Legal framework & regulation of managed accounts – Rainmaker managed accounts conference 4 May 2011 Stephen Etkind Partner Richard Batten Partner Minter Ellison Lawyers ME_91300231_1
Part A • Structure of managed accounts • Fiduciary duty • Income tax update 2
Part B • Volumebased rebates • Approved product lists • Shortform PDS • Retail/wholesale distinction • Other changes 3
Managed investment schemes • Specific structures include: • Unit Trust • IDPS • IDPSlike • MDA • SMA/IMA 4
Investordirected portfolio services • IDPSs involve a menu of investment options • Typically marketed as master funds and wrap accounts • Client makes all the investment decisions 5
Investordirected portfolio services • Class Order relief available from: • Requirements of Chapter 5C • Fundraising provisions in Chapter 6D • Product disclosure provisions in Part 7.9 6
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 7
Managed discretionary accounts • MDAs are arrangements that involve operators 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 8
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 9
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 10
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 11
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 of all investors by the managed account operator • Typically SMAs have tended to be more suited to retail clients because it is portfolio model driven 12
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 13
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] 14
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 ) 15
How will a statutory fiduciary duty work? • General fiduciary law (see UK 1996 case of Bristol ) requires: • The fiduciary to place clients’ interests ahead of own – must not place himself/herself in position where duty and interest conflict • Founded on an obligation of loyalty and good faith 16
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 17
How will a statutory fiduciary duty work? (cont’d) • Treasury 2010 discussion paper suggested changes will impose a statutory fiduciary duty on 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 18
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 19
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 20
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 21
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 22
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 offer 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 obtain … 23
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 … 24
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. 25
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!? 26
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 of the trust estate’ • Ensure that capital gains and franked distributions can be streamed to particular beneficiaries 27
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 28
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 29
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 30
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