Legal framework & regulation of managed accounts Rainmaker - - PowerPoint PPT Presentation

ME_91300231_1

Legal framework & regulation of managed accounts – Rainmaker managed accounts conference 4 May 2011

Stephen Etkind Partner Richard Batten Partner Minter Ellison Lawyers

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Part A

• Structure of managed accounts
• Fiduciary duty
• Income tax update

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Part B

• Volume­based rebates
• Approved product lists
• Short­form PDS
• Retail/wholesale distinction
• Other changes

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Managed investment schemes

• Specific structures include:
• Unit Trust
• IDPS
• IDPS­like
• MDA
• SMA/IMA

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Investor­directed portfolio services

• IDPSs involve a menu of investment options
• Typically marketed as master funds and

wrap accounts

• Client makes all the investment decisions

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Investor­directed portfolio services

• Class Order relief available from:
• Requirements of Chapter 5C
• Fundraising provisions in Chapter 6D
• Product disclosure provisions in Part 7.9

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Investor­directed portfolio services­like schemes

• IDPS­like schemes are IDPSs that are

structured and registered like managed investment schemes

• Class Order (02/296) relief available from:
• Aspects of requirements of Chapter 5C
• Fundraising provisions in Chapter 6D
• Aspects of product disclosure provisions in

Part 7.9

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Managed discretionary accounts

• MDAs are arrangements that involve
• perators managing a portfolio of assets for

a retail client on an individual basis

• MDA operators have the discretion to make

investments without referring to the client for each transaction

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Managed discretionary accounts (cont’d)

• Client’s assets are managed as a discrete

portfolio belonging to that client

• No pooling of clients’ portfolios
• ASIC Class Order 04/194 and RG179
• ASIC takes the approach that MDAs (and

SMAs) are likely managed investment schemes and MDA operators are regulated by ASIC as providers of financial services

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Managed discretionary accounts (cont’d)

• Class Order relief (CO04/194) available

from:

• Requirements of Chapter 5C
• Fundraising provisions in Chapter 6D
• Product disclosure provisions in Part 7.9

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Managed discretionary accounts (cont’d)

• ASIC focus on 2011 on MDAs (see media

release MR11­44):

• Use of high­risk strategies such as gearing and

product suitability

• Proper MDA file management and programme

review

• Clients receiving adequate disclosure and

general compliance

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Separately managed accounts

• Core to the concept of an SMA is that

individual securities are picked for the investor’s portfolio based on model portfolios

• Investment decisions are made by the

investment manager and executed on behalf

• f all investors by the managed account
• perator
• Typically SMAs have tended to be more

suited to retail clients because it is portfolio model driven

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Separately managed accounts (cont’d)

• However recent global trend in SMA growth

for more sophisticated/wholesale clients (see separate slides). Depending on the structure, SMAs may fall within ASIC’s definition of an MDA

• Typically SMAs are structured either as a

registered MIS or as an IDPS­like scheme

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ASIC MDA Policy, SMA/IMA and Pooled Investment Structures

• [See 2010 presentation for more detail

regarding legal structures and regulation of MDAs, SMAs, IMAs, IDPS, IDPS­like etc]

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Ripoll Inquiry recommendations

• Statutory fiduciary duty for financial advisers

(in progress)

• Industry to cease payments for product

manufacturers to planners (FOFA reforms)

• Financial advice tax deductible (not on

government agenda – confirmed by Minister Shorten at FPA luncheon, April 2011)

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How will a statutory fiduciary duty work?

• General fiduciary law (see UK 1996 case of

Bristol) requires:

• The fiduciary to place clients’ interests ahead
• f own – must not place himself/herself in

position where duty and interest conflict

• Founded on an obligation of loyalty and good

faith

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How will a statutory fiduciary duty work? (cont’d)

• That any benefit to the fiduciary is disclosed

(based on principle that he/she cannot profit from their position of trust – most common fiduciary is a trustee)

• The greater the degree of trust placed in the

fiduciary, the more onerous the level of duty imposed

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How will a statutory fiduciary duty work? (cont’d)

• Treasury 2010 discussion paper suggested

changes will impose a statutory fiduciary duty

• n licensees and representatives to act in the

best interest of their clients, subject to a ‘reasonable steps’ qualification, including placing the best interests of their clients ahead of their own when providing person advice to clients

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How will a statutory fiduciary duty work? (cont’d)

• The proposed reasonable steps qualification

will not require advisers to make an assessment of every single product available in the market if for example the approved product list has a sufficiently wide and suitable list of products available for recommendation

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How will a statutory fiduciary duty work? (cont’d)

• Exact details of the ‘best interests’, and in

particular, the reasonable steps that must be undertaken, will be developed in consultation with industry and there The Treasury anticipates that there will be a public exposure of draft legislation some time in mid­2011

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Practical effect of reforms

• Reasonable basis for advice:

Corporations Act s945A

• Advice must be appropriate to the client

having regard to the relevant personal circumstances of the client

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Practical effect of reforms (cont’d)

• MDAs – Class Order 04/194:

The MDA operator must ensure that each MDA contract obliges the MDA operator to act in the best interests of the client in providing the MDA services to the client and, if there is a conflict between the interests of the client and its own interests in providing the MDA services to the client, give priority to the client’s interests

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Does a general law fiduciary relationship already exist?

• Daly v Sydney Stock Exchange (1986)

160 CLR 371:

The duty of an investment adviser who is approached by a client for advice and undertakes to give it, and who proposes to

• ffer the client an investment in which the

adviser has a financial interest, is a heavy one … including to give the best advice to the client, to reveal fully the adviser’s interest and to obtain the best terms which the client would

• btain …

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Does a general law fiduciary relationship already exist? (cont’d)

Whenever a stockbroker or other person …

• Financial Ombudsman Service

(Determination 18959):

The legal nature of the adviser­investor relationship, as in financial planning, is fiduciary …

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US position

• Recent study on investment advisers and

broker­dealers by the SEC in January 2011 is to the following effect:

• The Supreme Court has construed

sections 206(1) and (2) of the Advisers Act as establishing a Federal fiduciary standard governing the conduct of advisers.

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US position (cont’d)

• This means according to the SEC report that

the standards of duties are loyalty and care, to serve the best interests of the clients, not to subordinate the client’s interests to their own and to disclose conflicts of interest

• These duties are already incorporated by

statute in Chapter 7 of the Corporations Act and accordingly if these are the features of a fiduciary relationship, then they are already enshrined in Australian law!?

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Tax developments for managed investment schemes in 2011

• Treasury rewrite of Division 6:
• Align the key concept of ‘income of the trust

estate’ with the tax law concept of ‘net income

• f the trust estate’
• Ensure that capital gains and franked

distributions can be streamed to particular beneficiaries

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Tax developments for managed investment schemes in 2011 (cont’d)

• Fixed trusts:
• Industry relies upon the ATO to exercise

discretion to regard the trust as fixed (eg, variable fees mean it may not be fixed)

• Colonial First State Investments v

Commissioner of Taxation – recent division and ATO view that capital gains are not income and you cannot stream capital gains

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Tax developments for managed investment schemes in 2011 (cont’d)

• MIT capital account election:
• Already in place for 2009/10
• Must elect and only eligible MITs can elect

deemed capital treatment

• For new schemes do it in first tax return:
• Must not be a trading trust and must be widely

held

• To receive reduced withholding tax rates of

7.5%, investment activity for Australian assets must be carried out in Australia

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Tax developments for managed investment schemes in 2011 (cont’d)

• Simplification:
• Minister Shorten announced in early April 2011

at an ICA meeting that the proposed rewrite and amendments are unlikely to be done by 30 June 2011 and the broader tax review or Division 6 rewrite for trusts, including MITs, property funds, equity funds, etc will be included as part of the longer­term review

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Adviser remuneration

Permitted Eg hourly rate, flat fee, retainer, performance fee paid up front, deducted from investment or payment plan Other types of advice fees Banned Asset based fee for service based on geared products

• r investment amounts

Permitted Agreed between client & adviser – may be deducted from investment Asset based fee for service Banned Paid by issuer to licensee or adviser & built into retail product Commission ­ initial ­ trailing

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• Agree fees directly with client
• Disclose charging structure

clearly in $ terms

• Annual renewal notice
• Ongoing fees if payment plan agreed or
• ngoing service
• Opt in or opt out after 1,2 or 3 years?
• Soft dollar: ethical standards review
• Insurance?

Client agreement and disclosure

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Volume­based payments

Image from lawsofrule.net under Creative Commons terms

Permitted Including product access fee Shelf space fees ­ not volume based Banned Paid by issuer to platform and then to licensee Shelf space fees ­ based on volume Banned Paid by licensee to advisers based on sales targets / volume based Volume based payments / sales incentives Banned Paid by issuer to licensee or adviser based on fum in product Volume bonus / fee rebate

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Implications for advisers and licensees

• Loss of scale benefits for licensees and clients
• Incentive to establish own funds/platforms
• Ban not said to apply to payments between

funds or mandate fee arrangements

• Restructuring fee arrangements to avoid

volume remuneration ban?

• Distinguishing between banned and permitted

payments

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Approved product lists

• Does the duty apply to construction of APLs?
• Will advisers need to consider non­APL

products?

• What will an adviser need to do if a suitable

product is not on the APL?

• Will they need to recommend a non­APL

product or decline to advise?

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• New PDS regime from

22/6/2011 for new products:

• Accumulation super: 8 pages (not pensions/DB)
• Simple managed investment schemes: 8 pages
• Margin loans: 6 pages
• 1 year transition period to 22/6/2012
• Incorporation by reference of certain

information

• Other information referenced

Shorter simpler PDSs

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Retail/wholesale distinction

• Update product threshold

to $1m?

• Index wealth and product

value thresholds?

• Exclude home/super from

wealth test?

• Require client agreement

where treated wholesale?

• 2 of 3 of product, income

& wealth tests?

• Higher thresholds for

complex products?

• Repeal experienced

investor test or make it

• nly test?
• Remove wholesale/retail

distinction?

• Review professional

investor test?

• Review application to

super trustees?

• Do nothing?

Images from www.simpsoncrazy.com

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Other changes

• Accountants licence to

advise on SMSF

• Improve FSG disclosure
• Facilitate access to

simple / limited advice

• Enhanced ASIC powers
• Tax adviser regime
• Proposed training and

assessment framework

• Compensation review
• ASIC focus for 2011:
• aggregator licensees
• quality of advice
• advice on complex

products

• MDAs

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