As we approach the first anniversary of the Managed Investment Act (MIA), it is timely to consider its impact.
Our prediction that the new regime would be less easy for fund managers than many seemed to think proved accurate. Some fund managers were aghast when they came to understand the considerable responsibilities and obligations a Responsible Entity (RE) faces, including the fact that they will now be the trustee at law.
Very few managers have become REs at this stage. A major reason for
As we approach the first anniversary of the Managed Investment Act (MIA), it is timely to consider its impact.
Our prediction that the new regime would be less easy for fund managers than many seemed to think proved accurate. Some fund managers were aghast when they came to understand the considerable responsibilities and obligations a Responsible Entity (RE) faces, including the fact that they will now be the trustee at law.
Very few managers have become REs at this stage. A major reason for this is the failure of federal and state governments to resolve capital gains tax and stamp duty problems caused by the MIA.
It was not until this March that the Assistant Treasurer announced by press release that tax relief will be granted to funds restructuring to comply with the MIA. However, the timing of relief legislation still remains unknown, delaying transition.
The CGT issue was raised years ago and should have been resolved when the MIA was enacted, thus avoiding the present snail’s-pace response.
Legislation by press release clearly falls outside Australia’s legislative process and until appropriate legislation is passed by the parliament, a statement by a Minister is merely a statement of intention and not law.
A year ago many said the MIA rang the death knell for trustees in collective investments. So far there has been little reduction in trustees’ involvement but this will change as funds move to the new regime.
Nevertheless, it is clear that the experience of former trustees gives them opportunities for ongoing roles, albeit in a different way. These roles include acting as an independent custodian; acting as a RE; acting as members of compliance committees; and consulting to REs.
Under the MIA, while it is not mandatory that an independent custodian holds assets (self-custody, related party custody, or an external custodian are allowed) REs must submit to ASIC a compliance plan setting out how asset separation will be achieved. If ASIC is not satisfied, the investment scheme will not be registered.
ASIC has said it expects most REs to appoint third party custodians because few will be able to meet ASIC’s stringent custodianship requirements. In addition, if an existing scheme’s trustee does not lodge a retirement notice by 30 June, 1999, a meeting is required to be held to decide whether the trustee or fund manager becomes the RE. Unit holders will also be given the opportunity to direct the RE to provide an independent custodian.
There are various reasons why some trustees of some unit trusts may feel they cannot lodge a retirement notice by 30 June. Lack of legislation covering tax and duty would be of particular concern to investors in property trusts.
Standard & Poors believes the importance of independence cannot be overestimated. So there are good reasons for REs to appoint an independent custodian including market credibility and investor confidence.
I still believe investor protection would be enhanced if ASIC were to certify custodians. This would also simplify the compliance task for RE boards and compliance committees, and would lead to greater certainty for investors.
Some fund managers, realising that being the trustee at law does not sit comfortably with their notion of core business, or because they are unable to meet capital adequacy requirements, are asking their trustee to become the RE with them as the investment manager.
As all REs are responsible for all acts and omissions of their agents, trustee companies will set rigorous selection standards before accepting an RE role.
Trustee companies are also interested in becoming corporate members of compliance committees, although whether corporate members will be permitted is still unclear. Trustee companies, or their employees, would add considerable value to these committees.
Another area where trustee companies may have a role under the MIA regime is providing advice to REs. Again, their experience makes them well qualified to do so.
So while progress is being made, it is slow. I cannot pretend that the new regime doesn’t still involve some tensions and problems. They are being worked on, but lack of clarity in existing legislation and regulations, and legislation that is yet sight unseen, makes life more difficult than it needs to be.
Kerrie Kelly is the national director of the Trustee Corporations Association of Australia.
