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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.

Glossary

The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

Abbreviation Definition
AAT Administrative Appeals Tribunal
AFSL Australian Financial Services Licence
AML/CTF Anti-Money Laundering and Counter-Terrorism Financing
AML/CTF Act Anti-Money Laundering and Counter-Terrorism Financing Act 2006
APEC Asia-Pacific Economic Cooperation
APFRN Australian Passport Fund Registration Number
APRA Australian Prudential Regulation Authority
ASIC Australian Securities and Investments Commission
ASIC Act Australian Securities and Investments Commission Act 2001
AUSTRAC Australian Transaction Reports and Analysis Centre
Bill Corporations Amendment (Asia Region Funds Passport) Bill 2018
CIS Collective investment scheme
Corporations Act Corporations Act 2001
Corporations Regulations Corporations Regulations 2001
Criminal Code The Criminal Code, as set out in the Schedule to the Criminal Code Act 1995
FRL Federal Register of Legislation established under the Legislation Act 2003
Guide Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011
IMR Investment Manager Regime
IOSCO International Organization of Securities Commissions
Johnson Report Australian Financial Centre Forum, Australia as a Financial Centre - Building on our Strengths, 2009
Joint Committee Asia Region Funds Passport Joint Committee
MIS Managed investment scheme
MOC Memorandum of Cooperation on the Establishment and Implementation of the Asia Region Funds Passport
Participating economy A signatory of the MOC who has not withdrawn from the MOC, until such time as the MOC is terminated
Passport Asia Region Funds Passport
PDS Product Disclosure Statement
Register Register of Passport Funds

General outline and financial impact

Corporations Amendment (Asia Region Funds Passport) Bill 2018

The Bill provides a multilateral framework that allows eligible funds to be marketed across economies participating in the Asia Region Funds Passport with limited additional regulatory requirements.

Date of effect: To be set by proclamation.

Proposal announced: This Bill implements the Government's commitment to the Asia Region Funds Passport Memorandum of Cooperation, which the Government signed on 28 April 2016.

Financial impact: The Bill has no financial impact.

Human rights implications: This Bill raises human rights issues. See Statement of Compatibility with Human Rights - Chapter 9.

Compliance cost impact:

It is anticipated that upfront regulatory costs will equate to a yearly average of $222,880 over the first 10 years of the Passport scheme. Upfront regulatory impacts relate to portfolio management activities, research and analysis, accounting, legal and compliance activities, and other support functions.

New regulatory costs will equate to a yearly average of $1.8 million over the first 10 years, arising from new Passport funds that either already offer or are yet to offer in participating economies.

Regulatory cost impacts will be offset by the expectation that there will be approximately $14 billion of assets under management in Passport funds over a 10-year average, which translates to an average gross regulatory benefit of $6.3 million per year. However, more than half of this comes from activity from collective investment schemes not currently offering in participating economies. Excluding these collective investment schemes reduces gross regulatory benefits to $2.8 million per year.

As a result, total net deregulatory savings (averaged over a 10-year period) will equate to $776,467. However, it must be noted that this calculation does not capture the deregulatory benefits accrued from offering into new markets that are likely to result from removing regulatory barriers.

Summary of regulation impact statement

Regulation impact on business

Impact: The Bill will impact the financial services industry, investors and consumers.

Main points:

Australia's funds management industry has a high comparative advantage. However this comparative advantage in funds management has not translated into strong exports of funds management services. This is predominantly due to the way foreign funds are taxed as well as regulatory barriers restricting trade in financial services.
Along with Japan, Korea, New Zealand and Thailand, the Australian Government signed the Memorandum of Cooperation (MOC) on the Establishment and Implementation of the Asia Region Funds Passport (the Passport), which took effect on 30 June 2016. The MOC is a commitment to implement arrangements in domestic law to facilitate the operation of the Passport.
The Passport will allow eligible funds to be offered across multiple participating economies under a common set of rules. The main regulatory savings captured relate to reductions in compliance costs from not having to meet multiple sets of regulatory arrangements. A larger pool of investor assets under management also provides greater scope for economies-of-scale benefits to arise for these funds.
The implementation of the Passport will, however, lead to upfront and regular costs for the industry, such as legal and compliance, accounting, and research analysis costs.
Consumers will see greater product choice and lower fees as a result of greater competition in the market. Increased access to foreign funds does bring potential risks for consumers. However, a number of arrangements have been put in place to provide a high level of consumer protection.
There are likely to be positive flow-on benefits from increasing Australia's export of fund management services: increase in job numbers, in the government revenue base and in aggregate gross domestic product.
The Passport scheme has been developed multilaterally. The process involved consultation by Australian officials with regulators and officials across the region, as well as open consultations involving various stakeholders from the region. The Government has also consulted three times on the draft Bill of the Passport, and held bilateral meetings, presentations and roundtables with predominantly private sector stakeholders as well as ASIC.
The outcomes of the Passporting regime will be reviewed on an ongoing basis by the Joint Committee (which consists of one representative from each participating economy).

Chapter 1 Context

Outline of chapter

1.1 This chapter sets out the context and background to the Bill. The Bill introduces into Australian law a multilateral framework that allows eligible funds to be marketed across economies participating in the Asia Region Funds Passport with limited additional regulatory requirements.

Context of amendments

1.2 The Passport provides a multilateral framework that allows eligible funds to be marketed across participating economies, with limited additional regulatory requirements. The Passport is intended to support the development of an Asia-wide managed funds industry through improved market access and regulatory harmonisation. This will bring many benefits for Australia and the Asia region.

1.3 Australia has the largest funds management industry in the Asia region, largely as a result of our pool of superannuation assets. As a result, Australian fund managers can achieve greater economies of scale and can sell a single product across Asia through the Passport to create regional economies of scale. This should lower costs for consumers.

1.4 The Passport will let managed fund providers from other participating economies sell their products in Australia. This will increase competition and choice for Australian consumers. It will provide cost-effective opportunities to gain investment exposure to a wider range of assets. A study of global pension assets by Willis Towers Watson found that Australia was second only to the United States in its home equity bias.[1]

1.5 In turn, Australian managed fund providers can sell their products in other Passport economies, including to Asia's expanding middle class and high net worth individuals. This will continue an existing trend of Australian providers managing overseas funds.

1.6 The 2009 Johnson Report recommended a package of reforms to make it easier for Australian fund managers to attract overseas investors into funds operated out of Australia. The wider objective of the Forum was to recommend reforms that would better position Australia as a leading financial services centre.

1.7 In relation to funds management, the Johnson Report recommended the establishment of an Investment Manager Regime (IMR), the introduction of new collective investment schemes (CISs)[2] and the development of the Passport.

1.8 The IMR clarifies that investments by non-residents in foreign assets will generally be exempt from tax in Australia. This ensures that Australian fund managers can compete with overseas financial centres, including Hong Kong, Singapore, London and Tokyo. Parliament passed legislation establishing the IMR in June 2015.

1.9 The new tax and regulatory framework for CISs will complement the existing MIS framework. It is anticipated that the new corporate collective investment vehicle, which the Government is also currently implementing, will enable funds management exports including through the Passport, using a corporate structure that many Asian investors are already familiar with. Fund managers are also likely to use corporate collective investment vehicles to sell their services to domestic investors.

1.10 The Australian Government supported the recommendation to introduce the Passport and, in order to determine whether there was sufficient interest in the concept of a Passport, introduced it as an exploratory policy initiative within the Asia-Pacific Economic Cooperation (APEC) Finance Ministers' Process. This provided a region-wide platform to collaborate with financial policy makers, regulators, industry participants, and technical experts with the aim of examining how a Passport could be developed.

1.11 An APEC policy dialogue was held on 27 October 2010 in Kuala Lumpur, Malaysia to engage with relevant stakeholders and targeted APEC economies to discuss the idea of a Passport. During this dialogue, participants identified various policy and technical challenges, and looked at the options to further progress the concept.

1.12 Since 2010, a model for the Passport has been developed through a series of policy and technical workshops attended by representatives from 13 APEC economies. In May 2014, six economies (Australia, Korea, New Zealand, The Philippines, Singapore and Thailand) publicly released a consultation paper detailing proposed arrangements for the Passport. In February 2015, draft Passport Rules were released for public consultation. In September 2015 the then Assistant Treasurer and the Minister for Finance jointly announced that Australia had signed a Statement of Understanding signalling its commitment to join the Passport.

1.13 On 28 April 2016, the then Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP, signed the Memorandum of Cooperation (MOC).[3] Japan, Korea, New Zealand and Thailand are also members of the Passport. Under the MOC, further economies may join the Passport at a later stage.

The passport arrangements

1.14 Currently, differences and duplication in regulatory requirements across economies can add significantly to the difficulties faced by fund operators attempting to sell CISs across borders (and in this way export their fund management services to foreign residents).

1.15 In some economies, foreign CISs may not be sold at all, or can only be sold to institutional or professional investors. To access these economies, a fund operator would, as a minimum, need to set up a subsidiary that is locally licensed to manage CISs. In a small number of other economies, notably New Zealand, Australian CISs enjoy relatively easy market access due to a bilateral mutual recognition arrangement.

1.16 The Passport allows certain CISs based and regulated in one economy (the home economy) to be 'passported' or sold to investors in other economies in the region (host economies). This will occur through mutual recognition, whereby two or more sufficiently equivalent jurisdictions agree to recognise aspects of each other's regulatory systems. Accordingly, there will be some host economy requirements applying to the operation and sale of schemes that CISs from participating economies do not have to meet.

1.17 The home economy regulator is generally responsible for supervision and enforcement of requirements relating to the operation of the CIS, as set out in the home economy laws and regulations and in the Passport Rules. The host economy regulator is generally responsible for supervision and enforcement of investor-facing requirements such as disclosure.

1.18 Each Passport economy must incorporate the Passport Rules into their domestic law. The MOC obliges each economy to ensure their domestic Passport Rules are substantially the same as the Passport Rules in Annex 3 of the MOC. The Asia Region Funds Passport Joint Committee (Joint Committee), as part of its oversight of the implementation of the Passport, will work to ensure consistency in the Passport Rules across the Passport economies.

1.19 To ensure the appropriateness of these arrangements, the government of each Passport economy has assessed the regulatory framework of each other Passport economy in terms of its regulatory outcomes for regulated CISs. Each Passport signatory:

must be a signatory to Appendix A of the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Co-operation and the Exchange of Information;
must not be on the Financial Action Taskforce's list of high risk and non-cooperative jurisdictions; and
must have fully or broadly implemented the relevant IOSCO principles relating to enforcement, cooperation and CISs.

Each government has determined that the other Passport economies' regulatory frameworks are equivalent to their own frameworks on that basis.

1.20 Regulator co-operation is central to the continuing operation of the Passport since host economy regulators place considerable reliance on home economy regulators to regulate the operation of the funds. The MOC sets out several mechanisms for regulator co-operation which have been incorporated into legislation. For example, in determining whether to reject a notice of intention to offer interests in Australia, or whether to issue a stop order against a foreign passport fund, the Australian Securities and Investments Commission (ASIC) must write to the home economy regulator if a decision to reject a notice of intention or issue a stop order would be made on the basis that a home economy law is not likely to be complied with.

1.21 Home regulators are only able to take enforcement action against funds registered in their jurisdiction that commit offences outside their territorial borders if offences have extended geographic reach. Australian authorities require extended geographic reach to take enforcement action with regard to offences committed outside Australia by funds for which Australia is the home regulator.

1.22 The MOC is structured as follows:

The body of the MOC sets out the signatories' commitment to participate in the Passport, establishes a governing framework and a mechanism for the resolution of differences, and sets out the eligibility criteria for economies wanting to participate in the arrangement. Paragraph 5 of the MOC establishes the commitment to implement the Passport arrangements and outlines what this means for participant economies.
Annex 1 of the MOC outlines how a participant may impose obligations on passport funds from other economies that are offered in its economy (the host economy obligations).
Annex 2 of the MOC sets out the common regulatory arrangements for passport funds that each participant will give effect to - how passport funds are to be registered and supervised by regulators and how the Passport arrangements are to be enforced (the common regulatory arrangements).
Annex 3 of the MOC sets out the Passport Rules. This is a common set of obligations which the operators of passport funds will be required to comply with on an ongoing basis. They will apply to a passport fund concurrently in both the home and any host economies.
Annex 4 of the MOC sets out arrangements for cooperation between regulators.
Annex 5 of the MOC defines the form to be used for formal notification of participation in the MOC by subsequent participants.

1.23 Following the signing of the MOC, it is necessary to reflect the Passport arrangements in Australian law through amendments to the Corporations Act 2001 (Corporations Act), the Australian Securities and Investments Commission Act 2001 (ASIC Act) and related legislation. The Bill implements the following key changes:

It establishes a mechanism for incorporating the Passport Rules in Annex 3 of the MOC into Australian law, and imposes an obligation on passport funds and operators registered in Australia as well as foreign passport funds and operators offering interests in Australia to comply with the Passport Rules.
It establishes a new Chapter 8A in the Corporations Act which mainly implements the common regulatory arrangements in Annex 2 of the MOC. Chapter 8A, among other things, sets out the process whereby Australian CISs may be registered by ASIC as passport funds. It also sets out the process whereby foreign passport funds may notify ASIC of their intention to offer interests in the fund to Australian investors and the circumstances in which ASIC may reject such notifications.
It makes amendments to other parts of the Corporations Act clarifying how the obligations in those parts are to apply to foreign passport funds, as allowed under Annex 1 of the MOC. Key areas in which obligations are made to apply to foreign passport funds in this manner include financial reporting, licensing and disclosure.

1.24 Other amendments to the law are required to implement the Passport arrangements. These include amendments to the Corporations Regulations 2001 (Corporations Regulations) and related regulations, and the making of the Passport Rules for this jurisdiction.

1.25 The amendments in the Bill commence on a date set by a proclamation. This mechanism is used so that the same commencement date can be set for the amendments in the Bill, the Passport Rules and the amendments to the regulations. The Passport arrangements in the Bill would not apply appropriately if they were to commence before the Passport Rules were made or relevant regulations were amended.

1.26 If the date is not proclaimed within six months of the Bill receiving Royal Assent, the amendments automatically commence at the end of the six months. This is a standard provision and ensures that laws which have not commenced do not sit on the statute books indefinitely.

1.27 The detailed amendments in the Bill are explained in full in the following chapters of this Explanatory Memorandum. All provision references in this Explanatory Memorandum are to the Corporations Act unless otherwise stated.

Chapter 2 Key definitions

Outline of chapter

2.1 Schedule 1 to the Bill inserts a new Chapter 8A into the Corporations Act. Parts 8A.1 and 8A.2 mainly contain a number of key definitions and set out the mechanism for incorporating the rules for passport funds into Australian domestic law.

Context of amendments

2.2 The MOC provides the key definitions for the Passport as follows:

definitions applicable to the framework of the MOC, such as Participant, the MOC, passport fund and Joint Committee (paragraph 4 of the MOC); and
key definitions for the Passport Rules, such as home economy, home regulator, host economy, host regulator and operator (Part 9 of Annex 3 of the MOC).

2.3 To give effect to the Passport in Australia, key definitions are inserted into the Corporations Act.

2.4 The Passport Rules contained in Annex 3 of the MOC are the Passport's core operating rules that are to apply as requirements in each Participant's economy. They apply to CISs that are admitted to enter the passport arrangements by their home economy. They will have effect in Australia as a consequence of the Minister making rules incorporating the content of the Passport Rules, using a new rule-making provision. The Passport Rules are made in Australia must be substantially the same as the Passport Rules contained in Annex 3 of the MOC.

Summary of new law

2.5 The new law states that a signatory of the MOC is a participating economy and eligible for the special Passport arrangements if it signed and implemented the MOC and has not withdrawn from the MOC. Economies will cease to be participating economies if the MOC is terminated.

2.6 The Minister must publish by notifiable instrument a list of the participating economies.

2.7 The Passport Rules for this jurisdiction are the rules for passport funds that are made by the Minister and in force in Australia. The Passport Rules for a participating economy other than Australia are the rules for passport funds in force in another economy that has signed and implemented the MOC. Both the Passport Rules for this jurisdiction and the Passport Rules for a participating economy other than Australia must be substantially the same as the agreed rules for passport funds in Annex 3 of the MOC.

2.8 Passport funds are regulated CISs and sub-funds of regulated CISs that are registered as a passport fund in a participating economy. The economy where the passport fund is first registered or approved is referred to as the fund's home economy. If the fund applies or is permitted to offer interests in another economy, the other economy is the fund's host economy.

Comparison of key features of new law and current law

New law Current law
Special arrangements apply to passport funds. Passport funds are regulated CISs, and sub-funds of regulated CISs, that are registered as a passport fund in a participating economy. No equivalent.
A participating economy is a signatory to the MOC that has been listed by the Joint Committee as having implemented the MOC. An economy will cease to be a participating economy if it withdraws from the MOC or the MOC is terminated. No equivalent.
The Minister must publish a list of the participating economies. No equivalent.
The Minister may make the Passport Rules for this jurisdiction by legislative instrument and these rules must be substantially the same as the rules in Annex 3 of the MOC. No equivalent.
The Passport Rules for a participating economy other than Australia are the rules in force in another economy that has signed and implemented the MOC, provided that those rules are substantially the same as the rules in Annex 3 of the MOC. No equivalent.
The home economy for a fund is the participating economy where the fund was first registered or approved as a passport fund. The regulator in this economy is referred to as the home regulator. No equivalent.
The host economy is any participating economy where the fund subsequently applies, or is permitted, to offer interests. The regulator in the host economy is referred to as the host regulator. No equivalent.

Detailed explanation of new law

Participating economies

2.9 A participating economy is an economy that:

is a signatory to the MOC;
has not withdrawn from the MOC; and
has been listed on the Joint Committee's website as an economy that has successfully implemented the MOC at or before the time in question.

[Schedule 1, item 1, section 1210]

2.10 The MOC is defined by the term 'Memorandum of Cooperation'. The definition makes it clear that the expression includes future changes made to the MOC as allowed under paragraph 9 of the MOC. [Schedule 1, item 1, section 1210 and Schedule 2, item 38, section 9, definition of 'Memorandum of Cooperation']

2.11 The Joint Committee established under paragraph 6 of the MOC plays an important role in interpreting and co-ordinating implementation of the MOC among Passport economies. Its functions include monitoring the Passport Arrangements and their operation as well as publishing guidelines on the operation of the Passport. It may assume any other functions it considers necessary or desirable for the effective implementation and operation of the Passport.

2.12 The term participating economy is designed to capture all economies that have both signed and implemented the MOC. Signing is just the first step to becoming a participating economy: an economy that has signed the MOC must also implement the MOC by amending its domestic laws so that they are consistent with the MOC and the Passport Rules.

2.13 The Joint Committee is required to publish a list of all of the signatories that have successfully implemented the MOC on its website. Inclusion in this list is taken to be conclusive evidence that an economy has implemented the MOC and is a participating economy. [Schedule 1, item 1, section 1210]

2.14 Economies will cease to be participating economies if they formally withdraw from the MOC by giving at least 28 days' notice to the Joint Committee Chair and other participating economies in accordance with subparagraph 14.2 of the MOC.

2.15 An economy does not cease to be a participating economy if it amends its domestic laws so that they are inconsistent with the MOC but does not formally withdraw from the MOC. Nevertheless, in this situation, the Minister may make a determination that funds from that economy must not offer interests in Australia (see Chapter 3 of this Explanatory Memorandum).

2.16 If the MOC is terminated, no economies will be participating economies. [Schedule 1, item 1, section 1210]

2.17 The Minister is required to publish a list of participating economies by notifiable instrument, which must include the date each economy became a participating economy or withdrew from the MOC. The list of participating economies that is published by the Minister confirms Australia's recognition of economies participating in the Passport. [Schedule 1, item 1, subsection 1210A(1) and paragraphs 1210A(2)(a) and (b)]

2.18 The inclusion of the date will make it easier to determine whether an economy was a participating economy at a particular point in time and remove the need for people to consult historical versions of the list.

2.19 This list must be updated as soon as is reasonably practicable after an economy:

becomes a participating economy, that is, the Joint Committee lists the economy as successfully implementing on its website; or
ceases to be a participating economy because it withdraws from the MOC or the MOC is terminated.

[Schedule 1, item 1, paragraph 1210A(2)(c)]

2.20 The list published by the Minister is not conclusive evidence of whether an economy is a participating economy. The criteria set out above are the critical factors in this regard: that is, the economy must have signed the MOC, been listed on the Joint Committee's website and not have withdrawn from the MOC, and the MOC must not have been terminated.

Passport Rules

2.21 The requirements for passport funds are generally set out in the Passport Rules contained in Annex 3 of the MOC. The Passport Rules cover:

the matters that must be included in a passport fund's constituent documents;
the eligibility requirements for operators of passport funds (including their experience, qualifications, financial resources, good standing and organisational arrangements);
the responsibilities of operators of passport funds and limitations on their right to delegate;
requirements for operators of passport funds to report breaches;
a requirement for funds to have an independent party responsible for holding the assets, and that party's duties;
a requirement for funds to have an independent oversight entity, such as a compliance committee;
a requirement for funds to undertake annual implementation reviews or audits;
extensive permissions, restrictions and limits with regard to asset classes, counterparties and investment limits;
redemption and valuation of assets;
the effect of deregistration; and
a requirement for funds to prepare financial statements.

2.22 Australia, together with the other signatories to the MOC, agreed to give effect to the rules in Annex 3 of the MOC. However, the MOC does not amend domestic laws and Annex 3 does not have any force in Australia unless it is incorporated into Australian law.

2.23 Part 8A.2 of the new law provides the mechanism for incorporating Annex 3 of the MOC into Australian law. It provides that the Minister may make a legislative instrument that sets out the rules for passport funds. [Schedule 1, item 1, subsection 1211(1)]

2.24 The rules made by the Minister (taken together with the other provisions of the Corporations Act) must have substantially the same effect as the rules in Annex 3 to the MOC. There may be minor differences, for example, to adapt the Passport Rules to existing legislative frameworks in this jurisdiction, such as the AFSL framework. [Schedule 1, item 1, subsections 1211(2) and 1211(3)]

2.25 Some aspects of Annex 3 of the MOC are incorporated directly into the Act where this is appropriate. These instances are specifically noted in this Explanatory Memorandum.

2.26 The legislative instrument will be subject to Parliamentary scrutiny and disallowance in the same way as other legislative instruments. It must also be published on Federal Register of Legislation established under the Legislation Act 2003 (FRL).

2.27 The Passport Rules for this jurisdiction are the Passport Rules set out in the legislative instrument made by the Minister.

2.28 The Passport Rules for a participating economy other than Australia are the rules for passport funds respectively in force in each of the other economies that have signed and implemented the MOC, provided that those rules are substantially the same as Annex 3 of the MOC. [Schedule 1, item 1, subsection 1211A(2)]

2.29 The phrase 'the Passport Rules for a participating economy other than Australia' may not necessarily designate identical rules when used in relation to different participating economies. This situation would arise if a participating economy adopts a version of Annex 3 which includes minor differences from the rules adopted in another participating economy even though both sets of rules are substantially the same as Annex 3. Such differences may arise because of the need to incorporate the rules in Annex 3 of the MOC within the structure of domestic law in each participating economy.

Amendments to the MOC

2.30 The Joint Committee may recommend amendments to Annex 3 of the MOC from time to time. A recommended amendment will only have effect and amend Annex 3 if all participating economies accept the recommendation and make any necessary amendments to their domestic law. If one or more participating economies disagree with the recommendation or fail to implement the changes within the agreed time period, the recommendation has no effect and must be further considered at the next Joint Committee meeting (paragraph 9 of the MOC).

2.31 To incorporate a recommended amendment into Australian law, the Minister must make a new legislative instrument. The legislative instrument will be disallowable. This ensures that both the Minister and Parliament have the opportunity to consider the proposed amendment before there is any change to Australian law. [Schedule 1, item 1, section 1211]

2.32 If the Minister does not make a legislative instrument which incorporates the recommended amendment, Australia's domestic law remains unchanged. This would also mean that the participating economies do not unanimously accept and implement the recommended amendment. Accordingly, the proposed amendment would need to be reconsidered at the next Joint Committee meeting.

Example 2.1 : Proposed amendment supported by all participating economies

The Minister makes a legislative instrument which replicates the rules in Annex 3 of the MOC.
The Joint Committee recommends a substantial amendment to Annex 3 of the MOC. All participating economies support the amendment and agree to give effect to it by 31 December.
On 1 August, the Minister in Australia makes a legislative instrument to incorporate the proposed amendment into Australian law. The legislative instrument will commence on 31 December but the commencement is conditional on all participating economies giving effect to it by that date.
All participating economies take the necessary steps to incorporate the recommended amendment into their domestic laws by 31 December. As a result:

Annex 3 of the MOC is amended; and
the condition in the legislative instrument is satisfied and the amended rules commence in Australia on 31 December.

Example 2.2 : Amendments to Annex 3 of the MOC that are not supported by all participating economies

The Joint Committee recommends another amendment to Annex 3 of the MOC. All participating economies agree to give effect to it by 1 July.

In Australia, the Minister makes a legislative instrument to implement the amendment. The legislative instrument is to commence on 1 July and it contains a conditional commencement in similar terms to the commencement clause in the legislative instrument in the previous example.
There is a change of government in one of the participating economies and the new government decides against implementing the recommended amendment. As a result, Annex 3 of the MOC is not amended.
Australia's legislative instrument does not commence and 'the Passport Rules for this jurisdiction' is not amended.
If Australia's legislative instrument did not contain a commencement provision and the proposed amendment was substantial, the Minister's act of making the legislative instrument may be beyond power. This is because the Minister only has power to make rules which are substantially the same as Annex 3 of the MOC.

2.33 The Joint Committee may make recommendations for other changes to the MOC, including the date when the amendment should take effect (paragraph (f) of subparagraph 6.2 of the MOC). The change will only take effect if it is agreed to by all participating economies and implemented by the time recommended by the Joint Committee (paragraph 9 of the MOC).

CISs and regulated CISs

2.34 A CIS is an arrangement where:

members contribute money or money's worth for the right to benefits;
contributions are pooled to produce financial benefits or an interest in property for the members;
not all the members, in their capacities as members, take part in day-to-day management of the scheme; and
the pool is managed as a whole for the benefit of the members collectively (section 55 of Annex 3 of the MOC).

2.35 CISs are not restricted to vehicles which meet the definition of a 'managed investment scheme' in Australia. Instead, the definition of a CIS captures a range of investment vehicles including superannuation funds, partnerships and other contractual relationships, MISs and corporate collective investment vehicles.

2.36 The new law uses the definition of regulated CIS in the Passport Rules for this jurisdiction and this definition must be substantially the same as the definition in Annex 3 of the MOC. [Schedule 1, item 1, section 1210 and subsection 1211(2)]

2.37 Under the MOC, a regulated CIS is basically a CIS which is regulated by the corporations legislation in the participating economy. Section 56 of Annex 3 of the MOC set this out as:

in relation to Australia, a CIS registered under the Corporations Act 2001;
in relation to Japan, a scheme under the Investment Trusts and Investment Corporations Act of Japan;
in relation to Korea, a CIS under the Financial Investment Business and Capital Markets Act of Korea;
in relation to New Zealand, a MIS registered under the Financial Markets Conduct Act 2013 of New Zealand;
in relation to Singapore[4], a CIS authorised under the Securities and Futures Act of Singapore; and
in relation to Thailand, a CIS under the Securities and Exchange Act of Thailand.

Passport funds, foreign passport funds and operators

2.38 An entity is a passport fund if it is:

a regulated CIS or a sub-fund of a regulated CIS; and
registered as a passport fund in a participating economy.

[Schedule 1, item 1, section 1210]

2.39 The first requirement restricts passport funds to regulated CISs and their sub-funds. For the definition of a regulated CIS, see paragraph 2.8 above.

2.40 Sub-funds has the same definition as in the Passport Rules in this jurisdiction, and this definition must be substantially the same as in Annex 3 of the MOC. [Schedule 1, item 1, sections 1210 and 1211]

2.41 Sub-funds are basically distinct compartments of a CIS which are segregated in a way that prevents the assets of one sub-fund being used to discharge the liabilities of another sub-fund. Sub-funds may have different legal forms in each participating economy and they may or may not have their own legal personality.

2.42 In relation to the second requirement, each participating economy will have its own procedures for registering regulated CISs and sub-funds as passport funds. The procedures which apply in Australia are set out in Chapter 3 of this Explanatory Memorandum. The procedures that apply in other economies will be set out in their regulatory frameworks, but they will be based on the MOC and must be broadly similar to the procedures in Australia.

2.43 Australian passport funds are registered schemes that are also registered as passport funds in Australia using the process set out in Part 8A.3 of this Bill. [Schedule 2, item 18, section 9]

2.44 Foreign passport funds are regulated CISs and sub-funds of regulated CISs that are registered as passport funds by participating economies other than Australia. They may take a variety of legal forms and, accordingly, the word 'entity' takes its ordinary meaning when used in provisions relating to passport funds in the new Chapter 8A. [Schedule 2, items 30 and 55, sections 9 and 64A]

2.45 Foreign passport funds are only permitted to offer interests in Australia if they lodge a notice with ASIC and the notice is not rejected. The special streamlined application process that applies to foreign passport funds is discussed in Chapter 3 of this Explanatory Memorandum.

2.46 A notified foreign passport fund is a foreign passport fund that has submitted a notice to offer interests in Australia and has not been rejected within the prescribed period. Notified foreign passport funds are a subset of foreign passport funds. In other words, all notified funds will be foreign passport funds, but only those foreign passport funds that may offer interests in Australia will be notified foreign passport funds. [Schedule 1, item 1, subsection 1213C(2)]

2.47 An Australian member of a notified foreign passport fund is defined as a person who either holds an interest in the fund that was acquired in Australia or is ordinarily resident in Australia and holds an interest in the fund. [Schedule 2, item 18, section 9]

2.48 The new law adopts for this jurisdiction the definition of an operator in the Passport Rules, and those rules must be substantially the same as Annex 3 of the MOC. The MOC contains a table that lists the operator in each participating economy (section 56 of Annex 3). The operator is the person or entity who is responsible for managing the overall operations of the CIS. In Australia, the operator is the 'person licensed to operate the CIS under the Corporations Act', which will be the responsible entity for a registered scheme. In some cases, the operator may be the same entity as the fund. [Schedule 1, item 1, sections 1210 and 1211]

Home and host economies

2.49 All passport funds have a home economy and they may also have one or more host economies.

2.50 The home economy for a passport fund is the participating economy where the passport fund is registered or approved as a regulated CIS, regardless of the exact name given to the registration or approval process. If the fund is registered or approved in more than one participating economy, then the home economy is the one where the fund is first registered or approved. This is substantially the same as the definition of home economy in Annex 3 of the MOC. [Schedule 1, item 1, section 1210 and Schedule 2, item 30, section 9, definition of 'home economy']

2.51 The host economy is any other participating economy (apart from the home economy) where the passport fund is permitted to offer interests or has submitted an application to offer interests. The passport fund may have more than one host economy. Australia acts as a host economy to foreign passport funds that have submitted notices of intention to offer interests, or are permitted to offer interests in Australia having become 'notified' (see Chapter 3 of this Explanatory Memorandum). [Schedule 1, item 1, section 1210 and Schedule 2, item 30, section 9, definition of 'host economy']

2.52 If a fund is deregistered as a passport fund in its home economy, it will no longer meet the definition of a passport fund and it will not have a home economy. It will also fail to meet the prerequisites for being permitted to offer interests in any other economy. Nonetheless, the Passport Rules (section 54 of Annex 3 of the MOC) specify that a regulated CIS or a sub-fund of a regulated CIS that has been deregistered as a passport fund must be operated in accordance with these rules until such point as certain conditions are met (see Chapter 3 of this Explanatory Memorandum).

Home and host regulators

2.53 'Passport Regulator' (as used in the definitions of 'home regulator' and 'host regulator') has the meaning as in the Passport Rules for this jurisdiction, and those rules must be substantially the same as Annex 3 of the MOC. Under the MOC, the Passport Regulator is the entity in each participating economy which performs the regulatory functions under the relevant legislation (as defined under the term passport regulator in section 55 of Annex 3). [Schedule 1, item 1, sections 1210 and 1211]

2.54 The Passport Regulators in each of the economies that initially signed the MOC are shown in the table below. If the entity responsible for the regulatory functions changes, the new entity will become the Passport Regulator.

Table 2.1 : Passport Regulator in each participating economy

Participant Regulator
Australia ASIC
Japan Financial Services Agency
Korea Financial Supervisory Service and Financial Services Commission
New Zealand Financial Markets Authority
Singapore[5] Monetary Authority of Singapore
Thailand Securities and Exchange Commission

2.55 The home regulator for a passport fund is the Passport Regulator in the fund's home economy. The host regulators for a passport fund are the Passport Regulators in each of the fund's host economies. While these definitions use the word 'entity', 'entity' takes its ordinary meaning and does not draw on the definition in section 64A. See paragraphs 2.49 to 2.52 for an explanation of the definitions of home and host economy. [Schedule 1, item 1, section 1210 and Schedule 2, item 30, section 9, definition of 'home regulator' and 'host regulator']

Consequential amendments

2.56 Consequential amendments have been made to the definition sections in the Corporations Act to include the Passport Rules for this jurisdiction in the definition of 'this Act' and ensure that 'entity' has the same definition in the new chapter as in Chapter 2E. [Schedule 2, items 48 and 55, sections 9 and 64A]

Chapter 3 Becoming a passport fund

Outline of chapter

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

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

Context of amendments

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

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

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

Summary of new law

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

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

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

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

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

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

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

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

Comparison of key features of new law and current law

New law Current law
Australian funds

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

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

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

No equivalent.

Foreign passport funds

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

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

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

ASIC may reject the notice if:

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

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

No equivalent.

Detailed explanation of new law

Registration of Australian funds

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table 3.1 Registration process for Australian passport funds

Stage Requirements
Application

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

ASIC consideration Two conditions:

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

Registration ASIC assigns APFRN and includes details on the Register

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

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

Notification of funds from other participating economies

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

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

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

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

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

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

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

Requests for further information

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

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

Grounds for rejecting notices of intention

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

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

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

Ground 1: Not likely to comply with relevant laws

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

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

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

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

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

Australian CISs Foreign passport funds
Relevant laws

ASIC Act and Corporations Act
The Passport Rules in this jurisdiction

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

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

Ground 2: Public interest

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

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

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

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

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

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

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

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

Ground 4: Unavailability of the name of the passport fund

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

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

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

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

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

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

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

Ground 5: Minister's determination

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

3.59 The Minister may make a determination that relates to:

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

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

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

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

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

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

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

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

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

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

Procedural fairness

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

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

The consideration period and authority to offer interests in Australia

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

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

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

Treatment of notified foreign passport funds

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

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

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

Register of passport funds

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

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

Deregistration of Australian passport funds

Voluntary deregistration

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

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

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

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

Deregistration initiated by ASIC

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

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

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

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

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

'Show cause' process

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

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

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

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

Process for deregistration as an Australian passport fund

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

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

Denotification of notified foreign passport funds

Voluntary denotification

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

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

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

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

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

Process for denotification

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

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

Consequences of deregistration on status as an Australian passport fund

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

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

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

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

'Show cause' process

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

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

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

Notices relating to deregistration process

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

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

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

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

Consequential amendments

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

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

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

Outline of chapter

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

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

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

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

Context of amendments

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

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

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

Summary of new law

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Comparison of key features of new law and current law

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

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

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

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

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

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

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

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

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

Reports are provided in English.

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

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

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

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

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

Detailed explanation of new law

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

Foreign passport fund products and investments in notified foreign passport funds

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

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

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

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

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

Example 4.1 : Circumstances where foreign passport fund products are securities for the purposes of Chapter 7

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

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

Disclosure obligations

PDSs

When a PDS is required

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

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

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

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

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

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

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

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

Content requirements for PDSs

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

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

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

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

[Schedule 2, item 273, section 1013GA]

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

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

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

Lodgment with ASIC

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

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

Requests for additional information

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

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

Financial Service Guides and Statements of Advice

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

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

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

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

Ongoing disclosure requirements

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

Dispute resolution systems

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

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

Continuous and enhanced disclosure for notified foreign passport funds

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

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

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

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

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

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

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

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

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

Restrictions on offering foreign passport fund products

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

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

Short-selling

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

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

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

Conflicted remuneration

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

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

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

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

Acquiring a foreign passport fund product

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

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

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

Providing reports and periodic statements to Australian members[10]

Annual financial reports to Australian members

Obligation on the operator

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

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

Requirement to provide copies of annual financial reports to members

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

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

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

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

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

How a report may be provided

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

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

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

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

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

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

Periodic statements

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

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

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

Obtaining a copy of the constitution

Persons who may request a copy

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

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

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

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

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

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

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

Process for making a request

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

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

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

Processing the request

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

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

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

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

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

Obtaining a copy of the register of members

Persons who may request a copy

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

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

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

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

Process for making a request

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

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

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

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

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

Processing the request

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

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

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

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

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

Restrictions on the use of information from the register of members

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

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

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

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

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

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

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

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

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

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

Right to a copy of reports

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

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

Process for obtaining a copy of the report

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

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

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

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

Requests for additional information

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

Destruction of records by ASIC

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

Consequential amendments

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

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

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

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

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

Application and transitional provisions

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

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')]

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.

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:

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
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

New law Current law
ASIC has the power to exempt entities from the provisions in Chapter 8A, or modify their effect.

ASIC may impose conditions on its exemptions and seek a court order to enforce these conditions in a specified way.

No equivalent.
ASIC has the power to exempt entities from the Passport Rules in this jurisdiction, or modify their effect if:

for exemptions relating to Australian passport funds, the exemption has been agreed by all host regulators; or
for exemptions relating to notified foreign passport funds, the exemption is the same as an exemption or modification granted by the foreign passport fund's home regulator.

ASIC may impose conditions on its exemptions and seek a court order to enforce these conditions in a specified way.

No equivalent.
Regulations may provide exemptions from or modify the operation of Chapter 8A and any other provisions of the Corporations Act or the ASIC Act that relate to passport funds or a class of passport funds. No equivalent.
ASIC has the power to make orders exempting notified foreign passport funds, their operators and the directors of the operators from all or specified financial reporting requirements in Part 2M.3.

ASIC may impose conditions on exemptions and the exemption may be for a limited or indefinite period.

ASIC has the power to make orders exempting companies, registered schemes and disclosing entities from all or specified financial reporting requirements in Parts 2M.2, 2M.3 and 2M.4 (other than Division 4).

ASIC may impose conditions on exemptions and the exemption may be for a limited or indefinite period.

Regulations may modify the operation of Chapter 2M in relation to a notified foreign passport fund or a class of notified foreign passport funds. Regulations may modify the operation of Chapter 2M in relation to a company, registered scheme or disclosing entity, or a class of these.
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 No equivalent
Regulations may 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 No equivalent

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:

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

(1) Legislative Instruments (2) Notifiable Instruments
Applies to: All entities/passport funds or all entities/passport funds in a class Specified entities
Disallowable? Yes No
Notification FRL

FRL
Written notification from ASIC

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:

make the financial report or other reports misleading;
be inappropriate in the circumstances; or
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:

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
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.

Chapter 8 Regulation impact statement

Background

8.1 The idea of an Asia Region Funds Passport (the Passport) was first put forward in a submission by the Investment and Financial Services Association (IFSA) (now the Financial Services Council) to the Australia as a Financial Centre Forum in March 2009.

8.2 IFSA proposed that a common framework be developed in the Asia-Pacific region to allow a higher level of cross-border trade in collective investment schemes.

8.3 The objective was to develop an arrangement, based on a mutual recognition, that would allow collective investment schemes based and regulated in one economy (the home economy) to be 'passported' or sold to investors in other economies in the region (host economies). This would occur without the collective investment scheme and its operator having to meet all the host economy requirements applying to the operation and sale of interests in such a scheme.

8.4 The Australian Financial Centre Forum's 2009 report, Australia as a Financial Centre - Building on our Strengths (the Johnson Report), supported the idea and recommended that the Passport scheme be developed.

8.5 The Australian Government supported the recommendation and, to determine whether there was sufficient interest in the concept of a Passport scheme, introduced it as an exploratory policy initiative within the Asia-Pacific Economic Cooperation (APEC) Finance Ministers' Process. This provided a region-wide platform to collaborate with finance policy makers, regulators, industry participants, and technical experts to examine how a passport scheme could be developed.

The problem

8.6 Australia has a well-developed, high-quality financial system. It ranked fifth in the World Economic Forum's Financial Development Index (2012). The Australian fund management industry (excluding superannuation) is made up of around 306 businesses, employing approximately 20,000 Australians.

8.7 In Deloitte's 2014 report Building the Lucky Country #3 - Business imperatives for a prosperous Australia, Australia's fund management industry is identified as having a high comparative advantage due to:

Australian industry's experience and skills developed with managing funds associated with Australia's compulsory superannuation system;
Australia's reputation as a safe investment location with solid financial institutions; and
Australia's ties with Asia.

8.8 However, this comparative advantage in fund management has not translated into strong exports of fund management services. Australia has the third largest pool of financial assets under management in the world at over $3 trillion.

8.9 The Johnson Report identified a number of reasons why Australia has been unable to translate this advantage into higher international trade.

8.10 A key issue raised was Australia's taxation of foreign funds. Aspects of the issues identified in the Johnson Report have been addressed through the implementation of an Investment Manager Regime (IMR). The IMR provides tax certainty to foreign investors investing in Australian and offshore assets by providing clear rules to exempt particular types of investments from being taxed. The first two elements were introduced in the Tax Laws Amendment (Investment Manager Regime) Act 2012, and the third and final element was introduced in the Tax and Superannuation Laws Amendment (2015 Measures No. 1) Act 2015.

8.11 Regulatory barriers also restrict trade in financial services. Differences and duplication in regulatory requirements across economies can add significantly to the difficulties and costs faced by fund operators attempting to sell collective investment schemes across borders (and in this way export their fund management services to foreign residents).

8.12 In some economies, foreign collective investment schemes are not allowed to be sold at all or only to institutional or professional investors. To access these economies, a fund operator would have to set up a subsidiary that is locally licensed to manage collective investment schemes. In other economies, such as New Zealand, Australian collective investment schemes enjoy relatively easy market access.

Thailand

8.13 Until the recent introduction of the Association of Southeast Asian Nations (ASEAN) mutual recognition scheme, Thailand did not allow foreign collective investment schemes to be sold to retail investors. An Australian fund operator would have to register a subsidiary (as a company) and have that subsidiary licensed (as an operator) in Thailand or enter into a joint venture with a local firm to offer a collective investment scheme to Thai retail investors. The collective investment scheme itself would also have to be constituted and authorised under Thai law.

Korea

8.14 Foreign collective investment scheme can be sold in Korea only after the scheme has been registered with the Financial Services Commission, having met the registration requirements (for example, capital and good standing requirements). Approval can take three to four months. In Korea, domestic domiciled collective investments constitute approximately 90 percent of the market (by assets under management).

New Zealand

8.15 Australian managed investment schemes can be offered to retail clients in New Zealand under the Australia New Zealand Mutual Recognition of Securities Offerings scheme (the trans-Tasman scheme). This is a full mutual recognition scheme and only minimal restrictions and process requirements apply.

Japan

8.16 Japan has a similar model to Korea, but imposes a greater number of ongoing obligations on foreign collective investment schemes, which necessitates changes to fund documentation (offering documents and constituent documents) which then also need to be approved in the home economy.

Case for government action/objective of reform

8.17 In September 2013, a Statement of Intent was presented at the APEC Finance Ministers' Meeting for signing. The purpose of this statement was to agree to a broad set of principles that would be used to develop the Passport and a commitment to public industry consultation on the arrangements.

8.18 Prior to the signing, an options regulation impact statement was prepared (under the regulation impact statement rules applying at the time), to consider the merits of Australia signing the Statement of Intent against two other alternatives for the Government:

Option 1 - do not engage in Passport negotiations (status quo);
Option 2 - pursue a full mutual recognition scheme (push for an alternative arrangement to be entered into by regulators); or
Option 3 - pursue a negotiated partial mutual recognition scheme (sign the Statement of Intent).

8.19 The Australian Government proceeded with option 3 and signed the Statement of Intent, along with Korea, New Zealand and Singapore. The Statement of Intent saw these economies, in addition to the Philippines and Thailand, seek to negotiate a Passport scheme.

8.20 Subsequently, a further options regulation impact statement was prepared in 2014, to consider whether Australia should become a party to the MOU. Three options were considered:

Option 1 - do not sign the Passport MOU and withdraw from the Passport process (status quo);
Option 2 - become a party to the Passport MOU; or
Option 3 - pursue a full mutual recognition scheme.

8.21 The Australian Government proceeded with option 2 and signed the MOU in September 2015, along with Japan, Korea, New Zealand, the Philippines and Thailand. The MOU signalled Australia's commitment to join the Passport ahead of its commencement in 2016.

8.22 The Australian Government signed the ARFP MOC, along with Japan, Korea, New Zealand and Thailand, which took effect on 30 June 2016. The MOC is a commitment to implement arrangements in domestic law to facilitate the operation of the Passport.

Policy options

Options for consideration

8.23 Australia has signed the MOC. Therefore the decision facing the Government is whether or not to implement the Passport provisions in domestic law.

Option 1 Status quo

8.24 Under this option, Australia would not implement the Passport provisions. Australian fund operators would continue to face the regulatory barriers described earlier.

Option 2 Legislate the arrangements of the MOC

8.25 Under this option, Australia would implement and participate in the ARFP. Under the MOC, the following arrangements would apply.

To be eligible, a fund must already be regulated in its home economy as a collective investment scheme (a regulated CIS). For example, for an Australian fund to be eligible, it will need to be a "registered scheme" under the Corporations Act 2001 (Corporations Act). This will mean a Passport fund is subject to a similar suite of rules in its home economy as a domestic fund.
A standard set of rules (the Passport Rules) will be applied to Passport fund operators in addition to the home economy laws and regulations that apply. The Passport rules cover areas such as the experience and financial resources of the fund operator, custody of assets, investment restrictions, asset valuation and redemption. The rules effectively restrict the use of the Passport to liquid, well-diversified collective investment schemes operated by experienced and well-capitalised fund operators.
To be registered as a Passport fund by its home regulator, a regulated CIS must be likely to comply with the Passport Rules. In Australia's case the home regulator would be ASIC.
Once a Passport fund is registered by its home regulator, it can apply for entry into other participating economies under a streamlined entry process. The host regulator has 15 business days to approve or reject the fund. The host regulator will rely on the home regulator's assessment with respect to the Passport rules, although there will be circumstances where the host regulator can reject the fund.
A Passport fund will not be subject to substantive additional regulation in host economies. For example, operators of Passport funds will not be required to be licensed in the host economy to offer the Passport fund there. Nor will the fund have to comply with any requirements in the host economy that relate to the internal operation of the fund (this will be covered by the Passport rules). However, host economies will impose obligations in some key areas, namely: disclosure, marketing and complaints handling.

8.26 The ways in which legislating the Passport arrangements would change the status quo for Australian fund operators will depend on where they seek to offer their products. For example, in Thailand it would mean there is no need to establish a locally licensed subsidiary or enter into a joint venture.

8.27 Importantly, it also allows a fund to be offered across multiple economies under the common Passport Rules, using one legal vehicle. Previously, fund operators would likely offer very similar products through different legal vehicles registered in different jurisdictions, with slight changes to reflect local requirements.

8.28 Given that the objective of the Passport arrangements is to implement a negotiated partial mutual recognition outcome, in combination with a package of special Passport rules that align differing regulatory arrangements, this option is deregulatory.

Cost benefit analysis of each option/Impact analysis

8.29 Implementing the Passport arrangements can have benefits for industry, the economy and investors. These benefits are discussed below in relation to each option.

Option 1 - Status quo

Summary of the indicative deregulatory impact - Option 1
Net deregulatory savings (averaged over 10 year period) $0

Industry net benefits

8.30 The Passport can commence after any two participating economies complete the implementation. If Australia were not to implement the Passport arrangements Australian industry would be at a disadvantage as other economies' managed funds industries would have preferential access to each other's markets but the Australian industry would not.

Economy net benefits

8.31 It is uncertain as to what the level of funds managed on behalf of overseas investors would be if Australia were to not implement the Passport arrangements. Growth from a low base has been relatively consistent and discussions with industry indicate that this would likely continue on trend. As such, there would continue to be an increase in positive flow on effects to the broader economy (jobs, government revenue and gross domestic product) but not to the same extent as Option 2.

Investor net benefits

8.32 If Australia were to not participate in the Passport, Australian retail investors' access to the foreign fund management industry would likely remain at around current levels. The number of current retail offerings of foreign collective investments schemes in Australia is low.

Option 2 - Legislate the arrangements of the MOC

Summary of the indicative deregulatory impact - Option 2
Gross deregulatory benefits (averaged over 10-year period) $6,253,011
Less activity from funds not currently offering in participating economies ($3,429,869)
New gross regulatory benefits $2,823,142
Less new upfront regulatory costs ($222,880)
Less new ongoing regulatory costs ($1,823,795)
Net deregulatory savings (averaged over 10-year period) $776,467*

8.33 * This calculation does not capture the deregulatory benefits accrued from offerings into new markets that are likely to result from removing regulatory barriers.

Industry net benefits

8.34 The Passport is likely to create opportunities for the Australian funds management industry to increase revenue by gaining access to new markets, or faster, less costly, access to existing markets. By reducing the barriers in this way, the Passport may make offering Australian collective investment schemes overseas profitable where it otherwise may not have been. By increasing the commerciality of offshore offerings, the Passport is likely to increase the volume of foreign collective investment schemes being managed in Australia and the size and profitability of the industry.

8.35 Based on industry estimates provided by the Financial Services Council there could be approximately $12.6 billion in funds under management in Passport funds managed by the Australian industry by 2020, translating to approximately $100 million per year in revenue.[12] Over the same period, it is estimated that there could be up to $50 billion in funds under management in Passport funds across the region.

8.36 Having a larger pool of investor assets under management also provides greater scope for efficiencies of scale benefits to arise.

8.37 Removing local licensing and registration requirements is likely to generate its own benefits by reducing the costs associated with repacking and tailoring investment products to meet differences in regulatory frameworks (discussed further below under regulatory impact).

8.38 The Government continues to engage regularly with industry, consumer groups and academics to ensure the design of the Passport arrangements provides a useable and effective framework to offer collective investment schemes across borders.

Overall regulatory impact

8.39 All up, the Passport is expected to reduce regulatory barriers associated with cross-border trade of collective investment schemes, and is anticipated to bring approximate ongoing savings per year of $776,467.

8.40 This costing is based on broader indications from industry about assumed activity savings - see appendix B for a breakdown of this activity.

Regulatory benefits- average ongoing deregulatory savings

8.41 The main regulatory saving captured is reduced compliance costs by not having to meet multiple sets of regulatory arrangements. Instead, firms will only need to comply with a streamlined set of arrangements.

8.42 Based on feedback received from industry, the Passport is anticipated to allow some firms to rationalise their current regional presences, and allow firms to designate more of their portfolio and support services to one particular economy. This reduces duplication.

8.43 Best estimates obtained indicate that gross regulatory costs of one full-time equivalent employee will be saved for every $275 million of assets under management in Passport funds.[13] This reflects reduced compliance costs relating to portfolio management activity, research and analysis, accounting, legal and compliance, and other support functions.

8.44 It is expected that there will be approximately $14 billion of assets under management in Passport funds over a 10-year average, which translates to an average gross regulatory benefit of $6,253,011 per year. However, more than half of this comes from activity from collective investment schemes not currently offered in participating economies. Excluding these collective investment schemes reduces gross regulatory benefits to $2,823,142 per year.

8.45 Industry has noted that further work to clarify and streamline the process for distributing collective investment schemes in the region may create further efficiencies and opportunities for industry. Both now and under the Passport, foreign collective investment schemes may only be distributed through a locally licensed distributor (i.e., a bank or financial services firm).

New ongoing regulatory costs

8.46 Given that the Passport is anticipated to increase the access retail investors have to foreign collective investment schemes, the Passport rules have been designed to provide a strong standard of protection for investors. As such, a number of the requirements will be new for Australian fund operators. For example, the Passport rules contain detailed requirements on the portfolio allocation. There is currently no equivalent in Australian regulation.

8.47 As such, there will be a greater ongoing compliance burden associated with operating an Australian Passport fund than there is operating a registered scheme which is not registered as a Passport fund.

8.48 It is expected that approximately 30 per cent of the full-time equivalent staff saved from streamlined regulatory arrangements will be required for compliance with new arrangements. These additional activities include time spent meeting and maintaining the portfolio and asset restrictions, completing annual compliance reviews, and providing timely advice to regulators when requested.

8.49 It is anticipated that there will be approximately $14 billion in Passport funds over a 10-year average. New regulatory costs will equate to a yearly average of $1,823,795 over the first 10 years, which includes new Passport funds from entities already offering in participating economies as well as entities not currently offering in participating economies.

One off, upfront regulatory costs

8.50 According to industry estimates, approximately one full time equivalent employee will require between six weeks and six months to set up a Passport fund in compliance with the Passport arrangements. This timeframe could decrease as industry becomes more familiar with the Passport arrangements and efficiencies are created.

8.51 It is anticipated that these upfront regulatory costs will equate to a yearly average of $222,880 over the first 10 years of the Passport scheme. Upfront regulatory impacts relate to portfolio management activities, research and analysis, accounting, legal and compliance, and other support functions.

Economy net benefits

8.52 There are also likely to be positive flow-on benefits from increasing Australia's export of fund management services. This was the subject of a report by Deloitte Access Economics (commissioned by the Financial Services Council) which found that increasing the export of fund management services would have benefits for the broader economy, adding to jobs, government revenue bases and aggregate gross domestic product. Such flow-on effects are estimated to be considerable in size.[14]

8.53 Looking at the region more broadly, a 2014 economic study conducted by the APEC Policy Support Unit found that

by providing more opportunities for funds managers to assemble locally domiciled funds, the ARFP could potentially bring about 170,000 new jobs in the region. Efficient funds industries will also be critical for channelling funds from surplus markets to those where there are shortages. Together, this will bolster the capital formation of the Asia region and maintain the region's position of being the key engine of global growth.[15]

8.54 There are difficulties in estimating long-term regional impacts. However, there is a range of research from commercial and non-commercial sources indicating that the Passport will have a positive impact on job and wealth creation in the region.

Investor net benefits

Benefits

8.55 The Passport is expected to result in greater competition in the market for collective investment schemes in participating economies. The extent to which this may translate into greater range of product offerings (for example, products focused on domestic Asian markets) or lower fees, is difficult to assess.

8.56 In its 2014 interim report to APEC Finance Ministers, the Asia Pacific Financial Forum found that

'if successful [the Passport] can offer investors more investment choices at reasonable costs while helping them achieve greater diversification and higher return on their investments.' [16]

8.57 In the long-term, Australia could experience a 10 basis point reduction in fees associated with the Passport - largely stemming from scale benefits associated with increases in potential markets and exports.[17]

8.58 A 10 basis point reduction in funds management services could translate to close to $2 billion in savings, which, in a competitive environment, a large proportion would likely flow to investors.[18]

8.59 Increased foreign offerings will give Australian investors increased choice and access to investments that are focused on foreign (particularly Asian) assets. Improving choice and access gives an investor more options to manage risk through investment diversification.

Potential risks

8.60 Increased access to foreign collective investment vehicles brings potential risks for Australian retail investors as outlined by the International Organization of Securities Commission (IOSCO) Objectives and Principles of Securities Regulation.[19] The key risks to consumers of collective investment products include: risks around governance, inadequate segregation of client assets, valuation of fund assets and inadequate disclosure of all material risks.

8.61 If a Passport investor loses money as a result of operator misconduct, there are also additional difficulties associated with taking legal action against a foreign Passport fund operator and enforcing any judgement made in the investor's favour.

8.62 However, a number of arrangements have been put in place to provide a certain level of consumer protection under the Passport scheme.

8.63 Only economies meeting certain specified membership requirements will be permitted to become Passport member economies.

8.64 The eligibility requirements focus primarily on demonstrated adherence to relevant IOSCO principles which represent a standard set by an international body that is followed by a majority of economies in the world. IOSCO has assessed each Passport economy as having appropriately addressed each of the risks facing these consumers.

8.65 As industry practice and regulatory arrangements may differ in each Passport economy, the Passport rules ensure there is a degree of uniformity in the structure of passport funds and in how risks are addressed by regulation. The Passport rules have also been designed with a strong consumer protection focus. Only liquid, well-diversified collective investment schemes with limited exposure to derivatives are 'passportable'. This is to ensure that Passport funds gain an early reputation for being simple, liquid, and well-regulated investments.

8.66 Under the MOC, each economy will be allowed to impose obligations on foreign collective investment schemes in relation to their dealings with investors in its economy (for example, rules around disclosure, misleading communications and complaint handling). This means investors will be able to compare disclosure documents, will be provided with warnings about the specific risks associated with foreign collective investment schemes and have access to Australian dispute resolution mechanisms.

8.67 While the Passport will rely on a large degree of cooperation between regulators, the Passport arrangements will allow host regulators some control over foreign Passport funds being offered in their economies. For example, host regulators will have the opportunity to assess foreign collective investment schemes under either a streamlined entry or notification process. They will also have the ability to take action against a foreign Passport fund for breaches of the Passport rules, which they may consider should the home regulator fail to do so.

8.68 In relation to enforcement of actions against a foreign Passport fund operator, arrangements have been negotiated to address potential gaps in the system. There are provisions in the Passport rules to ensure a Passport investor may take an action in their home economy.

Consultation plan

8.69 The Passport scheme has been developed multilaterally from the outset. This has involved close consultation and collaboration by Australian officials with representatives of securities regulators and finance ministries from across the region.

8.70 The Passport MOC was developed through a series of ten Working Group meetings which included all current Passport economies and a number of potential Passport economies.

8.71 As part of the process for developing and negotiating the Passport arrangements, Treasury sought nominations for an 'industry champions' group that has been meeting since November 2013. Industry champions include Australian fund operators committed to exploring the cross-border issuance of collective investment schemes under the Passport and other firms that are willing to lend their expertise to development of the Passport. More than 30 firms have participated.

8.72 Treasury and ASIC officials meet regularly with the industry champions and will continue to do so through to finalisation of the Passport legislation and potentially beyond.

8.73 As set out in the Passport Statement of Intent, a commitment was made by participating economies to formally consult publicly on the arrangements of the Passport. In 2014 a consultation paper, Arrangements for an Asia Region Funds Passport[20] was negotiated and agreed by all parties and was the principal document used for consultations. This consultation received 28 submissions, a number of which were from Australian financial institutions. Further details are provided at Appendix C.

8.74 Following the 2014 consultation, the Working Group refined the Passport rules and the Passport MOC through a process of multilateral negotiation. These close consultations with officials from across the region were intended to ensure that the Passport arrangements were acceptable to relevant regulators and governments. In doing so, they were intended to assist to facilitate the participation of a broad range of regional economies in the Passport, from its commencement or soon thereafter.

8.75 In 2015, Australia, other working group economies and some other regional economies consulted on the Passport rules. Australia encouraged active participation in these public consultations by relevant economies.

8.76 The purposes of these consultations, which were the first public consultations on the text of the Passport rules, are to ensure the rules are commercially viable and competitive (including by providing appropriate investor protections) and therefore attractive to industry stakeholders and consumers from across the region.

8.77 The outcomes of public consultations informed further refinements to the Passport rules at the final three Working Group meetings and were considered at the final Policy and Technical Workshop.

8.78 The Government also publicly consulted on an exposure draft of the core chapter for the ARFP regulatory framework from 25 August to 25 September 2017. As part of this round of consultation, stakeholders were asked about the estimated regulatory costs for complying with the ARFP regulatory framework. Eighteen submissions were received, which expressed support for the legislation but no submissions responded on the request for specific regulatory cost information.

8.79 This initial consultation was followed by consultation on revisions to the core elements and other required legislative changes from 20 December 2017 to 25 January 2018. One submission was received, which expressed support for the legislation.

8.80 Complementary consultation was also undertaken on the proposed regulatory guidance to be issued by ASIC and the other Passport economy regulators. The consultation closed on 19 September 2017. In addition, ASIC consulted on proposed guidance in relation to Passport funds (Consultation Paper 296). This consultation closed on 8 December 2017.

8.81 The MOC also established a Joint Committee with representatives from each of the Passport economies. One of the purposes of the Joint Committee is to monitor the Passport arrangements including ensuring that their application remains consistent with the objectives of the Passport. This will ensure that each Passport economy implements the Passport arrangements in a consistent way and that the implementation is conducive to supervisory co-operation.

Option selection/Conclusion

8.82 Option 2 is preferred because it will likely have net benefits for investors, and strengthen regional cooperation and trust amongst regulatory authorities involved. It has strong support within industry, and more broadly in the region.

8.83 Implementing the Passport provisions will give Australia access to a partial mutual recognition scheme that leaves a degree of control with the host regulators, ensuring consumer protection and financial stability. The application of the Passport rules will also promote regulatory equivalence in some areas.

Implementation and evaluation/review

8.84 Following the signing of the MOC it is necessary to reflect the Passport arrangements in Australian law through a package of amendments to the Corporations Act, the Australian Securities and Investments Commission Act 2001 (the ASIC Act) and related legislation. These amendments will make the following changes.

Establish a mechanism for incorporating the Passport Rules in Annex 3 of the MOC into Australian law, and imposes an obligation on Passport funds and operators registered in Australia as well as foreign Passport funds and operators offering interests in Australia to comply with the Passport Rules.
Establish a new Chapter 8A in the Corporations Act which mainly implements the common regulatory arrangements in Annex 2 of the MOC. Chapter 8A among other things sets out the process whereby Australian managed investment schemes may be registered by the Australian Securities and Investments Commission (ASIC) as Passport funds. It also sets out the process whereby foreign Passport funds may notify ASIC of their intention to offer interests in the fund to Australian investors and the circumstances in which ASIC may reject such notifications.
Makes amendment to other parts of the Corporations Act to amend how the obligations in those parts apply to foreign Passport funds. Annex 1 of the MOC sets out the main areas where host economies may apply their own regulation, including financial reporting, licensing and disclosure.

Passport Joint Committee

8.85 The outcome of the new Passporting arrangements can be reviewed by the Joint Committee, which has been established under Paragraph 6 of the MOC. The main functions of the Joint Committee are to:

monitor the Passport arrangements and its operation, which includes ensuring that the application of the Passport arrangements remains consistent with the objectives of the Passport;
maintain an official Passport website, where it will publish the text of the MOC and any amendments to it, and a list of participants that have implemented the Passport arrangements;
publish annual progress reports on the operation of the Passport;
commence a review of the Passport arrangements two years after the date on which the Passport first becomes operational, or at a time determined by the Joint Committee, and publish the report of the review on the official Passport website;
facilitate the resolution of differences as set out in Paragraph 8 of the MOC;
recommend amendments to the MOC where appropriate, and when the amendment should take effect in accordance with Paragraph 9 of the MOC;
assess nominations from prospective subsequent participants and make recommendations to the participants based on the procedures set out in Paragraph 11;
where considered appropriate, develop and publish information that serves as general guidelines to operators, investors and Passport regulators on the operation of the Passport including processes for registration of Passport funds, the admission of Passport funds in each host economy and the interpretation of the Passport Rules for CIS operators and investors; and
consider and, if agreed, make recommendations to the participants about aspects for the form or content of the application for registration of a Passport fund or entry to a host economy that are to apply.

8.86 The Joint Committee will consist of one representative from each of the participating economies. Since the MOC was established, the Joint Committee has convened in-person on three occasions, in Kuala Lumpur (November 2016),Tokyo (April 2017) and Bangkok (October 2017).

APPENDIX A: Asia Region Funds Passport - Key milestones

8.87 The milestones below represent the path taken by Australia and other participating economies to develop the Passport.

October 2010 Workshop
November 2010 Passport introduced at APEC Finance Ministers
2011 Three workshops
November 2011 Mandate for further progress at APEC Finance Ministers
2012 Two workshops
August 2012 APEC Finance Ministers agree to further development of a partial mutual recognition model, governing arrangements and policies for a pilot Passport
December 2012 Formation of Asia Region Funds Passport working group
2013 Two working group meetings
May 2013 Workshop
September 2013 Signing of the Passport statement of intent
2014 Three workshops
April 2014 Passport consultation paper released
February 2015 Release of the Asia Region Funds Passport rules and operational arrangements
September 2015 Signing of the Statement of Understanding
June 2016 The Memorandum of Cooperation takes effect
November 2016 Joint Committee Meeting 1 - Kuala Lumpur
April 2017 Joint Committee Meeting 2 - Tokyo
October 2017 Joint Committee Meeting 3 - Bangkok

APPENDIX B: Estimated net impact of option 2 on funds management activities

8.88 Based on arrangements detailed in the consultation paper released in April 2014 proposing arrangements for the Passport, it is expected that the following overall deregulatory savings would be distributed amongst the following categories.

Activity Examples of activity Indicative saving per $275 million of funds under management
Portfolio management Investment management, asset allocation and acquisition/disposal decisions Anticipated to provide 15 weeks of a single employee per year -44 percent of total net regulatory savings
Compliance and legal Oversight of fund's activities to ensure adherence to differing regulatory and legal requirements are met Anticipated to provide 13 weeks of a single employee per year -38 percent of total net regulatory savings
Accounting Fund accounting - pricing of investor interests, calculation of differing taxation and distribution calculations Anticipated to provide 3 weeks of a single employee per year -9 percent of total net regulatory savings
Research and analysis Fundamental assessments of assets quantitative assessments of return and risk Anticipated to provide 3 weeks of a single employee per year -9 percent of total net regulatory savings

Methodology

Industry data

8.89 Over August to October 2014, the Australian industry was consulted about the design of the Passport. Industry was also asked to describe how the Passport might change the regulatory costs associated with offering products in the region. The Financial Services Council surveyed its membership and 21 industry participants provided estimates on the number of collective investment schemes they may offer under the Passport in aggregate form.

8.90 Some within industry also provided confidential information direct to Treasury estimating how the Passport may lead to changes in the regulatory costs associated with their overseas product offerings including impacts on portfolio management and support functions.

8.91 Industry participants were advised of the regulatory burden measurement framework, and the types of costs that are considered as part of measuring regulatory impacts.

8.92 In addition, stakeholders were asked about their estimated regulatory costs as part of the Government's public consultation on the exposure draft of the core chapter for the ARFP regulatory framework, conducted between 25 August 2017 and 25 September 2017. However, there were no comments provided on the estimated regulatory costs.

Average labour costs per hour

8.93 A default hourly labour cost has been used based on Australian average weekly earnings, but adjusted to include income tax. This provides an economy-wide value for employees of $39.31 per hour. This value is scaled up using a multiplier of 1.75 to account for the non-wage labour on-costs (for example, payroll tax and superannuation) and overhead costs (for example, rent, telephone, electricity and information technology equipment expenses). This results in a scaled up rate of $68.79 per hour.

10 year time frame

8.94 Industry participants were asked to provide information based on a 10-year horizon, and to provide estimates as to how regulatory costs might change over this period.

8.95 All industry participants indicated that fund offerings via the Passport would increase gradually over time as industry became more familiar with the arrangements and tested investor awareness and demand for Passport products with limited offerings.

Participating economies

8.96 Industry provided estimates on the basis that the economies of Australia, Korea, the Philippines, New Zealand, Singapore and Thailand were anticipated to be participating upon the Passport's commencement. To date, Australia, Japan, Korea, New Zealand and Thailand have joined the Passport. Other economies are considering whether to join.

Estimated average participating Passport fund

8.97 Based on the industry responses received, averaged over a 10-year period from the commencement of the Passport, a typical Australian Passport fund is likely to have funds under management of close to $275 million. The Passport is likely to be used by larger fund operators that have the ability to meet track record and minimum capital requirements.

APPENDIX C: Working group response to public submissions to consultation paper: Arrangements for an Asia Region Funds Passport

8.98 A consultation paper, Arrangements for an Asia Region Funds Passport[21] was negotiated and agreed by the Passport working group. This document was used to support formal public consultations on the proposed passport arrangements, which were held in all working group economies over the period April to July 2014.

8.99 Submissions received demonstrated strong support for the passport, although a small number of rules attracted criticism. Comments were received on many aspects of the proposed arrangements. The following summarises feedback on key aspects of the arrangements and the working group's treatment of that feedback.

8.100 More broadly, consultations revealed a diverse range of views on numerous specific issues, which the working group considered and made judgments on. This meant that a number of suggested changes to the passport arrangements were not accepted by the working group. It is intended that the passport provide strong investor protections, including by restricting the range of fund managers that may participate and the types of funds that may be designated as passport funds. These goals guided the working group in considering the comments received.

8.101 For example, it was suggested that a broader range of experience be accepted in determining whether a fund manager meets the 'track record' requirements, including experience managing assets other than collectively (for example, individual discretionary mandates). Broadening measures of experience in this way is not considered appropriate given the importance not just in managing money but more specifically with the operational and legal frameworks associated with managing collective investment schemes.

8.102 It was also suggested that property funds be permitted to be passport funds, noting that in Australia there are a range of property funds on offer to the public and Australian fund managers have considerable experience in the management of property funds. However, this would conflict with the requirement that passport funds invest only in highly liquid assets, noting that property is not a type of liquid asset. This requirement is important in ensuring investors can redeem their passport fund interests promptly and is expected to contribute to generating a strong reputation for investor protection. For this reason, it is not considered appropriate for property funds.

8.103 One submitter proposed that the proposed liability of a master custodian for sub custodians be removed. However, this liability for the sub custodian encourages appropriate due diligence and oversight of the sub custodian and contributes to investor protection. It was not, therefore, considered appropriate to waive this liability.

8.104 There was broad support for the absence in the passport arrangements of any restrictions on the legal structure of passport funds. This means that, for example, trust, contractual and corporate investment structures are able to be utilised under the passport. Some submissions did note however, that their economies do not permit the use of all of these fund structures, irrespective of whether the passport permits their use. This is a matter for those economies to address, rather than for consideration in developing the passport arrangements.

8.105 Industry expressed the view that the proposed passport arrangements needed to be modified to permit the use of so-called 'umbrella' fund structures which would permit operators to register sub funds. In response, the passport rules have been amended to provide for the use of sub funds.

8.106 It was proposed that host economy laws and regulations concerning the labelling of exchange traded funds and money market funds would apply to passport funds and that additional disclosure may be required if an exchange traded fund is sold in an economy in which it is not listed. (An exchange traded fund is a security that tracks an index and whose interests trade on an exchange. A money market fund is a fund that invests in short-term debt securities.)

8.107 Under the requirements, a passport fund must not be called an exchange traded fund in a host economy unless it complies with any specific additional requirements for an exchange traded fund in the host economy. Similarly, a passport fund must not be called a money market fund or otherwise promoted as a money market fund in a host economy unless it complies with any specific additional requirements for a money market fund in the host economy.

8.108 A range of views were provided on offering exchange traded funds and money market funds under the passport arrangements. Some submitters argued for consistent naming conventions across the participating economies. Others were more ambivalent about whether this was necessary. A number of submitters argued against additional disclosure. Some questioned whether exchange traded funds and money market funds were likely to be sold cross border.

8.109 The working group considered these widely divergent views and decided against amending the proposed requirements. In so deciding, the working group concluded that it is appropriate to allow host economies to impose rules on naming conventions and disclosure relating to exchange traded funds. For example, it is important that where interests in an exchange traded fund are offered in a host economy, that investors in the host economy not be under the false impression that they can sell their interests in the fund on a market in the host economy where that is not the case.

8.110 A large number of submissions commented on the proposed home economy public offer rule. Under this proposed rule, interests in a passport fund could only be offered in a host economy if a number of conditions were met. Conditions included that the fund be offered and actively marketed in the home economy. The purpose of this proposed rule was to ensure the home regulator has a stake in monitoring the compliance of the passport fund with the passport arrangements. This stake is achieved because a requirement for a public offer in the home economy creates the possibility that investors in the home economy may acquire interests in the passport fund.

8.111 Some submissions opposed the rule on the basis of the regulatory burden it would create. Others raised issues with the conditions, expressing concern about what would be required to prove compliance.

8.112 Following discussion, the working group remained of the view that the benefits deriving from a public offer in the home economy in safeguarding investors outweigh the associated regulatory burden imposed by it. However, in light of comments received and on further consideration, the working group concluded that there were a number of different ways in which the outcomes sought could be achieved. In response, the passport arrangements were amended to enable passport funds to comply with this requirement by meeting one of three alternative tests. This provides considerable flexibility in meeting the requirement.

Chapter 9 Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Corporations Amendment (Asia Region Funds Passport) Bill 2018

9.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

9.2 The Corporations Amendment (Asia Region Funds Passport) Bill 2018 (the Bill) amends the Corporations Act 2001 (the Corporations Act), the Australian Securities and Investments Commission Act 2001 (the ASIC Act) and related legislation to introduce into Australian law a multilateral framework that allows eligible collective investment schemes to be marketed across participating economies, with limited additional regulatory requirements. The multilateral framework (known as the Asia Region Funds Passport) is contained in a Memorandum of Cooperation (MOC) that has been agreed and entered into by five participating economies, including Australia.

9.3 Key aspects of the Bill include:

establishing a mechanism for incorporating comprehensive Passport Rules, contained in Annex 3 of the MOC, into Australian law;
requiring passport funds registered in Australia and their operators, as well as foreign passport funds offering interests in Australia and their operators, to comply with the Passport Rules for this jurisdiction;
inserting new Chapter 8A into the Corporations Act, which sets out the process for registering registered schemes as Australian passport funds, a mechanism for foreign passport funds to notify ASIC of their intention to offer interests to Australian investors, and the circumstances in which ASIC may reject such notifications;
amending other parts of the Corporations Act and the ASIC Act to clarify how the corporations law applies to foreign passport funds, including in relation to financial reporting, consumer protection and disclosure; and
introducing a range of new offences, including strict liability offences and applying extended geographical jurisdiction Category A under section 15.1 of the Criminal Code to certain new offences.

9.4 The structure of the Bill is set out below.

9.5 Key definitions. Schedule 1 to the Bill inserts a new Chapter 8A into the Corporations Act. Parts 8A.1 and 8A.2 contain a number of key definitions and set out the mechanism for incorporating the Passport Rules into Australian domestic law.

9.6 Becoming a passport fund. Parts 8A.3, 8A.4 and 8A.5 of the new Chapter set out the registration process for registered schemes to become Australian passport funds and the notification process for foreign passport funds seeking to offer interests in Australia. Part 8A.8A sets out the rules and processes governing deregistration of Australian passport funds and denotification (that is, removal of permission to offer interests in Australia) of foreign passport funds.

9.7 Notified foreign passport funds: Relationship with members and prospective members in Australia. Schedule 2 to the Bill sets out consequential amendments to the Corporations Act, generally relating to notified foreign passport funds. These include extending existing requirements applicable to other financial products and services, such as provision of annual financial reports of the fund and periodic statements of a member's investment in a fund and existing disclosure requirements. The existing penalty notice regime in the Corporations Act is extended to cover contraventions of the new strict liability offences that are introduced by the Bill.

9.8 Notified foreign passport funds: Australian regulation of a notified foreign passport fund's other activities in Australia. In addition to the regulation by Australia of the investor-facing interactions of a notified foreign passport fund, where other aspects of the corporations law are potentially relevant to the activities of such funds in Australia, they are generally given equivalent treatment to Australian MISs in amendments under Schedule 2.

9.9 Compliance and enforcement. Part 8A.6 of Schedule 1 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 the additional regulatory function of passport regulator under the ASIC Act; allows ASIC to accept enforceable undertakings from operators of notified foreign passport funds; and authorises certain persons to disclose confidential information held by ASIC to other passport regulators as required under the MOC.

9.10 Exemptions and modifications. Part 8A.8 of the new law grants ASIC the power, and also allows regulations to be made, to exempt entities from the provisions in Chapter 8A and the Passport Rules, or modify any such provision as it applies to an entity. Part 8A.8A provides both that regulations can be made and 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. This ensures members of such funds who joined on the basis that the fund was a passport fund can continue to be protected in the event the fund is deregistered or denotified. ASIC is also granted 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.

Human rights implications

9.11 The Bill engages, or may engage, the following human rights:

the right to privacy;
the right to the presumption of innocence;
the right to a fair and public hearing; and
criminal process rights.

Engagement of the right to privacy

9.12 Article 17 of the International Covenant on Civil and Political Rights (ICCPR) requires parties to the ICCPR to uphold the individual right not to have one's private, family and home life or correspondence unlawfully or arbitrarily interfered with. It also includes the right to protection by law of one's reputation. According to the Parliamentary Joint Committee on Human Rights' Guide to Human Rights, the right to privacy includes:

the right to respect for confidential and private information, particularly the storing, use and sharing of such information; and
the right to control dissemination of information about one's private life.

9.13 The Bill engages the right to privacy because it:

involves the collection, security, use or disclosure of information that may include personal information; and
regulates information held on a public register.

9.14 New section 1213K of the Bill introduces the right for a person in this jurisdiction, or an Australian member[22], or former member of a notified foreign passport fund who either acquired an interest in the fund in Australia or is ordinarily resident in Australia, to request a copy of the register of members of the fund.

9.15 New section 1213L of the Bill introduces restrictions on the use of information obtained from the register of members of a notified foreign passport fund.

9.16 New section 1214 of the Bill provides that ASIC must establish and maintain a Register of Passport Funds or ensure that a Register of Passport Funds is established and maintained by another body. The Register will include details of Australian passport funds and notified foreign passport funds (that is, foreign passport funds that are permitted to offer interests in Australia), and may also include details of other passport funds. Records of transaction to the Register, such as lodgments of applications to become a passport fund, will be available for public search as a document.

9.17 The Privacy Act 1988 (the Privacy Act) provides for the protection of personal information, including setting out Information Privacy Principles applying to the Commonwealth public sector and National Privacy Principles applying to many private sector organisations.

9.18 The right to privacy and reputation is not an absolute right and is subject to permissible limits. The implied limitation arises inter alia as a result of the interpreting term 'arbitrary' in Article 17 of the ICCPR, which prohibits unlawful or arbitrary interferences with a person's privacy, family, home and correspondence.

Right to obtain a copy of the register of members and use of information contained on it

9.19 The Passport Rules contained in Annex 3 of the MOC require that operators of passport funds (whether Australian or foreign) have adequate internal control mechanisms, including procedures and systems, to ensure that registers of members are "duly kept".

9.20 Under new section 1213K of the Bill, a person in this jurisdiction, or an Australian member or former member of a notified foreign passport fund who either acquired an interest in the fund in Australia or is ordinarily resident in Australia, may request a copy of the fund's register of members. The information to be kept on a register of members of a notified foreign passport fund is determined by the laws and regulations of the fund's home economy, not by Australian laws and regulations. To the extent that the register of members that is required to be kept under home economy laws and regulations includes information such as members' names, postal addresses and shareholding details, then it would constitute personal information.

9.21 New section 1213K of the Bill is closely modelled on existing section 173 of the Corporations Act.

9.22 Existing subsection 173(3) provides that a person may obtain a copy of the registers of members of a registered scheme. The copy of register of members must be given to the person requesting it in the prescribed form.

9.23 New paragraphs 1213K(2)(b) and (c) of the Bill provide that a request to obtain a register of members must state the purpose for which the information obtained is intended to be used. This purpose must not be a prescribed purpose, and prescribed purposes may be set out in regulations. This replicates the existing conditions for an application to obtain a register of members of a registered scheme under subsection 173(3A), for which the prescribed purposes are set out in regulation 2C.1.03. It is envisaged that the prescribed purposes that currently apply in respect of registers of members of registered schemes will be extended by regulations to registers of members of notified foreign passport funds.

9.24 New section 1213L of the Bill sets out restrictions on the use of information obtained from a register of members of a notified foreign passport fund. The section is closely modelled on existing section 177 of the Corporations Act.

9.25 New subsection 1213L(1) of the Bill prohibits the use and disclosure of information obtained from the register to contact members. This replicates existing subsection 177(1), which prohibits the use and disclosure of information on any register kept under Chapter 2C (that is, including registers of members of registered schemes). New subsection 1213L(1) and subsection 177(1) are comparable to the requirements of the Australian Privacy Principle (APP) number 7 under the Privacy Act, which generally prohibits an organisation from using personal information about an individual for direct marketing purposes. However, the prohibitions contained new subsection 1213L(1) and subsection 177(1) are broader in scope because they deal with the sending of material in general, rather than specifically marketing material.

9.26 New subsection 1213L(2) of the Bill provides an exception to new subsection 1213L(1), in the same way as subsection 177(1A) provides an exception to subsection 177(1). The exceptions outlined in new paragraphs 1213L(2)(a) and (b) are the same as those in paragraphs 177(1A)(a) and (b) and allow actions (including the provision of information) that are relevant to a member's holding of interests recorded on the register and the exercise of rights that are attached to those interests. The ambit of these exceptions is restricted by the fact that, under the Criminal Code, a defendant wishing to rely on an exception bears the evidential burden of providing evidence that 'suggests a reasonable possibility' that the exception applies (subsection 13.3(3) of the Criminal Code).

9.27 New subsection 1213L(3) provides restrictions on the use or disclosure of information for prescribed purposes, in the same way as the existing subsection 177(1AA) does for information from any register kept under Chapter 2C. The power contained in existing subsection 177(1AA) has, to date, not been put to use. The power to prescribe additional prohibited purposes is precautionary, in case specific forms of misuse of the restricted right to contact members arise in future that need to be addressed.

9.28 These provisions aim to achieve the legitimate objective of ensuring that Australian members of notified foreign passport funds can be contacted regarding their interests in such funds, where this assists them to be informed about their interests and how they may exercise their rights in respect of those interests; for example, in relation to exercising their right to vote at a meeting of fund members. This is analogous to the existing rights and restrictions regarding access to and use of information on members' registers that apply in respect of registered schemes.

9.29 The limitations on privacy afforded by these measures can be considered rational and necessary because they essentially replicate and ensure consistency with a longstanding existing right for persons to obtain copies of registers of members of a registered scheme and achieve the same objective of facilitating contact with members of a passport fund for the purposes of providing them with information that is in their interest to have access to.

9.30 The limitations on privacy that these measures entail can be considered reasonable and proportionate because the legitimate purposes and uses of a register of members are strictly constrained and contraventions are subject to strict liability offences attracting significant penalties, thereby ensuring there is a strong incentive to comply with the law. Specifically:

requests for registers of members of a notified foreign passport fund must state the purpose for which the information is intended to be used;
the purpose must not be a prescribed purpose, and prescribed purposes may be set out in regulations;
the use or disclosure of information about a member of the register in contravention of the new law constitutes a strict liability offence attracting a penalty of 60 penalty units; and
the use or disclosure of information obtained from the register of members for any purpose prescribed by the regulations constitutes a strict liability offence attracting a penalty of 60 penalty units.

Creation and maintenance of a Register of Passport Funds containing information about passport funds

9.31 Section 7 of Annex 2 of the MOC requires that each Passport Regulator maintain a current public register containing a number of details of the passport funds and deregistered Passport Funds for which it is the Home Regulator.

9.32 Section 8 of Annex 2 of the MOC requires that each Passport Regulator take all reasonable measures to keep confidential any information provided to it by a Passport Fund or Operator of a Passport Fund on a confidential basis.

9.33 Section 7 of Annex 2 of the MOC also requires that the Part A application for registration as a passport fund be placed on the Passport Regulator's register, except for any part of it that is marked confidential. The Joint Committee of participating economy regulators that are responsible for implementing the Passport decided the Part A should be consistent for all participating economies. Part A as agreed includes some personal information.

9.34 As an Australian Privacy Principle (APP) entity under the Privacy Act, ASIC is required to maintain registers in accordance with its APP obligations, to the extent that such registers contain personal information.

9.35 New section 1214 provides that ASIC, as the home regulator, must either establish and maintain a Register of Passport Funds or ensure that a Register of Passport Funds is established and maintained by another entity. If the Register of Passport Funds is kept by ASIC, ASIC may do so in any form that ASIC considers appropriate. The Register of Passport Funds must include the prescribed details of Australian passport funds and notified foreign passport funds and of funds that have been deregistered as Australian passport funds and funds that have been denotified as notified foreign passport funds. The Register may include details of other passport funds.

9.36 The Register of Passport Funds will be a public register accessible via ASIC's website. As operators of passport funds and the funds themselves will generally be large entities, this will not generally limit the human rights of individuals. The data fields on the Register of Passport Funds maintained by ASIC will contain personal information that is collected from the application to register as an Australian passport fund or notice of intention to become a notified foreign passport fund. However, the publicly available search extracts of information contained on the Register of Passport Funds will not contain personal information.

9.37 An application to become an Australian passport fund or a notice of intention lodged by a foreign passport fund to become a notified foreign passport fund will contain personal information of the person lodging the application or notice (such as name, address, email, telephone number).

9.38 An application to become an Australian passport fund will also contain personal information about chief executive officers, directors and responsible officers (such as name, date of birth, qualifications and experience) and about officers of the fund operator, or a controlling entity and compliance committee members (such as name and date of birth). The application will be held on ASIC's systems and be available publicly via paid search.

9.39 A notice of intention lodged by a foreign passport fund will also contain personal information about directors and the local agent (such as name and date of birth). This notice of intention will be held on ASIC's systems and available publicly via a paid search.

9.40 Given operational difficulties in redacting personal information from the application to become an Australian passport fund and notice of intention to become a notified foreign passport fund, ASIC is currently considering the best way for it to comply with its APP obligations. This includes considering whether it can obtain consent from an applicant to publish any personal information.

9.41 Generally, under existing section 1274 of the Corporations Act, documents lodged with ASIC may be inspected by the public on payment of the prescribed fee. Copies or extracts may also be obtained. A person may also, within certain limits, inspect documents lodged with ASIC. Such documents may contain personal information. However, new subsections 1212(4), 1213(4) and a consequential amendment to section 1274 (subparagraph 1274(2)(a)(iab)), provides that ASIC may, by legislative instrument, determine which parts of an application to become an Australian passport fund or notice of intention to become a notified foreign passport fund are to be made available for inspection or copying. This is designed to ensure ASIC is able to protect personal information or information that is commercial-in-confidence from being accessed by members of the public.

9.42 Nonetheless, a 'record of transaction' will be created for each lodgment to the Register of Passport Funds. It is standard practice for the record of transaction to ASIC registers to include 'lodging party details' containing personal information (for example, name, address and the option for an email address).

9.43 Under existing section 1274A, ASIC may permit a person to search a prescribed register kept by ASIC under the Corporations Act. It is intended that the Register of Passport Funds be prescribed in the regulations, such that records of transaction to the Register of Passport Funds would generally be made available for public search.

9.44 These measures aim to achieve the legitimate objective of giving effect to the MOC requirement of creating and maintaining a Register of Passport Funds, so that the public can be informed about the passport funds that are able to offer interest in Australia, and extending the power ASIC already has in relation to permitting searches of registers maintained by ASIC to searches of the Register of Passport Funds.

9.45 Any limitation on privacy afforded by the right of members of the public to request records of transaction to the Register of Passport Funds is rational and necessary as it ensures consistency with existing rights for persons to obtain copies of records of transactions to registers maintained by ASIC. It would be inappropriate for the public to have less access to the Register of Passport Funds than it has to other registers maintained by ASIC.

9.46 Any limitations on privacy, to the extent they exist, can be considered reasonable and proportionate because:

ASIC may determine which parts of an application to become an Australian passport fund or notice of intention to become a notified foreign passport fund are to be made available for inspection or copying. This ensures that ASIC is able to ensure commercial-in-confidence and personal information is not available for inspection or copying.
ASIC is not under an obligation to permit a search of a prescribed register. ASIC can therefore choose not to permit a search in the event it was of the opinion that obtainment of personal information by a specific person from the records of transaction would not be in the interests of the individuals to which the personal information relates.

Engagement of the presumption of innocence

9.47 Paragraph 2 of Article 14 of the ICCPR protects the right of a person charged with a criminal offence to be presumed innocent until proven guilty according to law. The presumption of innocence is also a fundamental principle of the common law. As the Parliamentary Joint Committee on Human Rights has observed, the presumption of innocence 'imposes on the prosecution the burden of proving the charge, guarantees that no guilt can be presumed until the charge has been proved beyond reasonable doubt, ensures that the accused has the benefit of doubt, and requires that persons accused of a criminal act must be treated in accordance with this principle'.[23] The presumption of innocence generally requires the prosecution to prove each element of a criminal offence beyond reasonable doubt.

Strict liability offences

9.48 The Bill engages the presumption of innocence as several new strict liability offences are created that mean the prosecution is not required to prove fault as part of the offence; it must merely prove that a contravention took place and the only permissible defence is an erroneous belief about a material event or circumstance.

9.49 The Passport Arrangements of the MOC (paragraph 5) require that each participant conduct reasonable checks on compliance with and, where appropriate, enforce the Passport Rules, whether by administrative action, regulatory or supervisory function or other means. The MOC also provides (in Annex 1) that participants may, in addition to the Passport Rules, choose to extend laws and regulations applicable to domestic collective investment schemes to foreign passport funds offering interests in their economy. The strict liability offences created in the Bill contribute to giving effect to these aspects of the MOC.

9.50 The following subsections of the new Chapter 8A being inserted by the Bill impose strict liability offences, each attracting a penalty of 60 penalty units, which are also subject to the existing penalty notice regime in section 1313 of the Corporations Act as well as Section 15.1 of the Criminal Code (extended geographical jurisdiction Category A):

New subsection 1211B(4), on a person in relation to an Australian passport fund or notified foreign passport fund for non-compliance of with the Passport Rules as incorporated into Australian law;
New subsection 1213J(1), on the operator of a notified foreign passport fund for not providing a person with a copy of the consolidated constitution of the fund on an application by that person in accordance with the section. An equivalent obligation to provide a copy of the constitution applies to registered schemes under existing subsection 601GC(4);
New subsection 1213K(1), on the operator of a notified foreign passport fund for not providing a person with a copy of the register of the members of the fund on an application by that person in accordance with the section. An equivalent strict liability offence already applies in subsection 173(9A) for not providing a person with a copy of a register of members of a managed investment scheme on an application by that person in accordance with subsection 173(3);
New subsection 1213L(1), on a person who uses information from a register of members of a notified foreign passport fund to contact or send material to members or discloses information likely to be used for such purposes. An equivalent strict liability offence already applies in subsection 177(1B) for contravening restrictions outlined in subsection 177(1) on such use of information from a register of members of a managed investment scheme;
New subsection 1213L(3), on a person who uses information from a register of members of a notified foreign passport fund for a purpose prescribed in the regulations or discloses information likely to be used for such purposes. An equivalent strict liability offence already applies in subsection 177(1B) for contravening restrictions outlined in subsection 177(1AA) on such use of information from a register of members of a managed investment scheme;
New subsection 1213M(1), on the operator of a notified foreign passport fund for not providing Australian members of the fund with a copy of any reports that it makes available to members in its home economy without charge (unless the operator is otherwise required under the Corporations Act to lodge the report with ASIC or provide it to Australian members); and
New subsection 1213P(1), on the operator of a notified foreign passport fund for not lodging a copy of the register of members subsequent to a request to do so by ASIC. A strict liability offence already applies in subsection 168(1A) for not setting up and maintaining a register of members of a registered scheme (which ASIC is entitled to inspect).

9.51 New subsection 314A(9) inserted by the Bill also imposes strict liability offences on the operator of a notified foreign passport fund for:

failing to provide an Australian member of the fund a copy of the annual financial report and the auditor's report relating to the financial report (new subsection 314A(1));
not providing a notice at least once informing the member they may elect to receive a hard copy or electronic copy of the reports (new subsection 314A(3)); and
not providing the reports in English or in an official language of the home economy of the fund (if the member so elects) (new subsection 314A(7)).

9.52 Each of these offences carries a maximum penalty of 10 penalty units or three months imprisonment, or both. This is consistent with the existing strict liability offences that attach to the equivalent requirements for annual financial reporting to members of companies, registered schemes and disclosing entities in section 314.

9.53 An amendment to subsection 319(1A) extends an existing strict liability offence, carrying a penalty of 60 units, or one year's imprisonment, or both, so that it applies on the operator of a notified foreign passport fund for not lodging relevant financial reports with ASIC under new subsection 319(1AA). This strict liability offence already applies to a company, registered scheme or disclosing entity for not lodging relevant financial reports with ASIC under subsection 319(1).

9.54 Similar amendments are made to subsection 321(1A) and section 322 to extend existing strict liability offences, each carrying a penalty of 10 penalty units or imprisonment for three months, or both, so that they apply to a contravention of a direction from ASIC that an operator of a notified foreign passport fund to lodge financial reports and amended financial reports and directors' reports. These strict liability offences already apply in respect of contraventions of these provisions by a company, registered scheme or disclosing entity.

9.55 Presumption of innocence is not an absolute right and is subject to permissible limits, for example in a situation in which threats to the rights of the innocent are minimal in comparison to the threats to the wider public interest. However, because proof of fault is one of the fundamental protections of criminal law, strict liability should only apply where there is adequate justification and subject to specific considerations.

9.56 The strict liability offences created by the Bill pursue the legitimate objectives of enforcing the Passport Rules as well as laws applicable to notified foreign passport funds that are substantially the same as existing laws applicable to registered schemes.

9.57 The limitations on presumption of innocence afforded by these offences can be considered rational and necessary because they enhance the effectiveness of the enforcement regime in deterring unwanted conduct and replicate and ensure consistency with existing laws applicable to registered schemes.

9.58 In relation to the new strict liability offences that are introduced in new Chapter 8A, while it is recognised that such offences often sit uncomfortably with the presumption of innocence, it is also widely recognised that such offences are a legitimate tool for ensuring compliance with the law and providing a timely and effective method for dealing with infringements where it is relatively easy to determine that a contravention has occurred. The potential impact of contraventions of these provisions on the integrity of the passport arrangements and the level of protection afforded to investors in passport funds mean they are appropriate in the circumstances.

9.59 The penalties for a contravention of the strict liability offences that are introduced in new Chapter 8A comply with the Australian Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (the Guide) as:

the offences are not punishable by imprisonment;
the maximum penalty in each case is at the maximum allowable under the Guide for strict liability offences;
the potential harm to investors and the reputation of Australia's financial system of extensive non-compliance is such that fault should not be an element of these offence; and
entities subject to the requirements covered by the offences should be on notice to guard against the possibility of contraventions.

9.60 Several of the strict liability offences that are extended to operators of notified foreign passport funds by the new law do not comply with the Guide because they either exceed the maximum recommended penalty suggested by the Guide or impose a term of imprisonment. Each of these offences is an existing offence that already applies in respect of conduct by a company, registered scheme or a reporting entity. Extending these offences so that they also apply to conduct by an operator of a notified foreign passport fund is legitimate, rational and necessary because it is important that the deterrent effect in each circumstance is no less strong than it is for Australian companies, registered schemes and disclosing entities. For this reason equivalent penalties have been imposed for these offences.

Offence provisions that carry an evidential burden

9.61 An offence provision that requires a defendant to carry an evidential burden may be considered to engage the right to the presumption of innocence.

9.62 Extended geographical jurisdiction Category A as set out in section 15.1 of the Criminal Code is applied to several of the criminal offences that are introduced in the new Chapter 8A to ensure these offences are effective given the operator of a notified foreign passport fund will be located in another jurisdiction. The offences to which extended geographical jurisdiction Category A applies are:

a breach of the Passport Rules in this jurisdiction (new subsections 1211B(3) and (4));
failure by an operator of a notified foreign passport fund to provide a consolidated copy of the fund's constitution as requested by an Australian member or former member (new subsection 1213J(1));
failure by an operator of a notified foreign passport fund to provide a copy of the register of members upon request (new subsection 1213K(1));
a breach of the prohibitions on using information contained on a register to contact members (new subsections 1213L(1) and (3));
failure by an operator of a notified foreign passport fund to provide Australian members of the fund a copy of any reports that it makes available to members in its home economy without charge (new subsection 1213M(1)); and
failure by an operator of a notified foreign passport fund to lodge on request by ASIC a copy of the whole or a specified part of the register of members of the fund (new subsection 1213P(1)).

9.63 These 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. A defendant bears an evidential burden in relation to this defence.

9.64 The imposition of an evidential burden is justified because whether there is a corresponding offence in the domestic law of the jurisdiction where the conduct occurs will generally be a matter that is peculiarly within the defendant's knowledge. Moreover, the effect of the limitation is that the defendant must merely adduce or point to evidence there is no corresponding offence. Once this is done, the prosecution must refute this beyond the balance of probability. Accordingly, the limitation is reasonable in the circumstances.

Right to a fair and public hearing

9.65 Article 14 of the ICCPR ensures that everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

9.66 To the extent of any impact on individuals, noting that operators of passport funds will generally be bodies corporate, a number of strict liability offences contained in the new law might be considered to engage the right of a fair and public hearing because they are subject to the penalty notice in section 1313 of the Corporations Act. Under section 1313, ASIC may give a penalty notice where it has reason to believe a person has committed a prescribed offence. Eight strict liability offences are prescribed offences under the new law:

new subsections 1211B(1) and (2);
new subsection 1213J(1);
new subsection 1213K(1);
new subsections 1213L(1) and (3);
new subsection 1213M(1) and
new subsection 1213P(1).

9.67 Because these offences relate to specific operational matters of a notified foreign passport fund, minor breaches may be expected to occur with some frequency. The penalty notice framework in the Corporations Act is designed to provide an efficient way of dealing with minor breaches, as it avoids significant delays and costs associated with Court action. Importantly, payment of an amount in relation to a penalty notice is not taken to be an admission of liability regarding a contravention of the prescribed offence. For this reason, the Bill is not considered to limit the right to a fair and public hearing.

Assessment of civil penalties

9.68 Practice note 2: Offence provisions, civil penalties and human rights[24], observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the ICCPR, regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to a 'criminal' penalty for the purposes of Articles 14 and 15 of the ICCPR.

9.69 The new law creates two new civil penalty provisions that are inserted into subsection 1317E(1). The first is in respect of a contravention of new subsection 344(1A) where a person fails to take all reasonable steps to comply with, or secure compliance with, Part 2M.3 of the Corporations Act (relating to financial reporting). The second is in respect of new subsections 1211B(1) and (2) concerning breaches of the Passport Rules.

9.70 The new civil penalty provisions in the Bill should not be considered 'criminal' for the purposes of international human rights law. While the new civil penalty provisions have substantial maximum penalties, neither of the provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty. The penalties are directed at persons in a specific regulatory context and have the purpose of deterring misconduct, specifically breaches of the Passport Rules and financial reporting obligations, that have severe potential consequences for investors in passport funds.

Conclusion

9.71 The Bill is compatible with human rights. It engages, or may engage, with the right to privacy and reputation, the right to the presumption of innocence, the right to a fair and public hearing and criminal process rights. However, to the extent that the Bill places limitations on these rights, these limitations can be considered legitimate, rational and necessary in light of the objectives they aim to achieve, and reasonable and proportionate in their extent.

Willis Towers Watson, Global Pension Assets Study 2017, 2017, at 29.

For simplicity, the term CIS is used generically to refer to all corporate investment vehicles.

The MOC is available under key documents at http://fundspassport.apec.org/resources/.

Singapore participated in the discussions leading to the formation of the MOC but to date have not become a signatory to the MOC.

Note: Singapore is not currently a signatory to the MOC but has been added because it was a signatory to the earlier Statement of Intent.

It is also envisaged that corporate collective investment vehicles will be able to be registered as a passport fund once the regulatory framework for corporate collective investment vehicles is implemented (see Chapter 1 of this Explanatory Memorandum). Consequential amendments to Chapter 8A will be required to give effect to that outcome.

See paragraph 2.47 for the definition that applies for 'Australian member'.

New subsection 111AE(1B) (inserted by Schedule 2, item 61) defines ED security for the purposes of notified foreign passport funds.

Prescribed financial markets are defined in regulation 1.0.02A of the Corporations Regulations 2001.

See paragraph 2.47 for the definition of 'Australian member'.

See Australian Law Reform Commission, Traditional Rights and Freedoms-Encroachments by Commonwealth Laws (ALRC Report 129), December 2015. The report is available at https://www.alrc.gov.au/publications/freedoms-alrc129 (accessed December 2017).

Assuming an average funds under management fee of 0.8 per cent.

This is before consideration of total regulatory impacts; see page 14 - new regulatory impacts.

Deloitte Access Economics/Financial Services Council, The economic impact of increasing Australian funds management exports, 2014, available at: https://fsc.org.au/_entity/annotation/7b809d3e-bfc6-e611-80d2-00155dea4d00

Asia-Pacific Economic Cooperation Policy Support Unit, Asia Region Funds Passport - A study of Potential Economic Benefits (July 2014), available at:: http://publications.apec.org/publication-detail.php?pub_id=1535

Asia Pacific Financial Forum 2014 Interim Report to APEC Finance Ministers, page 47, available at: http://www.ncapec.org/events/APFF/APFF%20Interim%20Report%202014-06-30%20clean.pdf

Asia-Pacific Economic Cooperation Policy Support Unit, Asia Region Funds Passport - A study of Potential Economic Benefits (July 2014).

Ibid.

IOSCO Objectives and Principles of Securities Regulation, available from http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf

Arrangements for an Asia Region Funds Passport, available at: http://fundspassport.apec.org/consultation-paper

Arrangements for an Asia Region Funds Passport, available at: http://fundspassport.apec.org/consultation-paper/

See paragraph 2.47 of the Explanatory Memorandum for the definition of 'Australian member' under the new law.

Parliamentary Joint Committee on Human Rights, General Comment No 43 Article 14: Right to equality before courts and tribunals and to a fair trial, CCPR/C/CG/32, 23 August 2007, [30].

Parliamentary Joint Committee on Human Rights, Practice Note 2: Offence provisions, civil penalties and human rights, December 2014.


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