Key takeaways
The following are intended to remain:
- the regulatory framework for IDPSs, and exemptions for IDPSs from the requirement to be registered as a MIS; and
- the relief granted to IDPS-like schemes from certain MIS, fundraising, financial product disclosure and other investor rights provisions.
Background
On 28 March 2023, ASIC released Consultation Paper 369 (Remaking ASIC class orders on platforms; [CO 13/762] and [CO 13/763]), concerning two class orders (“COs”) that affect provisions of the Corporations Act 2001 (Cth) (“CA”). The COs need to be remade before they expire on 1 October 2023. ASIC notes that “the class orders are operating effectively and efficiently and continue to form a necessary and useful part of the legislative framework” and that the “fundamental policy principles that underpin the class orders have not changed”.
The COs in question are CO 13/763 (Investor directed portfolio services) and CO 13/762 (Investor directed portfolio services provided through a registered managed investment scheme). The Legislation Act 2003 (Cth) requires that all COs expire (or ‘sunset’), so that their regular renewal can enable them to remain in force while they are “fit for purpose, necessary and relevant”.
ASIC’s Consultation Paper proposes no significant changes to the COs (other than to extend their sunset dates to 1 October 2028, and otherwise to style and format only), but seeks feedback as to whether interested parties agree with this proposal (and if not, why not) or are aware of any significant issues with the operation of the COs.
Proposed ASIC Corporations (Investor Directed Portfolio Service) Instrument 2023
An ‘investor-directed portfolio service’ (“IDPS”) is an unregistered managed investment scheme (“MIS”) for holding and dealing with investments selected by investors. The features of an IDPS include that:
- investors generally make acquisition and disposal decisions;
- the IDPS provides custody, settlement and reporting services;
- investors can generally direct an IDPS operator to deal in assets held for the investor; and
- investors can often access investments that they would not otherwise be able to directly, and reduce costs through the netting of transactions or pooling of funds.
Under CO 13/763, which is very detailed, the operator of an IDPS is exempted from complying with various provisions of the CA, and the application of other provisions is amended, recognising that, unlike the responsible entity (“RE”) of a registered MIS, an IDPS operator does not make investment decisions. The general effect of these modifications is that IDPSs are, in many respects, treated more as a financial service than a financial product.
The CO inserts into the CA, s912AD (Requirements for the operation of an IDPS), which provides the regulatory framework for IDPSs. It outlines requirements relating to IDPS guides, which offer prospective clients of an IDPS an outline of services provided by the IDPS operator, as well as stating voting rights, fees and outlining the risks associated with participation in the IDPS. The section goes on to elaborate the nature of IDPSs as trust-based schemes, and requires that IDPS operators perform their obligations honestly and with reasonable care and diligence. Other notable requirements include quarterly and annual reporting of IDPS statements, to provide increased transparency for current and prospective clients, with exceptions for certain excluded information. Audit reports for IDPSs are split into 3 categories, depending on the nature of the IDPS operator: full service, back office or client contact. Regulation of internal controls, marketing and document provision, insurance and internal policies are outlined. Transactional functions, custody arrangements, licensee standards and dispute arrangements are also provided for.
Next, the CO alters the liability of IDPS operators for Financial Services Guides (“FSGs”), by inserting into the CA two versions (in two contexts) of s952BA (Apportionment of liability for Financial Services Guide), providing that a financial services licensee does not commit an offence (under CA s952E and s952G), or is not liable for loss (under CA s953B), if its FSG or supplementary FSG is defective because of a statement or omission, where another licensee is responsible for that element of the FSG.
The CO exempts IDPS operators from the need to provide a product disclosure statement (“PDS”) for the indirect interest in an underlying investment that a client would acquire by investing through the IDPS, provided that, generally, the client is given the PDS or other disclosure for the underlying investment that the client would be required to be given if the client had made a direct investment.
The CO goes on to insert into the CA, s704A (Offers though an IDPS), providing certain exemptions relating to disclosure documents in the context of IDPSs.
Finally, the CO states that an IDPS operator does not need to register the scheme under CA s601ED. Other people involved in an IDPS are also exempt from various obligations regarding equitable rights or interests in securities accessible through the IDPS.
Proposed ASIC Corporations (Investor directed portfolio services provided through a registered managed investment scheme) Instrument 2023
An ‘IDPS-like’ scheme is an IDPS provided through a registered MIS, in which members can:
- direct investment into specific assets available through the scheme; and
- receive capital and income distributions in relation to their interests in the scheme, determined by reference to amounts received through the scheme in relation to the investments made at their direction.
The CO goes on to make detailed provisions for PDSs relating to IDPS-like schemes, by inserting into the CA, s1013DAB (Requirements for IDPS-like schemes), which provides for PDS additional content, application forms, member information requests, rules regarding certain investment acquisitions, reporting and electronic document access, and the like.
The CO then inserts into the CA, s1019BA (Cooling-off for IDPS-like schemes), which requires the RE of an IDPS-like scheme to take reasonable steps to comply with a request made during the cooling-off period by a scheme member to realise financial products acquired for, and return relevant monies to, the member.
Next, the CA amends certain provisions of CA Chapter 5C regarding members’ rights to withdraw from the IDPS-like scheme.
The CO then inserts into the CA, s704B (Offers through an IDPS-like scheme), which compels a person who makes an offer of securities accessible through an IDPS-like scheme to notify the RE of the scheme of certain matters regarding disclosure documents relating to such securities.
Finally, the CO modifies for IDPS-like schemes the rules (under CA s314(1)(a)) relating to the provision of financial and auditors reports.
Looking forward
ASIC is inviting submissions in response to its Consultation Paper, which are due by 28 April 2023.
This article was written by Jack Fitzgerald (Paralegal), Andrew Taylor (Special Counsel), and Venn King (Principal Solicitor).
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