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Class action against Timbercorp felled by High Court
ASIC’s surveillance of property fund disclosure
Custodial v managing trustee – who owes the duties?
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UPDATE ON STREAMLINING FOFA
ISSUE 09AUGUST 2014
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From the editorWelcome to Fundamental, our guide to the issues affecting the funds management industry for fund managers and their advisers.
The first half of 2014 was a very active period for the funds management industry with an up-tick in new retail and wholesale offers hitting the market and a number of our clients actively raising capital.
Much of that capital is sourced from offshore, and the significant investor visa finally looks like it is finally working as intended. We have set up a large number of funds specifically targeting this market which is the most active sector we are seeing at the moment.
There have also been some important regulatory changes proposed in the last few months plus interesting court decisions impacting directly on the funds management industry. In this edition we feature—
• an update on the latest amendments to the FOFA regime
• the much anticipated mFund settlement service launched by the ASX
• ASIC’s review of Regulatory Guide 46 Unlisted property schemes: Improving disclosure for retail investors
• the unresolved issues around the duties owing by a custodial trustee as opposed to a managing trustee
Brendan Ivers
Partner, Funds Management
From the editor
Class action against Timbercorp felled by High Court
ASIC’s surveillance of property fund disclosure
Update on streamlining FOFA
Custodial v managing trustee – who owes the duties?
New mFund settlement service
Scheme withdrawal symptoms
Snapshot
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Contents • when a member of a managed investment scheme can withdraw from the scheme
• the failed class action against Timbercorp, leaving investors having to repay loans taken out to finance investment in its timber growing schemes
• the next step for the Asia Region Funds Passport.
Finally, we welcome internationally recognised chief economist Clifford Bennett as the keynote speaker for our annual Forum later this year. Clifford will provide cutting edge commentary on Australian economic and property sector developments and also join our discussion panel.
We trust you enjoy this edition of Fundamental and we welcome your feedback.
Best regards
Class action against Timbercorp felled by High CourtInvestors in forestry company Timbercorp now face having to repay considerable loans taken out to finance investment in its failed timber-growing schemes. The High Court of Australia recently refused leave to appeal against a Victorian court decision which dismissed a class action brought against Timbercorp, and the liquidator will now pursue the debts.
Litigation and risk management lawyer Andrew Mackintosh outlines the proceedings and explains the impact for securities class actions, investors and directors.
BACKGROUNDTimbercorp was the responsible entity (RE) for a number of forestry and horticulture managed investment schemes and also provided finance to investors to fund investment in the schemes.
The Timbercorp companies were wound up in 2009 and following the appointment of the liquidators, the plaintiff commenced proceedings against Timbercorp and three of its directors.
THE PROCEEDINGSThe proceedings were brought by the plaintiff as a “group proceeding” on behalf of all members who invested in the failed schemes during a certain period. The allegations made by the plaintiff included that the defendants had failed to disclose information on certain risks as required under the Corporations Act (Act) and had engaged in misleading or deceptive conduct.
The plaintiff sought damages from the defendants for the failed investments as well as an order that the members were not required to repay loans taken out with Timbercorp.
WHAT DID THE COURTS DECIDE?The trial judge found against the plaintiff on the nondisclosure allegations and rejected the misleading and deceptive conduct allegations. Importantly, he also found that the plaintiff had not relied on the representations in deciding whether or not to make the investment, which was a necessary precondition to an award of damages.
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ASIC’s surveillance of property fund disclosureOn 23 July 2014, ASIC alerted the market that it had undertaken surveillance of compliance by property funds with Regulatory Guide 46 Unlisted property schemes – improving disclosure for retail investors (RG 46). In short, ASIC is disappointed with the level, quality and consistency of disclosure against the RG 46 disclosure benchmarks and principles.
While it seems ASIC is not looking to introduce new or increased regulations around disclosure, it will be working closely with industry (particularly through the Property Funds Association and the Property Council of Australia) to ensure improvements in the level of disclosure. McMahon Clarke is working closely with both of those industry bodies and ASIC on these issues.
Here partner Brendan Ivers outlines the next steps for property fund managers.
WHAT DO PROPERTY FUND MANAGERS NEED TO DO?This increased focus by ASIC is an opportunity for all property fund managers to review their current disclosures against the RG 46 benchmark and disclosure principles.
In particular, property fund managers should ensure—
• all RG 46 disclosures are located in a prominent and easily accessible place on a website
• the required policies (eg valuation policy and interest cover policy) are in place and are easily accessible, and
• particular attention is given to the disclosures around related party transactions.
Following an unsuccessful appeal to the Victorian Court of Appeal the plaintiff applied to the High Court for special leave to appeal the decision of the Court of Appeal, which was refused on 11 April 2014. Please click here for more details.
IMPACT ON SECURITIES CLASS ACTIONSA key feature of the decision is the impact on the trial judge’s decision on whether the plaintiff had relied on the failure to disclose or misleading and deceptive conduct in making the investment.
The judge found the plaintiff did not read the product disclosure statement promoting the scheme (PDS) in any great detail but had instead chosen the scheme on the basis it would limit his tax liability. That meant he did not place great reliance on the contents of the PDS in making his investment.
This decision may have a significant effect on the recent trend of plaintiffs in securities class actions arguing that where there is misleading or deceptive conduct by a company, the investors should be entitled to a presumption of reliance. That is, the misleading conduct caused the price of financial products (such as shares or interests in a scheme) to increase and by purchasing the products at that increased cost the investors suffered a loss.
WHAT DOES THE DECISION MEAN FOR INVESTORS AND DIRECTORS?The major impact of this decision is upon the investors, many of whom were left with a worthless investment as well as an obligation to repay a sizable loan to the liquidators.
Now that the plaintiff has exhausted all options, negotiations are presently underway between the members and the liquidators with a view to reaching settlement. However, that looks to be some way off at this stage.
This decision is also a reminder for investors to carefully consider all information, whether contained within a PDS or otherwise, before investing in a financial product. Despite this decision, plaintiffs still need to prove reliance on misleading conduct and failure to do so will ordinarily cause the claim to fail.
Lastly, the decision provides useful guidance on what needs to be disclosed in a PDS. When determining whether something constitutes a significant risk for the purposes of the Act, the appeal judges stated that regard must be had to a “constellation of issues”. These include the probability of the occurrence, the degree of impact on investors, the nature of the product and the profile of the investors. Operating within this uncertainty can prove difficult for directors who should seek legal advice so they fully understand the obligations imposed by the Act.
In addition, those property fund managers issuing a new product disclosure statement (PDS) should ensure the disclosures in the PDS comply with the RG 46 benchmark and disclosure principles. From ASIC’s communications, it appears ASIC will pay close attention to new PDSs issued for unlisted property funds.
HOW CAN WE HELP?McMahon Clarke can review your current RG 46 disclosures and also advise on compliance with the RG 46 benchmark and disclosure principles, particularly for new PDSs issued for an unlisted property fund.
Brendan Ivers
Partner Funds Management
Andrew Mackintosh
Lawyer, Litigation & Risk Management
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Immediate changes
The Regulation has introduced a number of
immediate changes to FOFA as follows—
• Broadening the circumstances when the grandfathering arrangements for the ban on conflicted remuneration apply.
• Confirming that benefits can be paid under a balanced scorecard arrangement.
• Clarifying that bonuses paid in relation to ‘permissible revenue’ are not conflicted remuneration.
• Clarifying the application of the stamping fee provision to capital raising activities and broadening its application to include listed property trusts.
• Extending the application of the brokerage fee provisions to include brokerage fees paid in relation to financial products traded on the ASX 24.
• Ensuring the wholesale and retail client distinction that currently applies in other parts of the Act also applies for the FOFA provisions.
• Clarifying the operation of the ‘mixed benefits’ provisions.
Time-sensitive changes
The Regulation has implemented a number of time-sensitive changes to FOFA which will have effect from 1 July 2014 to 31 December 2015. These are interim changes which will be repealed (to the extent appropriate) once the Bill has been
implemented. The Regulation removes—
• the need for clients to renew their ongoing fee arrangement with their adviser every two years (also known as the ‘opt-in’ requirement)
• the requirement to provide an annual fee disclosure statement to clients in ongoing fee arrangements prior to 1 July 2013
• the ‘catch-all’ provision from the list of steps an advice provider may take to satisfy the best interests obligation, and facilitating scaled advice.
UPDATE ON STREAMLINING FOFA Following the Senate Economics Legislation Committee Report on the Corporations Amendment (Streamlining of Future of Financial Advice) Bill (Bill) the Minister for Finance, Mathias Cormann, announced the government would proceed with its proposed amendments to the future of financial advice (FOFA) regime. Many of these changes commenced on 1 July 2014 by way of the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Regulation). The changes to FOFA were intended to implement the government’s election commitment to reduce compliance costs imposed on the financial services industry.
On 15 July 2014 a Labour motion in the Senate to disallow the amendments was narrowly defeated by 34 votes to 31. The Regulation has introduced a number of changes to FOFA, including removing the ban on paying brokers ‘stamping fees’ which previously applied to listed property trusts. This is a significant victory for the property funds management industry as it allows property fund managers looking to list a property fund to use the stockbroking network to distribute their offering.
Partner Brendan Ivers and law graduate James Crinion explain the key aspects of the changes to FOFA.
Exemption for general advice
One of the most important (and controversial) changes implemented by the Regulation is an exemption from the ban on conflicted remuneration for general advice. There were strong objections to this amendment on the basis that it could potentially lead to commissions being reintroduced. The Committee’s report expressed particular reservations about this aspect of the Bill, and called for the government to redraft the provisions governing conflicted remuneration to ensure greater clarity.
The Regulation has implemented an exemption for general advice from conflicted remuneration but in a more restricted form than originally contained in the draft Bill. The Regulation provides that benefits relating to general advice are not conflicted, subject to certain conditions:
• The recipient of the benefit must be an employee or be in an in ‘employee-like’ relationship with the licensee, and must provide general advice under the name of the licensee, a trade mark of the licensee or a business name of the licensee.
• No commissions are permitted (which includes a recurring payment because the person has given the general advice, and a payment made solely because a financial product of a class in relation to which the general advice was given has been issued or sold to the client).
• During the 12 months immediately before the benefit was given, the recipient must not have given financial product advice to a retail client
other than— - general advice, or - personal advice in relation to basic banking products, general insurance products, and consumer credit insurance products.
• The financial product about which the general
advice is given must either be— - a product issued or sold by the licensee or a related body corporate of the licensee, or
- a product issued or sold by another entity under the name of the licensee, a trade mark of the licensee or a business name of the licensee.
Brendan Ivers
Partner Funds Management
James Crinion
Law Graduate Funds Management
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Changes to the ban on stamping fees for listed property trusts
Previously, the FOFA regime allowed stockbrokers to receive a brokerage fee (stamping fee) for distributing certain IPOs or rights issues for managed investment schemes that were listed or proposed to be listed. However, this exemption did not apply to traditional property funds that were listed or proposed to be listed. Consequently, a property fund manager seeking to list a property fund could not employ the usual stockbroking channels to distribute a proposed IPO or rights offer to retail investors.
These restrictions lead to property fund managers excluding retail investors from an offering or implementing complex and impractical ‘work arounds’ to the regime. This created an uneven playing field for property fund managers and distorted capital markets.
However, in return for Senate support for the Regulation, the government has committed to introduce additional consumer protection measures within 90 days. The following requirements must be explicitly listed in the Statement of Advice (SOA) signed off by the adviser and the client:
• The adviser is required to act in the best interests of their client and prioritise their client’s interests ahead of their own.
• Any fees must be disclosed and the adviser must provide a fee disclosure statement annually if the client enters into an ongoing fee arrangement after 1 July 2013.
• A client must have the right to return financial products under a 14 day cooling-off period.
• A client must have the right to change his or her instructions to their adviser (eg if they experience a change in their circumstances).
Custodial v managing trustee – who owes the duties?
Continued from page 7
The latest in the series of cases about the ongoing public battle between Opus Capital Limited (Opus) and the Public Trustee of Queensland features the Queensland Supreme Court grappling with the difference between a ‘custodial trustee’ and a ‘managing trustee’. Should the Public Trustee do everything Opus asks it too? Or does it have to independently exercise judgement as to what is in the best interests of the beneficiaries? Special counsel Brit Ibanez looks at the options.
In 2012, the court decided the Public Trustee had to comply with reasonable directions given to it by Opus to transfer the property it held as custodian for 11 managed investment schemes (Funds) to The Trust Company as the new custodial trustee. However, the Public Trustee was also entitled to retain money from the Funds while its dispute with Opus over legal fees it had incurred as the custodian was resolved.
On 30 September 2013, the Supreme Court decided that most of the legal fees had to be paid by Opus. However, it also decided that when the Public Trustee assumed legal title of the property of the Funds, it absolutely held that property on trust for the members of the Funds with all the associated obligations and duties. Even though Opus was also a trustee for the same beneficiaries and notwithstanding the contractual relationship between the Public Trustee and Opus, the Public Trustee did owe direct duties to the beneficiaries of the Funds.
Recently, the Queensland Court of Appeal delivered its judgement in Kern Consulting Group v Opus Capital deciding that Opus did not have standing to sue for unpaid rent because the Public Trustee was the legal owner of the property and the named lessor on the lease.
Opus tried to argue that, contrary to the Supreme Court’s 2013 judgment, the Public Trustee does not hold trust property on trust for members of the Funds. It argued that Opus holds scheme property on trust for the members and that the Public Trustee holds the land on trust for Opus. The court, unfortunately, did not directly deal with this proposition and instead resolved the matter by looking at the lease and the title of the land.
There are unresolved issues around the particular duties owing by a custodial trustee as opposed to a managing trustee. We provide advice regularly to trustees in many different capacities and can provide strategic advice to help navigate these issues.
Brit Ibanez
Special Counsel Corporate Advisory and Litigation
The ultimate fate and operation of the FOFA amendments is far from clear, and future developments need to be monitored closely.
The new Regulation simplifies this by extending the exemption on stamping fees to all listed managed investment schemes, including listed property trusts. This means stamping fees can now be paid to brokers as part of the distribution of a property fund that is proposed to be listed.
What will happen next?
It is important to be aware of the changes implemented from 1 July 2014. Of particular importance is the removal of the ban on conflicted remuneration for general advice, as well as the amendment removing the “catch-all” provision from the list of steps an advice provider may take to satisfy the best interests obligation and allowing for the provision of scaled advice to clients.
The extension of the exemption for stamping fees is welcomed and should have a positive effect upon capital markets.
• An enhanced public register of financial advisers must be established and include details of the adviser’s credentials and status within the industry.
• Any requests to alter or review instructions must be in writing, signed by the client and acknowledged by the adviser.
The financial adviser must also provide an explicit statement in the SOA confirming he or she genuinely believes the advice provided is in the client’s best interests given the client’s relevant circumstances. In addition, an enhanced public register of financial advisers must be established, to include details of the adviser’s credentials and status within the industry.
The ultimate fate and operation of the FOFA amendments is far from clear, and future developments need to be monitored closely. Our Funds Management team members can provide guidance on the latest developments and will keep you up-to-date with the FOFA reforms.
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New mFund settlement serviceThe Australian Securities Exchange has launched its highly anticipated mFund settlement service which has received widespread support. The service utilises the Clearing House Electronic Sub-register System (CHESS), the existing clearance system for shares traded on the ASX and, provided certain conditions are met, allows fund managers to accept electronic applications. Senior associate Emma Stapleton outlines the benefits for fund managers of this latest initiative.
WHAT IS MFUND?mFund is a central portal through which investors can acquire interests in a managed investment scheme at a unit price set by the responsible entity. Through mFund investors can access—
• a fund’s current product disclosure statement (PDS)
• performance data, and• other information about the fund.
Currently, only simple funds (that are required to prepare a short form PDS) can be listed on mFund. However, it is hoped the service will be expanded to include more complex products such as property funds.
WHY SHOULD FUND MANAGERS USE MFUND?The mFund service is designed to simplify the process for investing in unlisted managed investment schemes. It can also be used to assist in the distribution of funds. A major advantage for investors (and therefore for fund managers) is that investors can use the same Holder Identification Number (HIN) as they do for shares and exchange traded funds, which will consolidate reporting across these asset classes.
However, fund managers should keep in mind that mFund does not provide a platform upon which interests in funds can be traded and, therefore, will not provide liquidity for an illiquid fund.
HOW CAN FUND MANAGERS USE MFUND?As mFund involves electronic applications and not application forms that were included in or accompanied a PDS, fund managers need to rely on class order relief issued by ASIC to use mFund. There are several conditions which must be met before a fund manager can rely on the relief, including the following:
• The fund manager must only accept electronic applications that come through a licensed broker or financial adviser.
• The fund manager must reasonably believe that the investor has received a copy of the most recent PDS for the fund before submitting an application. If not, the fund manager must provide the investor with a PDS within five business days after issuing the interests to the investor.
It has yet to be seen whether there will be any real benefits to fund managers having their funds on mFund. However, it seems that the industry has been quick to embrace it with over 45 funds already available.
Emma Stapleton
Senior Associate Funds Management
Elliott Stumm
Lawyer Funds Management
The RE argued it was empowered by the constitution to suspend withdrawals and the legislative procedure for making and accepting withdrawal offers had not been followed.
WHAT DID THE HIGH COURT DECIDE?The High Court said withdrawal from a registered scheme requires some act of volition on the part of the unitholder; specifically, a unitholder withdraws from a scheme if the unitholder acts so as to result in the RE returning the whole or some part of the unitholder’s contribution. That does not occur if the RE exercises a compulsory power to redeem the units of a unitholder. Because the
Scheme withdrawal symptomsWhen can a member of a managed investment scheme withdraw from that scheme?
In this article lawyer Elliott Stumm explains the impact of a recent High Court decision where a responsible entity (RE) which carried out an obligation imposed on it by the units’ terms of issue did not constitute a withdrawal.
BACKGROUNDIf a scheme is not liquid then the RE can’t allow a member to withdraw except in accordance with the scheme’s constitution and the Corporations Act (Act) (which contains a detailed and prescriptive framework for withdrawals from a scheme).
MacarthurCook Fund Management Limited held 15 million subscription units in an unlisted registered managed investment scheme (Trust). The subscription units’ terms of issue required the RE to redeem the units for their issue price using funds received by the Trust as a result of a public offer between six months and one year from when the units were issued. However, this was subject to compliance with any requirements under the Corporations Act and the constitution.
The Trust’s constitution provided a unitholder had no right to withdraw when the Trust was not liquid unless there was a withdrawal offer currently open for acceptance by unitholders. Also, the RE had the power to suspend withdrawals if it was not in the best interests of unitholders.
Although the Trust had received funds totalling $12,347,079 from the public offer, the RE had not redeemed any of the subscription units. This was all occurring in the midst of the global financial crisis and so the RE suspended all withdrawals from the Trust until further notice. At the time of suspension, the Trust was not liquid.
RE’s obligation to redeem the subscription units arose from the terms of issue, and was to be exercised independent of any act on the part of MacarthurCook, the redemption did not constitute a withdrawal. The RE was therefore in breach of the terms of issue of the subscription units and liable to pay damages
WHAT DOES THE DECISION MEAN?The High Court has made it clear the withdrawal provisions in the Corporations Act only apply to voluntary conduct by scheme investors in response to a withdrawal offer. They do not regulate compulsory redemptions nor, it appears, contractual arrangements which set the investment period and have the same effect of enforced redemption at the end of that term.
...the withdrawal provisions in the Corporations Act only apply to voluntary conduct by scheme investors in response to a withdrawal offer.
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1262 Charlotte St Brisbane Q 4000 GPO Box 1279 Brisbane Q 4001 T 07 3831 8999 F 07 3831 1121 www.mcmahonclarke.com
Save the date - McMahon Clarke presents chief economist Clifford Bennett Internationally recognised chief economist Clifford Bennett is the keynote speaker for the McMahon Clarke annual Forum later this year. Clifford has been rated as the world’s most accurate currency forecaster by Bloomberg News NY, and will provide an over the horizon view of Australian economic and property sector developments and also join the discussion panel.
Please save the date:
• Brisbane - 17 September 2014 7.30am – 9.00am, The Hilton Hotel (190 Elizabeth Street, Brisbane)
• Sydney - 18 September 2014 8.00am – 9.30am, Sofitel Sydney Wentworth (61 – 101 Phillip Street, Sydney)
• Melbourne - 19 September 2014 8.00am – 9.30am, Hotel Grand Chancellor (131 Lonsdale Street, Melbourne)
To register your interest please contact Avril Clayton on 07 3239 2957 or [email protected].
The next step for the Asia Region Funds PassportA consultation paper proposing how the much anticipated Asia Region Funds Passport will be implemented amongst the participating countries was released on 16 April 2014. The Passport is an Asia-Pacific Economic Cooperation (APEC) initiative aimed at creating a framework to facilitate the offer of managed funds established in Passport member economies to investors in other participating economies.
Public consultation on the proposed Passport rules was invited and submissions closed on 11 July 2014. APEC proposes to release updated Passport rules in late 2014.
Please click here for an outline by lawyer Kristy McCluskey of the opportunities and challenges presented by the proposal where she encourages fund managers to gain an understanding of the consequences for their business.
McMahon Clarke welcomes new team memberMcMahon Clarke welcomes law graduate James Crinion to our funds management team. James has worked in complex financial services structuring and litigation in Ireland where he acted for major banks dealing with post GFC debt issues.
Snapshot
James Crinion
Seminar: IPD market results updateMcMahon Clarke invites you to join us for the IPD market results update – Reviewing the value proposition for green buildings and the role of the ESG.
McMahon Clarke funds management partner Brendan Ivers will moderate a panel discussion, and our speakers include:
• Anthony De Francesco, Executive Director and Head of Australia & NZ, IPD
• Matt Allen, Partner, Real Estate, McMahon Clarke
• Peter Gill, Director, Urbis• Dominic Ambriano, National
Sustainability Manager – Property, AMP Capital
• Amanda Steele, Head of Sustainability, CBRE.
McMahon Clarke is proud to host this complimentary event.
Friday 29 August 2014
7.45am for 8.00am – 9.30am
The Hilton Hotel, 190 Elizabeth St, Brisbane
Please click here to view the invitation.
To register: Please contact Avril Clayton ([email protected] or 07 3239 2957)
