules in this jurisdiction and apply to foreign passport funds must be the same as an exemption or modification granted by the home regulator.

7.8 ASIC may exempt notified foreign passport funds, their operators and the directors of the operators from financial reporting obligations under the Corporations Act. Regulations may also be made to modify the operation of Chapter 2M in relation to notified foreign passport funds.

7.9 ASIC must use a legislative instrument for exemptions and modifications that apply to all entities or all entities within a class. It may use a notifiable instrument for exemptions and modifications that only apply to specified entities.

7.10 The new law also allows for regulations to be made to provide exemptions from or modify the operation of Chapter 8A, the Passport Rules or a provision in any other chapter of the Corporations Act or of the ASIC Act that relates to passport funds.

7.11 The new law grants ASIC the power to continue the application of the Corporations legislation to funds that have been deregistered as Australian passport funds or removed as notified foreign passport funds. Regulations may also provide that the Corporations legislation continues to apply to funds that have been deregistered as Australian passport funds or removed as notified foreign passport funds.

Comparison of key features of new law and current law

Detailed explanation of new law

ASIC's exemption and modification power

Exemptions and modifications in relation to Chapter 8A

7.12 ASIC has the power to exempt entities from the provisions in Chapter 8A. It may also omit, modify or vary the effect of these provisions. The exemption may apply to nominated requirements, or all of the requirements, in the chapter. [Schedule 1, item 1, section 1217]

7.13 The exemption and modification power is limited to the provisions in Chapter 8A, the definitions that apply to Chapter 8A and regulations made for the purposes of Chapter 8A. [Schedule 1, item 1, paragraph 1217(2)(a) and subsection 1217(9)]

7.14 The power does not extend to the other chapters in the Corporations Act. This is similar to the scope of the exemption and modification power that applies to registered schemes in Chapter 5C.

7.15 The existing law already includes exemption and modification powers for some of the other provisions which potentially apply to passport funds.

7.16 The exemption and modification power may relate to:

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all entities or a specified class of entities (which may include operators, custodians and auditors); or

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all passport funds, a specified class of passport funds or specified funds.

[Schedule 1, item 1, paragraphs 1217(2)(b) to (d)]

7.17 ASIC may impose conditions on its exemptions and apply to the court for an order compelling the entity to comply with the condition in a specified way. [Schedule 1, item 1, subsections 1217(3) to (5)]

7.18 If the exemption applies only to a single specified entity, ASIC must use a notifiable instrument which is not subject to disallowance. Notifiable instruments must be entered on the FRL. ASIC must also give a copy of the exemption or declaration to the specified entity or operator of the passport fund in writing as soon as reasonably practicable after making the notifiable instrument. [Schedule 1, item 1, subsections 1217(7) and (8)]

7.19 If the exemption or modification relates to all entities or all entities within a class, ASIC must make a legislative instrument. The legislative instrument is subject to disallowance and entered on the FRL. It is not necessary for ASIC to provide a notice to the affected entities because ASIC may not know the identity of all entities that are, or may be, affected. [Schedule 1, item 1, subsection 1217(6)]

7.20 Table 7.1 below compares the two mechanisms that ASIC may use to make an exemption or modification.

Table 7.1 : Mechanism for making an exemption or modification

7.21 The new exemption and modification powers allow ASIC to provide administrative relief in circumstances where the strict operation of the Corporations Act produces unintended or unforeseen results that are not consistent with the policy intention for the Passport, including the intention of the MOC. Issues may arise that were not contemplated at the time of drafting because the Passport is a new regime, the funds industry is undergoing rapid innovation, and many foreign passport funds are structured differently to MISs or use arrangements that are not available in Australia. In this context, it is appropriate for ASIC to be able to provide relief where the issues to be addressed are too individual and specific to justify addressing them by legislative means.

7.22 The exemption and modification powers in the new law are subject to the usual safeguards, including administrative review by the AAT, judicial review and consideration in appropriate circumstances by the Commonwealth Ombudsman.

Exemptions relating to the Passport Rules

7.23 ASIC's exemption and modification powers with respect to the Passport Rules are the same as its exemption and modification powers for Chapter 8A, except that there are certain preconditions that must be satisfied before ASIC can exercise its powers. These conditions are designed to prevent one economy from unilaterally changing the Passport Rules and are based on subsection 13(2) of Annex 2 of the MOC. [Schedule 1, item 1, section 1217A]

7.24 The first precondition applies to exemptions or modifications for Australian funds. It requires the approval of all host regulators for the fund before the exemption or modification can take effect. [Schedule 1, item 1, paragraph 1217A(3)(a)]

7.25 Host regulators include the regulators in economies where Australian funds are allowed to offer interests or applied to offer interests. [Schedule 1, item 1, section 1210]

7.26 It is not necessary to obtain the approval of participating economies that are not host regulators. Nevertheless, if the fund wanted to offer interests in one of these participating economies at a later point and the regulator of that participating economy did not accept the exemption, the regulator may refuse the notice of intention to offer interests. See Chapter 3 of this Explanatory Memorandum for an explanation of this ground for refusing a notice of intention.

7.27 The second precondition applies to exemptions or modifications which relate to notified foreign passport funds. It prohibits ASIC from exercising its powers unless a similar exemption or modification has been granted by the foreign passport fund's home economy. [Schedule 1, item 1, paragraph 1217A(3)(b)]

7.28 Under the MOC, the home economy will only be able to make an exemption or modification if it has been agreed by all host regulators.

Exemption orders relating to financial reporting

7.29 Upon receipt of a written application authorised by the operator of a notified foreign passport fund and lodged with ASIC, ASIC may make a legislative instrument to exempt the notified foreign passport fund, the fund operator, or directors of the operator from all or specified requirements of Part 2M.3 that relate to financial reporting. All cross-references to ASIC's power to exempt persons from the Part 2M.3 requirements are also updated. [Schedule 2, items 24, 66, 110, 259 and 266, section 9 definition of 'continuously quoted securities', section 111AX, section 340A and paragraphs 1012DAA(2)(e) and 1012DA(5)(d)]

7.30 When making, revoking or suspending an order, ASIC must give written notice to the applicant; that is, the operator of the applicable notified foreign passport fund. [Schedule 2, item 110, subsection 340A(4)]

7.31 This replicates ASIC's existing exemption order powers relating to financial reporting for companies, registered schemes and disclosing entities.

7.32 ASIC may make an order to exempt a notified foreign passport fund, the fund operator, or directors of the operator from all or specified requirements of Part 2M.3. The order is made by legislative instrument, which is disallowable. Legislative instruments must be entered on the FRL. [Schedule 2, item 111, section 341A]

7.33 When making an exemption order in relation to a class, it is not necessary for ASIC to provide a notice to the affected entities because ASIC may not know the identity of all entities that are, or may be, affected. This replicates the existing exemption class orders relating to financial reporting for companies, registered schemes and disclosing entities.

7.34 The existing criteria for making exemption orders for companies, registered schemes and disclosing entities are set out in section 342 (see paragraphs 7.35 to 7.36 of this Explanatory Memorandum). These powers allow ASIC to provide administrative relief in appropriate circumstances, which are reflected in the criteria for making exemption orders outlined below.

The criteria for making exemption orders

7.35 Under the existing law, to make an exemption order in relation to companies, registered schemes and disclosing entities and requirements under a relevant Part of Chapter 2M, ASIC must be satisfied that complying with the relevant financial reporting requirements would:

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make the financial report or other reports misleading;

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be inappropriate in the circumstances; or

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impose unreasonable burdens.

7.36 These criteria are extended to also apply to when ASIC makes exemption orders in relation to notified foreign passport funds and financial reporting under Part 2.M3. [Schedule 2, items 112 and 113, heading to section 342 and subsection 342(1)]

Regulation-making power regarding exemptions and modifications

Regulation-making powers in respect of Chapter 8A, the Passport Rules and the corporations legislation

7.37 Regulations may provide exemptions from or modify the operation of Chapter 8A, the Passport Rules or a provision in any other chapter of the Corporations Act or the ASIC Act. The exemptions or modifications may apply to a single passport fund, a class of passport funds or all passport funds, as well as to a single entity, a class of entities or all entities in relation to a passport fund. This is broader than ASIC's exemption and modification power, which is confined to the new Chapter 8A and the Passport Rules in this jurisdiction. [Schedule 1, item 1, section 1217B]

7.38 This power provides the flexibility required to deal with unintended consequences that may arise as the Passport is introduced. The modification powers provided under this section represent a necessary tool to deal with such circumstances to ensure that the laws as they relate to passport funds operate appropriately.

7.39 These regulations will be disallowable, are subject to the sunsetting regime and must be notified on the FRL.

Financial reporting

7.40 Regulations may also modify the operation of Chapter 2M. The modifications may apply to a single notified foreign passport fund or a class of notified foreign passport funds. [Schedule 2, items 114 and 115, paragraphs 343(a) and (b)]

7.41 This power provides the flexibility required to deal with the unintended consequences and extends the existing modification by regulations power in relation to companies, registered schemes and disclosing entities.

7.42 These regulations will be disallowable, are subject to the sunsetting regime and must be notified on the FRL.

ASIC's power to continue the application of the Corporations legislation

7.43 ASIC may declare that the corporations legislation continues to apply in relation to a fund (or to an entity in relation to a fund) that has been deregistered as an Australian passport fund or denotified as a notified foreign passport fund, either in its existing form or as if specified provisions were omitted, modified or varied as specified in the declaration. [Schedule 1, item 1, subsection 1216K(1)]

7.44 A declaration may apply to all or specified provisions in the Corporations Act; to all entities, a class of entities or a particular entity; and to all former passport funds, a class of former passport funds or a particular former passport fund. The declaration may relate to matters generally or as specified in the declaration. [Schedule 1, item 1, subsection 1216KB(2)]

7.45 This power is designed to enable ASIC to deal flexibly with any issues that may require continuing regulatory oversight after an Australian passport fund has been deregistered or a notified foreign passport fund has been denotified. In particular, the power is designed to enable ASIC to undertake continuing regulatory oversight in order to protect the interests of any members who became members after the fund became a passport fund. The MOC, which was agreed by all economies participating in the Asia Region Funds Passport regime, expressly recognises the potential need for deregistered funds to be subject to the same obligations applicable to registered funds (see Subsection 15(2) of Annex 2 and section 54 of Annex 3 of the MOC). Without the power to enable the Corporations Act to continue in force, a deregistered or denotified passport fund may be beyond regulatory reach.

7.46 ASIC's exercise of this power is generally subject to the same scrutiny and oversight as other Henry VIII clauses in the Corporations Act, including merits review and disallowance by Parliament.

7.47 As with exemptions and modifications in relation to Chapter 8A, if the declaration relates only to a single specified entity, it must be a notifiable instrument, which is not subject to disallowance. Notifiable instruments must be entered on the FRL. ASIC must also give a copy of the declaration to the specified entity or most recent operator of the passport fund soon as reasonably practicable after making the notifiable instrument. [Schedule 1, item 1, subsections 1216K(4) and (5)]

7.48 If the declaration relates to all entities, all entities within a class, all former passport funds or a specified class of former passport funds, ASIC's declaration must take the form of a legislative instrument. The legislative instrument is subject to disallowance and entered on the FRL. It is not necessary for ASIC to provide a notice to the affected entities because ASIC may not know the identity of all entities that are, or may be, affected. [Schedule 1, item 1, subsection 1216K(3)]

Regulation-making power regarding continuation of the application of the Corporations legislation

7.49 In addition to ASIC's powers described above, the new law also provides that regulations may provide that the corporations legislation continues to apply, either as it is or as if specified provisions were omitted, modified or varied:

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in relation to a fund, all funds of a specified class or all funds that have been deregistered as Australian passport funds or denotified as notified foreign passport funds; and

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to an entity, all entities of a specified class or all entities in relation to a fund, all funds of a specified class or all funds that have been deregistered as Australian passport funds or denotified as notified foreign passport funds. [Schedule 1, item 1, section 1216L]

7.50 The regulations are disallowable, subject to the sunsetting regime and must be notified on the FRL.