House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Chapter 4: CCIVs - Securities

Outline of chapter

4.1 This Chapter outlines the types of securities that CCIVs may issue and the circumstances when a CCIV is permitted to pay dividends. The Chapter also explains the requirements that a CCIV must satisfy when reducing its share capital (including under redemptions and share buy-backs).

Context of amendments

4.2 A CCIV may have a variable capital structure that provides flexibility for the issue, redemption or repurchase of its shares. Like many managed funds, some CCIVs or sub-fund(s) may be 'open-ended' - meaning that its share capital is not limited. It has broad flexibility to issue, redeem or repurchase shares. Other CCIVs or sub-fund(s) may be 'close ended' (such as listed CCIVs or sub-funds) whose share capital is fixed or limited. Proprietary and public companies are close-ended and are not able to be open-ended.

4.3 At common law, the doctrine of the maintenance of share capital ordinarily prevents a company from reducing its share capital except in the legitimate course of its business. This doctrine is intended to protect the interests of members and creditors. Chapter 2J modifies that position for ordinary companies so that capital can generally be reduced in some circumstances where it is fair and reasonable to members and does not materially prejudice the company's ability to pay its creditors.

4.4 Part 8B.4 recognises that CCIVs are intended to operate as investment funds, rather than carrying on active businesses, and may have a variable capital structure. Part 8B.4 sets out the rules for share capital management for CCIVs - which provide greater flexibility for CCIVs to issue and reduce its share capital in circumstances where other types of companies are prohibited from doing so.

Summary of new law

4.5 Division 1 of Part 8B.4 governs the issue and redemption of shares and the payment of dividends.

4.6 Subdivision A of Division 1 of Part 8B.7 provides that a CCIV may issue shares, including redeemable shares, referable to only one sub-fund of the CCIV. It also specifies the requirements for converting shares of one type into another type.

4.7 Subdivision B of Division 1 of Part 8B.7 sets out the requirements for redemptions of redeemable shares.

4.8 Subdivision C of Division 1 of Part 8B.7 enables a CCIV to pay calls on partly-paid shares in certain circumstances.

4.9 Subdivision D of Division 1 of Part 8B.7 provides for the payment of dividends to members.

4.10 Subdivision E of Division 1 of Part 8B.7 relaxes the requirements for reporting to ASIC in relation to share issues and cancellations.

4.11 Subdivision F of Division 1 of Part 8B.7 permits cross-investment between sub-funds of a CCIV - consistent with other international CCIVs.

4.12 Division 2 of Part 8B.4 sets out the requirements for transactions affecting share capital.

4.13 Subdivision A of Division 2 of Part 8B.4 sets out the circumstances for the reduction of share capital by a CCIV. Generally, it provides greater flexibility for CCIVs to reduce its share capital compared to ordinary companies given its variable capital nature.

4.14 Subdivision B of Division 2 of Part 8B.4 sets out the circumstances in which a CCIV may directly acquire or take control over its shares (including in relation to cross-investment).

4.15 Finally, Division 3 of Part 8B.4 allows a CCIV to issue debentures, but these must also be referable to only one sub-fund.

Comparison of key features of new law and current law

Detailed explanation of new law

Issuing shares in a CCIV

4.16 A CCIV has the power to issue shares in itself. The self-dealing exemption, which allows companies to issue their own shares without holding an AFSL, applies to CCIVs as a CCIV is a type of company.

4.17 A CCIV can determine the terms of issue and the rights and restrictions attaching to its shares in the same way as other companies, subject to one caveat. Each share must be referable to a single sub-fund. That is, the rights attaching to the share must relate to the assets of one sub-fund and to no other sub-funds. This preserves the segregation of assets between each sub-fund. [Schedule 1, item 4, subsections 1230(1) and (3); Schedule 2, item 91, note 5 to subsection 254B(1)]

4.18 The requirement for each share to be referable to only one sub-fund does not preclude a CCIV from issuing multiple classes of shares for each sub-fund. Nor does it prevent members holding shares in more than one sub-fund.

4.19 A CCIV may engage in cross-investment within the CCIV, such that it may acquire in respect of one sub-fund, shares that are referable to another sub-fund (explained further below). The fact that a sub-fund has invested into another sub-fund does not change the underlying character of the shares of the investing sub-fund. Those shares are still only referable to one sub-fund. That is, if sub-fund A acquires shares referable to sub-fund B, the shares that are referable to sub-fund B do not change. Those shares are only referable to sub-fund B (and not also sub-fund A). [Schedule 1, item 4, subsection 1230(2)]

4.20 Regulations may prescribe further requirements placed on a CCIV issuing shares in itself. It is anticipated that any such regulations would contain technical detail concerning the issuance of shares by the CCIV in itself. For example, the regulations may outline pricing mechanisms which would be acceptable for use in determining the price applied to a share issued by a CCIV in itself. [Schedule 1, item 4, section 1230(3), (5) and (6)]

4.21 This regulation-making power is appropriate to ensure alignment between the regulatory requirements applied to MISs when issuing shares and those applied to CCIVs. Any regulations made under this power would be subject to parliamentary scrutiny and disallowance.

4.22 A court can only make an order that is inconsistent with the requirement for each share to be referable to only one sub-fund if the interests of justice require it. [Schedule 1, item 4, subsection 1230(4)]

4.23 The shares referable to the same sub-fund form at least one class of shares. The shares referable to that sub-fund may be divided into further classes - such that multiple classes of shares are referable to the same sub-fund. [Schedule 1, item 4, subsections 1230A; Schedule 2, item 35, note to subsection 57(1)]

Types of shares that may be issued

4.24 A CCIV may issue the same types of shares as other companies, including ordinary shares and preference shares.

4.25 A CCIV also has the power to issue shares that can be redeemed at the member's option and/or the CCIV's option. If all the CCIV's or sub-fund's shares are redeemable at the member's option, the CCIV or sub-fund (as relevant) is 'open-ended' and members can seek a return of their paid-up capital in exchange for cancelling the shares. [Schedule 1, item 4, subsections 1230B(1) to (4)]

4.26 The mere fact that a share can be redeemed does not make it a preference share. This modifies the common law position where shares liable to be redeemed at the member's option are 'preference shares' if the other shares on issue (or the other shares that the CCIV has the power, in its constitution, to issue) cannot be redeemed. [Schedule 1, item 4, subsection 1230B(5)]

4.27 A share that can be redeemed may be either a 'redeemable share' or a 'redeemable preference share'. A redeemable share is an ordinary share that can be redeemed. In the context of a CCIV, a redeemable preference share is a share that can be redeemed and has a preference attached to it (apart from a right to redeem). Any preferences relating to redemptions are ignored for the purposes of determining whether a share is a preference share. Preferences that are taken into account in determining whether a share is a preference share or redeemable preference share are, for example, priority over dividends. [Schedule 1, item 4, subsections 1230B(4) to (5); Schedule 2, item 22, definition of 'redeemable share' in section 9 of the Corporations Act]

Share conversions

4.28 A CCIV may convert any type of share into an ordinary share that is not a redeemable share. There are no specific requirements for this type of share conversion. The new law is based on the provisions applying to the conversion of preference shares into ordinary shares in existing section 254G. In addition, the rules for the variation of class rights in sections 246B to 246G of the existing law continue to apply to any conversion. [Schedule 1, item 4, item 1 of the table at subsection 1230C(1); Schedule 2, items 92 to 93, note 2 to subsection 254G(1)]

4.29 A CCIV may convert any share (including a preference share or an ordinary share that is not redeemable) into a redeemable share if the conversion is approved by a special resolution of the sub-fund of the CCIV to which the share is referable (subject to the restrictions on varying class rights). The requirement to obtain a special resolution is based on the existing requirements for converting ordinary shares into preference shares. Redeemable shares, like preference shares, have additional rights attaching to them that do not apply to other ordinary shares. [Schedule 1, item 4, item 2 of the table at subsection 1230C(1)]

4.30 Conversions of any type of share into a preference share (other than a redeemable preference share) are permitted if the holders rights are set out in the CCIV's constitution or the rights have been approved by a special resolution of the sub-fund of the CCIV to which the share is referable. If there are amounts unpaid on the shares, the unpaid amount is divided equally among the replacement shares. [Schedule 1, item 4, item 3 of the table at subsection 1230C(1); Schedule 2, items 92 to 93, note 2 to subsection 254G(1)]

4.31 Conversions of any type of share (whether an ordinary share, redeemable share or preference share) into a redeemable preference share are prohibited. This reflects existing subsection 254G(3). Nevertheless, the requirements for CCIVs are significantly more flexible than for other types of companies because the right to redemption is not itself a preferential right in the CCIV context. [Schedule 1, item 4, subsection 1231C(2)]

4.32 A CCIV is also permitted to convert shares into a larger or smaller number. Unlike other types of companies, the CCIV is not required to hold a general meeting and pass a resolution in order to do so. [Schedule 1, item 4, subsection 1231C(3); Schedule 2, items 94 to 95, note to subsection 254H(1)]

Share redemptions

4.33 The requirements for redeeming shares in a CCIV are more flexible than the requirements for redeeming shares in other types of companies. This reflects the fact that CCIVs are a type of collective investment vehicle where members of a CCIV can seek a return of their paid-up capital, while still providing a level of protection for creditors. [Schedule 1, item 4, section 1230D]

4.34 The share redemptions rules differ depending on whether the CCIV is a retail or wholesale CCIV and whether the sub-fund to which the share relates is liquid. The requirements for each type of redemption are summarised in Table 4.2 and explained in more detail in the following paragraphs. [Schedule 1, item 4, section 1230D and 1230F; Schedule 2, item 96, note to Part 2H.2]

4.35 All shares are cancelled after they have been redeemed (resulting in a reduction of share capital for the CCIV that is authorised under the law - see explanation in paragraphs 4.88 to 4.98 below). [Schedule 1, item 4, section 1230E]

Redeeming shares of any CCIV

4.36 A CCIV (retail or wholesale) may only redeem shares (being either redeemable shares or redeemable preference shares) if it is in accordance with the terms on which the shares were issued. Terms on which shares are issued has the same meaning as section 254B and section 254J of the existing law, reflecting a company's ability to determine the terms and rights on which its share are issued, and the requirement to redeem in accordance with those terms. [Schedule 1, item 4, subsection 1230F(1)]

4.37 In addition, a CCIV may only redeem shares if the sub-fund to which the shares are referable is not insolvent and there are reasonable grounds for suspecting that the sub-fund to which the shares are referable would not become insolvent immediately after the redemption. Solvency and insolvency is defined under existing section 95A of the Corporations Act (see also explanation at paragraph 4.91 below). [Schedule 1, item 4, subsection 1230F(2)]

4.38 The requirements for redemptions of shares in a CCIV are more flexible than the requirements for redemptions of 'redeemable preference shares' in a company, contained in existing Part 2H.2. In particular, a share redemption in a CCIV does not need to be paid out of profits or the proceeds of a new share issue. Instead, the above solvency requirement must be satisfied. This makes it easier for members of a CCIV to seek a return of their paid-up capital while still providing a level of protection for creditors.

4.39 If a CCIV redeems shares in contravention of these requirements (because the sub-fund was insolvent or the redemption was not in accordance with the terms of issue for the shares), then the redemption is still valid. Any contract or negotiation associated with the redemption is also still valid. [Schedule 1, item 4, subsection 1230F(3)]

4.40 In addition, the CCIV does not commit an offence. However, a person dishonestly involved in the CCIV's contravention is liable for an offence with a penalty of up to 2,000 penalty units or 5 years imprisonment (or both) for an individual, or 20,000 penalty units for a body corporate. This penalty is consistent with the Guide to Framing Commonwealth Offences. It is consistent with the existing penalty for the equivalent redemption provisions for corporations under section 254L of the existing law. It ensures that persons involved in the management of the CCIV's share capital or transactions related to this capital are appropriately incentivised to take reasonable steps to protect the interests of members and creditors when making a redemption - by ensuring the terms of issue are complied with and that a redemption is not made when the relevant sub-fund is insolvent. [Schedule 1, item 4, subsection 1230F(4); Schedule 2, item 199, penalty for subsection 1230F(4) inserted into Schedule 3 to the Corporations Act]

4.41 If a person is involved in the CCIV's contravention but the relevant fault element of dishonesty is not satisfied, then they may be liable for a civil penalty under existing section 1317E of the existing law. [Schedule 1, item 4, subsection 1230F(5); Schedule 2, item 192, new table item for subsection 1230F(5) inserted into subsection 1317E(3) of the Corporations Act]

4.42 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

Additional requirements for retail CCIVs

4.43 In addition to the requirements above, a retail CCIV is subject to further requirements for the redemption of shares depending on whether the sub-fund to which the share is referable is liquid or not.

4.44 A sub-fund is liquid if at least 80 per cent of the value of its assets are liquid; that is, they can be realised within the period specified in the CCIV's constitution for satisfying redemptions. [Schedule 1, item 4, section 1230H]

4.45 There is a presumption that money in an account or on deposit with a bank, bank accepted bills and marketable securities are liquid assets but the presumption may be rebutted. Regulations may also specify other kinds of property that are presumed to be liquid. Additionally, any other property is a liquid asset if the CCIV's corporate director reasonably expects that the property can be realised for its market value within the period specified in the CCIV's constitution for satisfying redemptions when the sub-fund is liquid. [Schedule 1, item 4, subsection 1230H(2)]

Redeeming shares of a retail CCIV where the sub-fund is liquid

4.46 If a sub-fund is liquid, a retail CCIV may redeem a share in the CCIV if, in addition to the requirements above:

•

the redemption is permitted by the CCIV's constitution; and

•

the redemption is in accordance with the CCIV's constitution.

[Schedule 1, item 4, section 1230G]

4.47 If a retail CCIV redeems a share in circumstances where it is not permitted by the CCIV's constitution or it is not in accordance with the CCIV's constitution, then it is liable for a strict liability offence with a penalty of up to 20 penalty units. This offence is consistent with the Guide to Framing Commonwealth Offences. There is a real risk of members being disadvantaged or treated inequitably if a redemption is not consistent with the constitution - given the constitution sets out the terms and rights attached to the member's shares. [Schedule 1, item 4, subsections 1230G(1) and (2); Schedule 2, item 199, penalty for subsections 1230G(1) and (2) inserted into Schedule 3 to the Corporations Act]

Redeeming shares of a retail CCIV where the sub-fund is not liquid

4.48 The CCIV may only offer members an opportunity to redeem shares in a non-liquid sub-fund to the extent that particular assets of the sub-fund are able to be converted to money in time to satisfy redemption requests that members may make in response to the offer, and no other offer is open in relation to the sub-fund. [Schedule 1, item 4, subsection 1230J(1)]

4.49 A redemption offer must be in writing and must be made in accordance with any procedures for doing so in the CCIV's constitution, or otherwise by giving a copy to all members of the sub-fund in question. For joint members, a copy need only be given to the joint member named first in the register of members. [Schedule 1, item 4, subsections 1230J(2) and (4)]

4.50 The CCIV must also lodge a copy of the offer with ASIC as soon as practicable after making the offer. A failure to lodge this notice is a strict liability offence punishable by up to 20 penalty units. There are legitimate grounds for penalising persons who do not intentionally or recklessly fail to lodge the offer because ASIC needs to be aware of all offers to properly perform its supervisory role and protect consumers. Existing offences for failing to lodge other documents with ASIC are also strict liability offences (see, for example, sections 319 and 320 of the Corporations Act). Both the offence and the penalty are consistent with the principles in the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1230J(5) to (6); Schedule 2, item 199, penalty for subsection 1230J(5) inserted into Schedule 3 to the Corporations Act]

4.51 A redemption offer must specify:

•

the period during which the offer will remain open (which must last for at least 21 days after the offer is made);

•

the assets that will be used to satisfy redemption requests;

•

the amount of money that is expected to be available when those assets are converted to money; and

•

the method the CCIV will use to deal with redemption requests if the money available is insufficient to satisfy all requests (provided the method complies with the requirements set out below in paragraph 4.54).

[Schedule 1, item 4, subsection 1230J(3)]

4.52 The CCIV must ensure redemption requests made in response to a redemption offer are satisfied within 21 days after the offer closes. [Schedule 1, item 4, subsection 1230K(1)]

4.53 Only one offer may be open in relation to a particular sub-fund at any one time and the CCIV cannot satisfy the redemption until the offer closes. Thus, a CCIV may not make a standing offer with respect to an illiquid sub-fund. This mirrors the requirements for registered schemes and reduces the risk of members of the same sub-fund being treated differently. [Schedule 1, item 4, subsections 1230J(1) and 1230K(2)]

4.54 If an insufficient amount of money is available (from assets specified in the offer) to satisfy all redemption requests, the requests must be satisfied proportionately according to the following formula:

Amount of money available × [Amount shareholder requested to redeem ÷ Total of all amounts shareholders request to redeem]


4.55 The CCIV has the option of cancelling a redemption offer before it closes if it contains a material error, and must cancel the redemption offer before it closes if it is in the best interests of members of the sub-fund to do so. [Schedule 1, item 4, subsection 1230J(6)]

4.56 The CCIV must make the cancellation in accordance with any procedures for doing so in the CCIV's constitution or otherwise by notice in writing to the members to whom the offer was made. The CCIV must also lodge written notice of the cancellation with ASIC as soon as practicable and in any event within two business days after the cancellation. [Schedule 1, item 4, subsections 1230J(7) to (8)]

4.57 A failure to lodge a written notice of the cancellation with ASIC is a strict liability offence punishable by a penalty of up to 20 penalty units. Both the offence and the penalty are consistent with the principles in the Guide to Framing Commonwealth Offences. A strict liability offence is appropriate because a failure to lodge the document undermines ASIC's ability to perform its supervisory responsibilities. It is consistent with the imposition of strict liability in other circumstances involving the failure to lodge documents with ASIC in the existing law. [Schedule 1, item 4, subsection 1230J(9); Schedule 2, item 199, penalty for subsection 1230J(8) inserted into Schedule 3 to the Corporations Act]

Calls on capital

4.58 The power for a company to limit calls on share capital to when a company is externally administered in existing section 254N does not apply to a CCIV. [Schedule 1, item 4, section 1230N; Schedule 2, item 97, note to subsection 254N(1)]

Dividends

4.59 A CCIV may only pay dividends to members of a sub-fund if the sub-fund to which the share is referable is solvent immediately before the dividend is paid and there are reasonable grounds for suspecting that the sub-fund would not become insolvent immediately after the dividend is paid. [Schedule 1, item 4, section 1230M; Schedule 2, item 98, note 3 to subsection 254T(1)]

4.60 The preconditions for paying dividends are less onerous for CCIVs than for other types of companies (see existing section 254T). Other types of companies are prohibited from paying dividends if their assets do not exceed their liabilities, the payment is not fair and reasonable to the company's shareholders as a whole or the payment of dividends could materially prejudice the company's ability to pay its creditors. Similarly, there is no explicit or implicit requirement for the dividends to be paid from profit.

4.61 Less onerous requirements are appropriate in the CCIV context as CCIVs are a form of collective investment vehicle and may return capital or pay dividends to members on a more regular basis than other types of companies. The only constraints on the payment of capital for registered schemes are those contained in the trust deeds. If a CCIV was required to satisfy the same preconditions for paying dividends as other types of companies, the flexibility of the CCIV regime would be hampered and CCIVs would be at a commercial disadvantage to registered schemes.

4.62 A failure to comply with the requirements for paying dividends is an offence with a maximum term of imprisonment of two years. This is the same as the corresponding offence for other types of companies in existing section 254T. [Schedule 2, item 199, penalty for subsection 1230M(1) inserted into Schedule 3 to the Corporations Act]

4.63 Each share in a class of shares in a CCIV must have the same dividend rights unless the CCIV's constitution provides for differential rights or differential rights are agreed by special resolution of the sub-fund to which the shares are referable. [Schedule 1, item 4, section 1230N; Schedule 2, item 99, note to subsection 254W(1)]

Notice requirements

4.64 The notice requirements in Part 2H.6 do not apply to CCIVs. This is because share issues, redemptions and cancellations are expected to occur more frequently in the CCIV context and the notice requirements could create a large compliance burden for CCIVs. Further, there are no notice requirements applying to registered schemes. [Schedule 1, item 4, section 1230P; Schedule 2, item 100, note to Part 2H.6]

Cross-investment between sub-funds of a CCIV

4.65 A CCIV is generally permitted to acquire in respect of any of its sub-funds, one or more shares that are referable to another of its sub-funds. This is referred to as cross-investment between sub-funds of a CCIV. [Schedule 1, item 4, section 1230Q]

4.66 Cross-investment between sub-funds of a CCIV is intended to allow a CCIV to utilise funds management structures such as:

•

a building blocks structure (also known as a master-feeder structure), where a CCIV establishes sub-funds that hold a certain asset class (building block sub-funds) and then creates a number of other sub-funds with different levels of exposure to the building block sub-funds; or

•

a hedging structure, where one sub-fund of the CCIV holds core assets and additional sub-funds hold a relevant hedging instrument and shares in the core sub-fund.

4.67 The ability to engage in cross-investment between sub-funds of a CCIV applies despite any law (including legislation, common law or equity) in force in Australia or elsewhere. For example, the rules in the Corporations Act that prohibit a company from directly acquiring its own shares do not restrict cross-investment between sub-funds of a CCIV. However, these rules continue to restrict for example, a CCIV from acquiring in respect of a sub-fund, shares that are referable to that same sub-fund. [Schedule 1, item 4, section 1230Q]

Requirements and restrictions on cross-investment

4.68 The regulations may provide for requirements or restrictions on cross-investment. [Schedule 1, item 4, section 1230R]

4.69 These requirements and restrictions are intended to ensure there are adequate protections for members of the CCIV where the CCIV engages in cross-investment. This could include, for example, requirements and restrictions that are designed to prevent circular investment or to ensure there is sufficient transparency relating to cross-investment transactions.

4.70 The current intention is to include a restriction on circular investment in the regulations - subject to feedback obtained in consultation.

4.71 Having these restrictions and requirements in the regulations is appropriate as it ensures there is sufficient flexibility to determine and adjust the requirements over time, in response to changes in the market or issues that may only become apparent once the regime is operational. This approach is also consistent with other comparable overseas regimes, such as Singapore and the United Kingdom.

4.72 If a CCIV does not comply with the requirements or restrictions on cross-investment, the CCIV does not commit an offence. Instead, the person involved in the CCIV's contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years' imprisonment, 2,000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1230S(2) and (3); Schedule 2, item 199, penalty for subsection 1230S(3) inserted into Schedule 3 to the Corporations Act]

4.73 If the person involved in the contravention does not act dishonestly, the person contravenes a corporation/scheme civil penalty provision. [Schedule 1, item 4, section 1230S(4); Schedule 2, item 192, new table item for subsection 1230S(4) inserted into subsection 1317E(3) of the Corporations Act]

4.74 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.75 These consequences are appropriate as there is the risk of significant harm to the members of the investor sub-fund and other third parties that engage with the CCIV (such as creditors) if the requirements and restrictions are not complied with. Contravention of these requirements or restrictions could also compromise the integrity of the CCIV's structure (for example, with respect to the strict segregation of the sub-funds of the CCIV).

4.76 Additionally, if a CCIV engages in cross-investment and contravenes the requirements or restrictions in the regulations, this contravention does not affect the validity of the acquisition or share or of any contract or transaction connected with it. This approach ensures there is more certainty for third parties, including members of the investor sub-fund, with respect to these acquisitions. It is also consistent with the existing consequences of failing to comply with the prohibition on companies acquiring shares in itself. [Schedule 1, item 4, section 1230S]

Membership rights of the CCIV

4.77 Where a CCIV, in respect of a sub-fund, acquires shares that are referable to another sub-fund of the CCIV, the CCIV will generally be a member of the second sub-fund as it is the legal person holding shares issued by the second sub-fund.

4.78 To ensure this outcome does not unduly influence the governance of the CCIV or subvert the rights of the other members in the second sub-fund, the CCIV is not entitled to vote as a member of the second sub-fund on a resolution at a meeting of the CCIV's members. [Schedule 1, item 4, subsection 1230T(1)]

4.79 However, the CCIV remains entitled to vote as a member of the second sub-fund on a resolution at a meeting of members of the sub-fund, subject to any requirements or restrictions prescribed in the regulations. This regulation-making power may be used to prescribe when the CCIV's vote can be cast at a meeting of members of the sub-fund, and who can cast the CCIV's vote on behalf of the CCIV at such a meeting. [Schedule 1, item 4, subsection 1230T(2)]

4.80 A CCIV will continue to be entitled to any financial rights it may have in respect of the shares it has acquired in engaging in cross-investment.

Inclusion of cross-investment information in the constitution and product disclosure statements

4.81 If a retail CCIV intends to engage in cross-investment between sub-funds of the CCIV, its constitution must make adequate provision for cross-investment. This ensures that prospective members of a retail CCIV are aware that this type of investment activity could occur in relation to the sub-fund they are considering investing in. [Schedule 1, item 4, paragraph 1223G(e)]

4.82 Additionally, if a retail CCIV intends to engage in cross-investment, its PDS must include a statement to that effect. This will assist retail clients to understand the potential risk profile of their investment. [Schedule 1, item 4, section 1241T(1)]

4.83 Further, if a retail CCIV is required to provide a PDS to a retail client, the PDS may also need to include information about any fees that may be charged to members in respect of any cross-investment activity. The requirement to include information about the cost of the relevant financial product and any amounts that will or may be payable by a holder of the product after its acquisition is an existing feature of the PDS regime.

Other amendments relating to cross-investment

4.84 The provisions make clear that where a CCIV engages in cross-investment and acquires a share in respect of a sub-fund that is referable to another sub-fund within the CCIV, this is not considered to be a share buy-back. [Schedule 1, item 4, section 1230U, note 1 to subsection 1231C(1)]

4.85 Additionally, engaging in cross-investment as permitted by the new cross-investment rules, does not relieve the corporate director of a CCIV, or an officer or employee of the corporate director of a CCIV, from any duties under the Corporations Act or their fiduciary duties. This includes the general duties under Part 2D.1 of the Corporations Act and the specific duties for CCIVs in Divisions 2 and 3 of Part 8B.3. [Schedule 1, item 4, section 1230V]

4.86 A share does not become referable to another sub-fund merely because of cross-investment between sub-funds. That is, the sub-fund to which a share is referable does not change if, after the share is issued, the CCIV acquires the share in respect of another of its sub-funds. [Schedule 1, item 4, subsection 1230(2)]

4.87 For the purposes of the meaning of the assets of a sub-fund (and more broadly, the allocation rules relating to assets and liabilities of sub-funds), a share that is referable to a sub-fund and that is acquired out of another sub-fund's assets, forms part of the other sub-fund's assets. This reflects that the share is property obtained by the application of assets of the other sub-fund. [Schedule 1, item 4, paragraph 1233H(2)(c)]

Share capital reductions

General requirements

4.88 A CCIV may reduce its share capital (for example, under a share buy-back) if it is authorised under the law. The CCIV regime establishes a wide range of circumstances where a reduction in share capital is authorised.

4.89 A reduction is specifically authorised if:

•

it involves the redemption of redeemable shares or redeemable preference shares that comply with the requirements for redemptions in Subdivision B of Division 1 of Part 8B.4 (explained above);

•

it is reduced under a Court order;

•

it involves the cancellation of shares following the return of a financial product under a cooling-off period;

•

it involves the cancellation of forfeited shares (approved by resolution of the members of the relevant sub-fund) or in other circumstances covered by Division 3 of Part 2J.1; or

•

it is authorised under regulations.

[Schedule 1, item 4, sections 1231D, 1231E, 1231F, 1231G and 1231H; Schedule 2, items 102 to 105, notes to Divisions 1, 2 and 3 of Part 2J.1 and Part 2J.2]

4.90 In addition to these specific circumstances, in any event, a reduction is authorised if it is permitted in the CCIV's constitution and, immediately before the reduction, each sub-fund that is affected by the reduction is solvent and there are no reasonable grounds for suspecting it would become insolvent immediately after the reduction. [Schedule 1, item 4, section 1231A]

4.91 A sub-fund is solvent if it is able to pay the debts that are liabilities of the sub-fund as and when they become due and payable. If a sub-fund is not able to pay the debts that are liabilities of sub-fund as and when they become due and payable then the sub-fund is insolvent. These definitions are based on the cash-flow test of solvency which is used for other companies (see existing section 95A of the Corporations Act) but applies them at the sub-fund level. [Schedule 2, items 14 and 26, definitions of 'insolvent' and 'solvent' in section 9 of the Corporations Act]

4.92 If there are any requirements prescribed in regulations for the share capital reduction, then the reduction must also comply with those requirements in order to be authorised. The regulations may prescribe requirements for different types of share capital reductions (such as buy-backs or cancellations), different circumstances in which the reduction arises (such as on-market or off-market, equal access or selective), or different types of CCIVs or sub-funds.

4.93 The capacity to prescribe additional requirements in regulations are intended to ensure there are adequate protections for members and third parties (such as creditors) in different circumstances for share capital reductions in a CCIV. Having these restrictions and requirements in the regulations is appropriate as it ensures there is sufficient flexibility to determine and adjust the requirements over time, in response to changes in the market or issues that may only become apparent once the regime is operational.

4.94 The requirements for reducing a CCIV's share capital relax the existing provisions that apply generally to companies, recognising the CCIV's status as a corporate collective investment vehicle that generally has variable capital. For example, the existing requirements for ordinary companies to obtain shareholder approval and ensure the reduction does not materially prejudice the company's ability to pay its creditors do not apply to CCIVs.

Consequences of non-compliance

4.95 If a CCIV does not comply with the requirements for share capital reductions, the CCIV does not commit an offence. Instead, the person involved in the CCIV's contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years' imprisonment, 2000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences and essential to ensure the protection of creditors and members and is consistent with penalties for similar offences elsewhere in the Corporations Act. [Schedule 1, item 4, subsections 1231B(1) and (3); Schedule 2, item 199, penalty for subsection 1231B(3) inserted into Schedule 3 to the Corporations Act]

4.96 If the person involved in the contravention does not act dishonestly, the person contravenes a corporation/scheme civil penalty provision. The maximum penalty for contravening a corporation/scheme civil penalty provision is $200,000. [Schedule 1, item 4, subsection 1231B(4); Schedule 2, item 192, new table item for subsection 1231B(4) inserted into subsection 1317E(3) of the Corporations Act]

4.97 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.98 If a share capital reduction is unauthorised, the validity of the reduction or of any contract connected with it is not affected. This promotes certainty and ensures that third parties can rely on acts by the CCIV relating to share capital reductions. [Schedule 1, item 4, subsection 1231B(2)]

Share buy-backs

4.99 As with other companies, a CCIV may buy back its shares. A share buy-back that amounts to a share capital reduction must meet the same requirements as other share capital reductions by a CCIV explained above. [Schedule 1, item 4, subsections 1231C(1), (2) and (6)]

4.100 Once a CCIV has agreed to buy back its shares, all rights attaching to the shares are suspended. The suspension is lifted if the agreement is terminated. Immediately after the shares are transferred back to the CCIV, the shares are cancelled and the CCIV cannot dispose of them. [Schedule 1, item 4, subsections 1231C(3) to (5)]

Self-acquisition of shares

4.101 A CCIV is generally prohibited from acquiring shares (or units of shares) in itself. [Schedule 1, item 4, section 1231J]

4.102 There are three main exceptions where a CCIV is permitted to acquire its shares. These are:

•

in buying back shares (see paragraphs 4.99 to 4.100 of this explanatory memorandum);

•

under a court order; or

•

when engaging in cross-investment (see paragraphs 4.65 to 4.67 of this explanatory memorandum).

[Schedule 1, item 4, section 1231J(1); Schedule 2, items 106 and 107, note 2 to subsection 259B(1)]

4.103 A retail CCIV must only acquire shares in itself for the consideration payable if the shares were acquired by another person, and subject to terms and conditions that would not disadvantage other members. This is relevant in all circumstances when a retail CCIV acquires shares in itself - including under cross-investment or under a share buy-back. This is to ensure that such acquisitions reasonably represent their market value and the process is fair to other members. The corporate director of a retail CCIV is subject to similar restrictions when acquiring shares in the CCIV (see paragraph 3.132 above). [Schedule 1, item 4, 1231J]

4.104 If a CCIV acquires shares other than when permitted, the CCIV does not commit an offence. Instead, the person involved in the CCIV's contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years' imprisonment, 2000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences and with existing offence penalties a responsible entity would be subject to for similar offences (see section 601FG of the existing law). [Schedule 1, item 4, subsection 1231J(4) and (6); Schedule 2, item 199, penalty for subsection 1231J(6) inserted into Schedule 3 to the Corporations Act]

4.105 If the person involved in the CCIV's contravention does not act dishonestly, the person contravenes a civil penalty provision. [Schedule 1, item 4, subsection 1231J(5); Schedule 2, item 192, new table item for subsection 1231J(5) inserted into subsection 1317E(3) of the Corporations Act]

4.106 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.107 Akin to other companies, a CCIV is also prohibited from taking security over shares in itself or a company that it controls. The existing law provides exceptions for companies which are financial institutions or take security under approved ESSs. These exceptions are not available for CCIVs as they should not be financial institutions and cannot hire employees. [Schedule 1, item 4, section 1231K]

Rule against giving financial assistance

4.108 There is no prohibition on a CCIV giving financial assistance. The prohibition on giving financial assistance in Part 2J.3 of the existing law is primarily designed to protect the interests of existing shareholders and creditors by ensuring that a trading company is not able to hand over control of the company to another person. A specific prohibition on a CCIV giving financial assistance is not required because:

•

a CCIV is not a trading company;

•

a CCIV must be widely held if it wishes to take advantage of the concessional tax treatment; and

•

there are specific duties which protect the interests of members of a retail CCIV (see, for example, the corporate director's duty to act in the best interests of members, explained at paragraph 3.183).

[Schedule 1, item 4, section 1231L]

4.109 Retaining the prohibition on giving financial assistance could prevent some of the transactional dealings which are conventional for MISs, such as, fee rebates and the payments of expenses associated with the issue of interests by the corporate director.

Effect on corporate director's duties

4.110 A corporate director is not relieved from any of its duties (including the new duties set out in Chapter 5 of this explanatory memorandum) because it complied with the relevant requirements for share capital reductions or redemptions. [Schedule 1, item 4, section 1231M]

Debentures

4.111 A CCIV may issue debentures so long as each debenture is referable to one and only one sub-fund. Thus, the debenture holder's rights in respect of the assets of the CCIV must be limited to rights in respect to the assets of the single sub-fund against to which the debenture is referable. [Schedule 1, item 4, section 1231N]

4.112 If the debenture or the required trust deed creates or includes a security interest, that interest must not be over CCIV assets that are referable to a different sub-fund.