A Guide to the Law of Securitisation in Australia - Clayton Utz

An interest in a managed investment scheme clearly is definedvery widely. If there were no limitations on the concept, it wouldembrace any type of investment contemplated in the businesscommunity. Therefore, in order to make the definition, and theassociated regulatory scheme, workable, the Corporations Acthas had to specify a number of exclusions. These include theissue of debentures by a body corporate.The purpose of excluding debentures is to ensure that they areregulated only by Chapter 2L of the Corporations Act (see above)and not also by the managed investment scheme sections.There is a real prospect that a structured instrument that is not adebenture will qualify as an interest in a managed investmentscheme. This follows from two factors: first, from the width ofthe definition itself; secondly, the body of case law confirmingthat a debt security issued to investors in circumstances wherethe money is then reinvested and investors are promised acertain rate of interest, and repayment of principal, satisfies thedefinition of a managed investment scheme.Interestingly, bills of exchange and promissory notes are nolonger specifically excluded from the definition of managedinvestment scheme, as was the case in respect of the definitionof participation interest under the former regime. For some of theimplications of this, see section 2.2.5.The statutory requirements for interests in a managed investmentschemeChapter 5C of the Corporations Act regulates the issue ofinterests in managed investment schemes. Every registeredmanaged investment scheme must have a responsible entity,being the person who operates the scheme and performs thefunctions which are conferred upon it by the scheme’sconstitution and the Corporations Act. The Chapter sets out thestatutory responsibilities of a responsible entity and its officersto the members of the scheme. It also provides for theregistration with the Australian Securities and InvestmentsCommission (ASIC) of the governing constitution of the managedinvestment scheme and its compliance plan, which must containthe measures taken, or to be taken, by the responsible entity toensure compliance with its constitution and the Corporations Act.2.2.3 The extent to which securitisations involve debenturesand interests in a managed investment schemeAs can be seen from the above, some securitised instrumentsmay be debentures, others may be interests in a managedinvestment scheme, while others may be neither. Securitisationsbased on these different instruments might be regulated underChapter 2L, Chapter 5C or may be completely unregulated.However, in order to simplify the analysis in this publication, it isassumed that a debt security issued by a corporation is adebenture, but it is important to appreciate that this may oftennot be the case.It is clear that equity securities issued by a trustee (ie. units in aunit trust) are interests in a managed investment scheme (eg. seeAttorney General of NSW v Australian Fixed Trusts [1947] ACLC40-100), which was decided under the previous regime, but thereasoning of which continues to apply to the current definition ofa managed investment scheme.As can be seen from the above, bills of exchange (for anyamount) and promissory notes (for a face value in excess of$50,000) are not debentures. Therefore, securitisations based onthese are not regulated by Chapter 2L. However, securitisationsbased on bills of exchange or promissory notes have the potentialto be regulated under Chapter 5C as managed investmentschemes.A more difficult issue is the proper classification of debtsecurities issued by trustees. On their face, they should beregulated in the same manner as for other debt securities (ie. onthe basis that they are debentures). This approach, however, iscomplicated by a draft Policy Statement issued in July 1992 bythe Australian Securities Commission (ASC), the predecessor toASIC. In it the ASC felt that debt securities issued by trustees insecuritisations were not debentures and should be regulated by ahybrid approach blending the then Divisions 4 and 5, which nowcorrespond to Chapters 2L and 5C.In most cases, the proper classification of a securitisedinstrument as a debenture, or an interest in a managedinvestment scheme, has no immediate commercial ramifications.This is because the regulatory regimes imposed by Chapters 2Land 5C do not apply where there is an offer of securities thatdoes not need disclosure under Chapter 6D.2. As will be seenfrom the next section, the effect of this is that almost the entiresecuritisation industry is exempt from the application of theseChapters of the Corporations Act. The only exception is that allissues of debentures need to comply with the register provisionsof the Corporations Act (sections 168(1)(c) and 171). However,these are not onerous and can be easily satisfied.Recently however, there have been a number of “retail”securitisation issues. In these cases it is important to determinethe proper classification of the securities as debentures, interestsin a managed investment scheme or neither. As can be seen fromthe previous analysis, some arbitrary results can arise.11