Whether you are starting or joining one, it is important to understand how managed investment schemes operate and the strict obligations they are subject to.
1. What is a Managed Investment Scheme?
A managed investment scheme involves a group of people pooling money for the purpose of financial gain. The scheme is managed by a ‘responsible entity’ and can cover a wide range of investments such as property, share and mortgage schemes. The Corporations Act 2001 (Cth) regulates the managed investment schemes which must satisfy the following requirements:
- Members make contributions in return for an interest in the benefits the scheme produces;
- Contributions are pooled to produce the benefits; and
- Members do not have day to day control over how the scheme operates.
If a member does not participate in all decision making it is likely that they will not be considered to have day to day control.
Commonly a scheme will be run through a unit trust. An investor will hold a number of units in the trust and will be entitled to the profits and losses of the scheme on a pro rata basis.
2. Does the Scheme Need to be Registered?
A managed investment scheme must be registered when:
- It has more than 20 members;
- It was promoted by a person (or an association of a person) who is in the business of promoting managed investment schemes; or
- ASIC has made a determination that it must be registered.
If an investor’s own trust is holding units in the managed investment scheme, all beneficiaries under the trust will count in calculating the number of members in the scheme (rather than the trustee). If there are a number of separate but related schemes, and they have over 20 members in total, ASIC may require that they are registered.
However, a managed investment scheme will not need to be registered if the interests that members are entitled to do not require a product disclosure statement. A product disclosure statement gives information about the benefits, risk and cost of a financial product. An interest will not need a product disclosure statement if it is a small offer exemption, meaning there are less than 20 members, under $2 million per year, or if it is for non-retail clients. A member is not a retail client if they invest more than $500,000, they are a large business, or they are a sophisticated investor by definition.
3. What are the Obligations on the Responsible Entity?
The obligations on a responsible entity differ depending on whether the scheme meets the registration requirements or not. The responsible entity for a registered scheme must be a public company (a corporate trustee of the unit trust). From this structure stems obligations on the responsible entity under the Corporations Act (as a public company and managed investment scheme) and obligations as trustee (fiduciary duties). These obligations include:
- Acting in the best interest of members;
- Avoiding conflicts of interests and/or giving priority to member interests;
- Acting honestly;
- Exercising a reasonable degree of care and diligence; and
- Not using its position to gain an unfair advantage for itself.
Also, the responsible entity must ensure that the scheme has the following:
- A compliant constitution; and
- Compliance plan; and
- Clearly identifies scheme property which is regularly valued and appropriately distributed.
The responsible entity will also be subject to disclosure requirements which will likely involve a financial services guide, a statement of advice and a product disclosure statement.
Importantly, a responsible entity of a registered scheme must hold an Australian Financial Services Licence authorising it to operate the managed investment scheme and any other additional financial services it offers.
An operator of an unregistered scheme is not subject to the same licensing and disclosure obligations. However if they are providing other financial services, or carrying on a financial services business, they may need to hold a licence regardless. The responsible entity of an unregistered scheme does not have to be a public company, but by holding scheme property on trust, they will have the same fiduciary obligations as a registered scheme.
If you are looking to start a managed investment scheme, it is important that you receive specialist legal advice. Similarly, if you are a part of a scheme and want to inform yourself of your rights, a specialist lawyer in this area will be able to assist you. If you have any questions, get in touch with our startup lawyers on 1300 544 755.