21 February 2022
PwC has been closely following the legislative developments on a Corporate Collective Investment Vehicle since 2017, when the first tranche Exposure Draft Treasury Laws Amendment Corporate Collective Investment Vehicle 2017 (the First Tranche Exposure Draft) was released by the Australian Government. We issued our first LegalTalk alert on the First Tranche Exposure Draft, and our second LegalTalk alert soon followed for more in-depth consideration of the duties of a corporate director of a Corporate Collective Investment Vehicle.
In 2018, the second tranche of the Exposure Draft Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (The Second Tranche Exposure Draft) was released, and we issued our third LegalTalk alert to consider the key features of a Corporate Collective Investment Vehicle proposed in the Tranche 2 Exposure Draft.
On 10 February 2022, after the long wait since the First Tranche Exposure Draft in 2017, the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2022 (the New Law) was passed, with the commencement date, 1 July 2022.
Our fourth LegalTalk alert summarises the key features of the New Law and what to look forward to from 1 July 2022.
As we have examined in our first LawTalk alert, it was raised in the Australian Financial Centre Forum’s Australia as a Financial Centre: Building on our Strengths Report (the Johnson Report) in 2009 that the current trust based collective investment vehicle in Australia fails to attract the same level of interest from international investors when compared to other jurisdictions. It was examined that the conventional investment structure, which is largely trust based, is predominantly domestic focused, and it is not perceived as a safe investment vehicle by international investors, nor is it suitable for large scale funds managers. The Johnson Report recommended that Australia needs a new alternative investment structure which operates with a corporate structure like other international investment vehicles. This recommendation was accepted, and the First Tranche Exposure Draft was released in 2017 with a view to create an alternative investment structure in Australia.
In a nutshell, a CCIV is a new alternative investment structure that is a hybrid of a company and a trust. A CCIV has features that an ordinary company has, such as having its own legal identity, perpetuity, and, relevantly, corporate veil but like a trust, will have flow through tax treatment and an AMIT regime which aligns with the existing AMIT regime for managed investment schemes. The most distinctive feature of a CCIV is that it cannot have any employees, officers or directors. A CCIV will be operated solely through a corporate director, which is a public company that holds an Australian Financial Services Licence (AFSL) with the relevant authorisation required to operate a CCIV (Corporate Director). A CCIV is an umbrella investment structure which can hold multiple sub-funds. Each sub-fund has its own allocated assets and liabilities and is required to be operated as a separate business to any other sub-fund within the CCIV. A sub-fund does not have a legal personality and is not a separate legal entity. Investors will hold shares in the CCIV itself, which will be referable to a specific sub-fund of that CCIV.
A sub-fund may cross invest in another sub-fund of the same CCIV, and similarly a single asset may be allocated across multiple sub-funds, in each case, subject to certain conditions. These features provide greater flexibility to create a more efficient investment structure.
A CCIV must be registered with ASIC to come into existence. Unlike the Managed Investment Scheme (MIS) regime, all CCIVs must be registered regardless whether they are retail or wholesale. When making an application to register a CCIV, the CCIV must satisfy certain basic requirements:
It is a company limited by shares;
It has a constitution;
The appointed Corporate Director must hold an AFSL with the authorisation to operate the business and conduct the affairs of the CCIV;
It has at least one sub-fund, which will have at least one member; and
If it is a retail CCIV, must have a compliance plan.
A CCIV must have the expression “Corporate Collective Investment Vehicle”, or the abbreviation “CCIV” at the end of its name.
Subsequently created sub-funds within a registered CCIV need to be registered with ASIC as well. Each sub-fund will be granted an Australian Registered Fund Number. Each sub-fund of a CCIV is to be treated as a separate entity for tax purposes – this means that a single CCIV can serve as a holding vehicle for many different investors and investments.
While all CCIVs, either retail or wholesale, are required to be registered with ASIC, such distinction is still necessary because there are additional regulatory requirements that attach to a retail CCIV such as the requirement to have a compliance plan not dissimilar to a registered MIS.
A CCIV is a retail CCIV if it has at least one member who is:
A “protected” retail client;
A “protected” client under a custodial arrangement; or
A “protected” member of a passport fund.
A person is a protected retail client if the person acquires a security by a CCIV as a retail client. The meaning of retail clients within the existing definition as set out in Chapter 7 of the Corporation Act applies. Persons who are ‘associated’ with the CCIV, and persons that acquire securities in the CCIV by way of an issue that is part of a small-scale personal offer are excluded from the definition of a protected retail client. A person is ‘associated’ with the CCIV where they have a close relationship with the CCIV or its Corporate Director.
A person is a protected client if the acquisition of the security occurs under a ‘custodial arrangement’, the person would have been a retail client if there was an ‘equivalent direct acquisition’ and the person is not associated with the CCIV.
A person is a protected passport fund member if the sub-fund is an Australian passport fund, and the person became a member after the sub-fund became an Australian passport fund, or on the expectation that the sub-fund would become an Australian passport fund. An Australian passport fund is a fund that is registered with ASIC as a “passport” fund with a view to offer interests to investors in those countries that have signed the Asia Region Funds Passport’s Memorandum of Cooperation (MoC). Countries including Australia, Japan, Korea, Thailand and New Zealand have signed the MoC. The key objective of the MoC is to have a common set of rules that apply to passport funds in the participating countries to eliminate regulatory burdens and to give flexibility.
A CCIV is a wholesale CCIV if it is not a retail CCIV. Retail clients who acquire a share in a CCIV must be provided with a PDS. This means that Part 7.9 rather than the disclosure requirements in Chapter 6D will apply to shares in a CCIV. The content requirements for the PDS of a CCIV are largely consistent with the requirements for PDSs of registered MISs.
In general, listing either retail or wholesale CCIVs in the official list of a prescribed financial market operated in Australia (Australian Financial Markets) that are set out in Reg 1.0.02A of the Corporations Regulations 2001 is prohibited. However, a retail CCIV with a single sub-fund or a sub-fund of a retail CCIV with a single sub-fund may be included in the Australian Financial Markets. Those listed CCIV, and sub-funds must comply with the rules that apply to listed entities in the Corporations Act. These listing restrictions, however, do not affect the ability to quote a security in a CCIV on a financial market, such as the ASX Quoted Asset Market, provided that the applicable rules and requirements are met.
One of the issues identified in our first LawTalk alert after our review of the First Tranche Exposure Draft was around uncertainty as to capacity of a contracting party. If a CCIV is an entity with no natural person, who signs a contract on behalf of the CCIV? Also, how does a Corporate Director satisfy the s127 requirements? These concerns were resolved by adding an assumption under the New Law which assumes that a CCIV is taken to have signed a document if two directors, or a director and secretary of the Corporate Director of the CCIV sign the document.
Both the retail and wholesale CCIVs must have a constitution, and it must be registered with ASIC. There are basic content requirements for a retail CCIV include making provisions for the establishment of sub-funds, and the establishment of classes of shares referable to sub-funds. For a retail CCIV, the constitution can only be modified, repealed, or replaced by:
a special resolution of the members;
by the Corporate Director if it reasonably considers the change will not adversely affect members’ rights; or
by a special resolution of the members of a sub-fund of the CCIV, if the Corporate Director reasonably considers the change will not adversely affect the rights of any member of any other sub-fund.
For a wholesale CCIV, the process of modifying the constitution must be set out in the CCIV’s constitution. The Corporate Director must ensure the modified, repealed, and replaced constitution is lodged with ASIC within 14 days of the modification.
Corporate Director’s Duties
The Corporate Director commits an offence if it appoints an alternative director to exercise some or all of its powers. A Corporate Director of an CCIV has the obligation to operate the CCIV and perform functions conferred on it by the CCIV’s constitution and the Corporations Act. The Corporate Director can appoint an agent to do anything that the Corporate Director is authorised to do in relation to the CCIV.
As we have discussed at length in our second LawTalk alert, some of the duties of a Corporate Director in a CCIV structure are borrowed from the registered MIS regime. On top of the duties imposed on Corporate Director as an officer under Part 2D.1 of the Corporations Act, a Corporate Director has some additional duties that are imposed on a responsible entity of a registered MIS (RE), for example, a Corporate Director has the obligation to act in the best interests of the members of the CCIV, and sub-fund(s), and it has the obligation to ensure that assets and liabilities of the sub-funds of the CCIV are clearly identified, valued at regular intervals and held in the required manner. Also, as for an RE, members in a CCIV have the right of recourse against a Corporate Director if the member suffers loss or damage because the Corporate Director has not complied with its obligations.
A retail CCIV must have a compliance plan as it is required for a registered MIS. A copy of a compliance plan must be lodged with ASIC within 14 days of becoming a retail CCIV. The compliance requirements set out in the New Law are expected to be supplemented by ASIC’s guidance. Just like a registered MIS, the Corporate Director of a retail CCIV has the obligation to engage an auditor to conduct an annual compliance plan audit, and the Corporate Director must lodge the auditor’s report of the compliance plan with ASIC.
Conduct of an agent of the CCIV, the Corporate Director, an employee, director or agent (Officers) of the Corporate Director or other person acting at the direction of the Officers is attributed to the CCIV. A CCIV has corporate criminal responsibility for any office, however, as a CCIV has no officers or employees other than a Corporate Director, if a CCIV contravenes its obligations under the law, the Corporate Director has the ultimate responsibility for the CCIV’s contraventions.
Assets and liabilities allocation to sub-funds
As discussed above, a CCIV must have at least one sub-fund to register with ASIC. A Corporate Director must operate each sub-fund as a separate business. Each sub-fund can hold assets such as amounts paid in consideration for issues of any shares that are referable to the sub-fund, shares acquired by the CCIV in respect of the sub-fund, money deposited with the CCIV in relation to the sub-fund. However, money or property acquired by a CCIV in a single transaction that relate to the business of more than one sub-fund shall not form part of assets of one sub-fund in particular; and will be distributed across all sub-funds CCIV holds fairly.
Liabilities incurred by a CCIV must also be allocated to the CCIV’s sub-funds. Liabilities of a CCIV includes debts of the CCIV, expenses of the CCIV and anything else that might give rise to a debt or claim against the CCIV. Where liabilities of a CCIV that relate solely to the business of a particular sub-fund and it is considered fair and reasonable to allocate the liabilities entirely to the sub-fund, the liabilities shall become the sub-fund’s sole liabilities. On the other hand, if liabilities of a CCIV relate to its business more broadly, then the Corporate Director will determine fairly and reasonably how the liabilities shall be allocated amongst sub-funds.
In the First Tranche Exposure Draft, it was proposed that a retail CCIV will require a third-party depository or custodian to hold assets. However, the New Law has not adopted this requirement. A CCIV, whether retail or wholesale, may hold its assets itself or engage a third-party custodian or depository to hold its assets. When holding assets, they must be clearly identified in the allocation register, and must be held separately from assets of other sub-funds. If a CCIV elects to hold assets itself, are they providing ‘custodial or depository’ services’? The New Law states clearly that activities including operation of a CCIV, operation of the business and conducting the affairs of a CCIV, and holding the money or property of a CCIV do not constitute providing a ‘custodial or depository service’.
The New Law amends the existing laws on external administration so that they can be applied to a CCIV, which ultimately is an umbrella structure holding multiple sub-funds. The question posed in the industry was how the issue of sub-fund level external administration will be addressed if the laws apply at entity level.
The New Law resolved this concern by introducing general translation rules, so the existing laws on arrangements, reconstruction, receivership, winding up, property recovery, external administration offences can be applied to CCIVs, so that external administration applies to applicable sub-fund of a CCIV, rather than the CCIV as a whole.
In relation to statutory demands by creditors under Part 5.4 of the Corporations Act, the position has been changed slightly, and the New Law now requires creditors to specify the name of the sub-funds of the CCIV to which the debt relates, and the proportion of the debt relates to each sub-fund when serving a statutory demand. The creditor can find this information through the Corporate Director.
While most common forms of external administration available to conventional companies apply to CCIVs with the general translation rules, the arrangements for restructuring a company under Part 5.3B of the Corporations Act is not available in the CCIV context.
In relation to takeovers, compulsory acquisitions, and buyouts, the position set out in the Second Tranche Exposure Draft has largely been maintained. Listed CCIVs are subject to compliance with Chapters 6 to 6C of the Corporations Act. This means that where a person acquires a relevant interest in issued voting shares in a listed CCIV, relevant sections in Chapters 6 to 6B must be followed. Listed CCIVs are subject to listed entities requirements as set out in Chapter 6C of the Corporations Act. CCIVs that are disclosing entities are subject to the continuous disclosure requirements in Chapter 6CA of the Corporations Act.
The proposals made in the Tranche 2 Exposure Draft around applying the financial services regime to CCIVs have been implemented in the New Law. The New Law requires a Corporate Director to hold an AFSL to ‘operate the business and conduct the affairs of a CCIV’. A member of each CCIV is treated as a client of CCIV. While disclosure provisions do not apply to a CCIV or its Corporate Director in respect of operating a CCIV, they need to comply with Part 7.9 disclosure requirements when issuing a security to a retail client.
After the lengthy discussions since 2017, it is great to see the arrival of the long awaited new investment vehicle that is considered more attractive from an offshore investor perspective is finally here. There still are regulations, ASIC and ATO’s policies and guidance to come which will provide more information at practical level, which we expect to be ready within the next few months before the commencement date, 1 July 2022.
For a deeper discussion on how these issues might affect your business, please contact: