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Australia – Admission Of Funds To The ASX mFund Settlement Service.

25 March, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Capital Markets

 

Requirements for responsible entities of participating funds


What You Need To Know

 

  • ASX has developed a new service, called “mFund”, which enables investors to buy (ie apply for) or sell (ie redeem) units in unlisted managed funds through ASX participants. Application forms will be completed electronically through CHESS, which automatically transmits the information to the responsible entity of the relevant fund.
  • Investors’ holdings in these funds will be held electronically and linked to the same HIN used to hold other investments transacted through ASX (eg shares), which should result in portfolio and administrative efficiencies for investors and their brokers, and access to a wider range of investors for fund issuers.
  • To facilitate the introduction of the mFund Settlement Service, ASIC has issued class order relief to permit the use of electronic application forms and electronic confirmations that a PDS has been given. Other amendments to the ASX Operating Rules and the ASX Settlement Operating Rules will become effective on 21 March 2014. However, the actual launch date of mFund has not been announced.


What You Need To Do

 

  • Fund issuers who wish to enable investors to invest in their fund, using the mFund Settlement Service to settle the fund’s transactions, must:
    • become approved as an “AQUA Product Issuer” and have the relevant fund approved as an “AQUA Product” for settlement through the mFund Settlement Service under the ASX Operating Rules;
    • comply with the requirements for AQUA Product Issuers under the ASX Operating Rules and the ASX Settlement Operating Rules; and
    • comply with the requirements of ASIC Class Order [CO 13/1621] in relation to the issuing and redeeming of interests in the fund.


mFund Settlement Service


After detailed consultation over the past two years, ASX recently announced its new mFund Settlement Service (mFund), which enables investors to buy (ie apply for) or sell (ie redeem) units in unlisted registered managed investment schemes (funds) through ASX participants.


Paper-based application forms are not required to effect settlement of transactions through mFund. Instead, application forms will be completed electronically through the Clearing House Electronic Sub-register System (CHESS), which automatically transmits the information to the responsible entity of the relevant fund (fund issuer).


Benefits Of mFund


By participating in the mFund Settlement Service, fund
issuers can:

 

  • access a wider range of investors who may not have otherwise been aware of, or considered investing in their funds;
  • expand their distribution network to include ASX participants that the fund issuer may not otherwise have a relationship with; and
  • achieve operational efficiencies and reduce administrative costs by streamlining their processes and minimising the need to use paper-based application forms for applications and redemptions.


The mFund Settlement Service is ideally suited for retail investors who invest in managed investment schemes and want the benefits of electronic settlement and consolidated reporting. ASX expects that the first adopters will be investors who already have a stockbroking relationship in place to access ASX investment products such as shares. This group mainly comprises self-directed investors, SMSF trustees and financial advisers to these groups.


Products Not Able To Be “Traded”


The mFund Settlement Service does not facilitate the purchase and sale of units in participating funds between investors in the way that ASX quoted financial products can be traded. Rather, mFund uses CHESS to automate and track the process of applying for and redeeming units in unlisted funds. Funds are “admitted to participate” in mFund by ASX.


Once a Fund has been admitted to participate in mFund, the fund issuer is not obliged to accept any particular application made through the mFund Settlement Service, but may accept or reject applications for an issue of units in the usual way. Similarly, applications to redeem units submitted through mFund may be accepted, rejected or deferred by the fund issuer.


Unit Pricing And Announcements


The current price of a participating fund’s units will be available at “www.mfund.com.au“. ASX also expects stockbrokers to make pricing information available through their own portfolio management systems.


Announcements relating to mFund products will be released through ASX’s regular market announcements service. Investors will also receive communications directly from participating fund issuers regarding information such as details of distributions.


Whenever there is a change in the number of units an investor holds in a participating fund, ASX Settlement will issue a CHESS statement confirming the changed unit holding balance. These statements are issued at the end of each month. This is similar to the process of issuing statements in regard to CHESS holdings of ASX quoted financial products.


Approval As An “AQUA Product Issuer”


Fund issuers must be approved as an “AQUA Product Issuer” by ASX to use the mFund Settlement Service. Under new Schedule 10A.2 to the ASX Operating Rules, to be approved as an AQUA Product Issuer, generally, an applicant must:

 

  • be a responsible entity of a managed investment scheme registered under the Corporations Act 2001 (Cth) (Corporations Act);
  • hold all relevant licence authorisations under Chapter 7 of the Corporations Act;
  • confirm to ASX that it has facilities, expertise, procedures, personnel and financial resources that are adequate for the performance of its obligations as an AQUA Product Issuer; and
  • agree in writing to be bound by the ASX Operating Rules, and conditions imposed under them.
 

Admission As An “AQUA Product” For Settlement Through mFund


A fund must be admitted as an “AQUA Product” by ASX before transactions may be settled through the mFund Settlement Service in relation to that fund. To be admitted as an AQUA Product for settlement through mFund, new Schedule 10A.3 to the ASX Operating Rules generally requires:

 

  • the fund to be a “simple managed investment scheme”1 (as defined in the Corporations Regulations 2001 (Cth) (Corporations Regulations)) in relation to which the fund issuer provides disclosure in the form of a shorter Product Disclosure Statement (PDS) in accordance with Part 7.9 Division 4, Subdivision 4.2C of the Corporations Regulations;
  • the fund issuer to be approved by ASX as an AQUA Product Issuer;
  • the fund issuer to apply to ASX using the prescribed form – ASX may admit AQUA Products for settlement through mFund on any conditions it considers appropriate, or grant or refuse admission without giving any reasons for its decision;
  • the fund issuer to prepare and provide ASX with a disclosure document that complies with the Corporations Act, or evidence of an exemption from the disclosure requirements under the Corporations Act;
  • ASX to have no objection to the fund including the investment mandate or other constituent documents of the fund; and
  • the fund issuer to satisfy any other conditions that ASX may impose in relation to disclosure (discussed below).


Disclosure And Additional Requirements


Disclosure


Under Schedule 10A.4.2 to the ASX Operating Rules (and the corresponding requirements under the ASX
Operating Rules Procedures) a fund issuer must disclose the following in relation to funds to be settled through mFund:

 

  • information about the net asset value of the units in the fund at least quarterly – this information must be disclosed on the fund issuer’s website;
  • information about redemptions from the fund – the amount and value of units redeemed for each fund must be reported to ASX and on the fund issuer’s website on a monthly basis (the week after the end of each month);
  • continuous disclosure notices lodged by the fund under section 675 of the Corporations Act as a disclosing entity – this information must be given to ASX at the same time as it is given to ASIC;
  • information about dividends or distributions paid in relation to the fund – these should be disclosed to ASX as soon as possible after they are declared or paid (whichever is earlier); and
  • any other information that the fund issuer is required to disclose or make available to investors generally, or prospective investors, in the fund under the Corporations Act or otherwise (such as a PDS or Supplementary PDS) – and disclosed to ASX at the same time as it is sent or made available to investors or prospective investors.


Additional Requirements


Under Schedule 10A.4.5 to the ASX Operating Rules (and the corresponding requirements under the ASX Operating Rules Procedures) fund issuers must:

 

  • not issue interests in a fund to an investor, in response to an mFund request, without electronic confirmation (given through mFund) that the current version of the relevant disclosure documents (identified by date) have been given to the client (but this does not apply if the fund issuer is not otherwise required to comply with s1016A of the Corporations Act in relation to the issue);
  • within 5 business days of issuing interests in a fund to an investor, confirm the issue in writing and inform the investor that:
    • they should have received the current version of the relevant disclosure documents (and specify the date of those documents); and
    • if they have not, they should contact the fund issuer to obtain a copy of the disclosure documents free of charge;
  • notify ASX within 10 business days of all situations where an investor has indicated that a current version of all disclosure documents required to be given to a person as a retail client under the Corporations Act were not given to the investor. The notice to ASX should identify the trading participant that processed the relevant application; and
  • retain for 7 years:
    • records to demonstrate that it has complied with the obligation to inform clients of specified matters;
    • an electronic copy of all applications it receives through the mFund Settlement Service; and
    • any request for a disclosure document received from a client.


ASX will notify ASIC where the number of instances in which a particular trading participant has failed to give investors the current PDS exceed certain thresholds to be determined by ASX.


Class Order Relief To Permit Electronic Application Forms And Disclosure


The Australian Securities and Investments Commission (ASIC) has made Class Order [CO 13/1621] to permit the use of electronic application forms and electronic confirmations that a PDS has been given in connection with the mFund Settlement Service.


Under the Class Order, a fund issuer can issue an interest in a fund to an investor in response to an application submitted electronically on behalf of the investor through the mFund Settlement Service, and may rely on an electronic confirmation accompanying the application that the investor was given a PDS before the application was made.


The Class Order relief only applies where:

 

  • the application made through mFund is accompanied by an electronic confirmation stating that a PDS with a specified date has been given to the investor;
  • the PDS referred to in the confirmation has been prepared by the fund issuer, and was not defective at the time the application was made;
  • the fund issuer has no reason to believe that the requirements of the ASX Operating Rules and the ASX Settlement Operating Rules were not satisfied in relation to the application;
  • the fund issuer reasonably believes that the PDS referred to in the confirmation was available free of charge on the ASX website at the time the application was made; and
  • the operation of mFund is authorised by an Australian market licence, or mFund is the subject of an exemption under s791C of the Corporations Act (which is currently the case).


The Class Order stipulates several further conditions that must be satisfied for fund issuers to rely on the exemption, however these generally mirror the additional requirements under Schedule 10A.4.5 to the ASX Operating Rules (discussed above).


Other Matters Relating To The mFund Settlement Service


The mFund Settlement Service is not a licensed market. The participating funds will not be listed on ASX, and interests in the funds will not be quoted or admitted to quotation, or be able to be traded on mFund or ASX. Instead, funds will be “admitted to participate” in mFund by ASX.


Accordingly, participating funds are not subject to the ASX Listing Rules. The disclosure of information by the funds is regulated by the Corporations Act and not the continuous and periodic disclosure rules in the ASX Listing Rules.


ASX operates a compensation fund called the National Guarantee Fund. This fund covers investors in certain cases of broker misconduct, where the investor bought shares and some other investment products on ASX. As with other investments not traded on ASX, the National Guarantee Fund does not cover investments in mFund products.


Division 4 of Part 7.11 of the Corporations Act contains a number of statutory warranties which operate to provide protections in relation to transfers of financial products on a stock exchange. These statutory warranties do not apply to transactions effected through the mFund Settlement Service.


New Requirements For ASX Market And Settlement Participants


See our Update in relation to the new requirements for ASX market participants and ASX settlement participants to use the mFund Settlement Service.

 

End Notes

 

1 simple managed investment scheme means a registered managed investment scheme which is or was offered because it meets one of the following requirements:
(a) the scheme invests at least 80% of its assets in money in an account with a bank on the basis that the money is available for withdrawal:
(i) immediately during the bank’s normal business hours; or
(ii) at the end of a fixed-term period that does not exceed 3 months;
(b) the scheme invests at least 80% of its assets in money on deposit with a bank on the basis that the money is available for withdrawal:
(i) immediately during the bank’s normal business hours; or
(ii) at the end of a fixed-term period that does not exceed 3 months;
(c) the scheme invests at least 80% of its assets under 1 or more arrangements by which the responsible entity of the scheme can reasonably expect to realise the investment, at the market value of the assets, within 10 days.

 

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For further information, please contact:

 

Don Maloney, Partner, Ashurst
don.maloney@ashurst.com


Con Tzerefos, Partner, Ashurst
con.tzerefos@ashurst.com


Lisa Simmons, Partner, Ashurst
lisa.simmons@ashurst.com


Michael Ryland, Partner, Ashurst
michael.ryland@ashurst.com

 

Sarah Galloway, Ashurst
sarah.galloway@ashurst.com


Vince Battaglia, Ashurst
vince.battaglia@ashurst.com

 

Matt Vitale, Ashurst
matt.vitale@ashurst.com

 

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