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FEBRUARY 2014ISSUE 08HEDGE FUNDS –DISCLOSURE OR EXPOSURE— page 63 5 9Asia Region FundsPassport - updateNew customer duediligence requirementsWhen is scheme landnot scheme property?1

Asia Region FundsPassport – UpdateContents23456891011From the editorAsia Region FundsPassport – updateMeetings of managedinvestment schememembersNew customer duediligence requirementsHedge funds –disclosure or exposureEnhancing privacyWhen is scheme landnot scheme property?Are you an ordinaryresident?SnapshotFrom the editorWelcome to the first edition of Fundamentalfor 2014.A range of activity looks set to make thisyear an exciting and challenging one for thefunds management industry, including:• an encouraging up-tick in theestablishment of new funds and dealsbeing done by our clients• ramped up regulatory activity by theAustralian Securities and InvestmentsCommission (ASIC)• a number of recent court decisionsimposing higher duties on fund managersand the directors of fund managers.Also, the change of Government hasbrought with it a number of new inquiriesrelating to the funds management industry,most notably the ‘Son of Wallis’ FinancialSystem Inquiry. McMahon Clarke isworking with a number of industry bodiesin preparing submissions to those inquiriesand advocating for the funds managementindustry.In this edition we feature:• the Asian Region Funds Passport whichwill allow Australian fund managers todistribute interests in their managedfunds, across multiple regional borders• ASIC’s increased obligations for REs ofhedge funds and ‘funds of hedge funds’• issues to consider when holding ameeting of the members of a managedinvestment scheme• new customer due diligencerequirements.We welcome two new members toour funds management team, KristyMcCluskey and Elliott Stumm, as wellas Wayne Penning (partner) in the firm’sexpanding capital markets practicefocusing on equity and debt raisings,private equity and capital managementstrategies. Wayne is joined by associateAndrew Williams and lawyer LauraSteele who will work closely with ourcorporate advisory, real estate and fundsmanagement teams.Also, we’re very proud to announce thatthe Chambers Asia-Pacific 2014 Guide hasagain ranked McMahon Clarke as a‘leading firm’ in investment funds Australiawide,and two of our senior lawyers havebeen singled out as leaders in that field.This is an excellent result, particularly for afirm of our size, and reflects the quality andcomplexity of our work.We hope you enjoy Fundamental, ourguide to the issues affecting the fundsmanagement sector. As always, wewelcome your feedback and suggestions.Best regardsBrendan IversPartner, Funds ManagementAustralian fund managers are set to takeadvantage of the ever increasing wealth amongthe middle class in Asia, with the move bythe Australian Government to formalise andimplement the Asian Region Funds Passport(Passport). Andrew Shearer-Smith says thePassport will allow Australian fund managersto distribute interests in their managed funds,across multiple regional borders.On 20 September 2013, the finance ministersattending the Asia-Pacific Economic Cooperationsummit signed a cross-border agreement for thedistribution of managed funds in the Asia-Pacificregion. The participating countries are Australia,New Zealand, South Korea and Singapore.A key advantage for Australian fund managersis that the Passport will enable the sale ofmanaged funds to participating countries and themanagement of Asian money in Australia, underAustralian regulations.The finer details about how the Passport will beregulated and implemented are set for publicconsultation early this year. It is anticipated not alltypes of managed funds will be able to access thebenefits of the Passport and there will be somerestrictions, such as—• eligible asset classes• liquidity requirements• registration (or licensing) arrangements• limitations around the use of leverage.It appears only simple managed investmentschemes (eg bond funds, cash funds and equitiesfunds) will be able to access the Passportarrangements.It is envisaged a pilot program will beimplemented around January 2016.We will keep a close eye on this importantdevelopment for the funds management sectorand keep you up-to-date with developments.Andrew Shearer-SmithConsultant,Funds Management23

Meetings of managedinvestment schememembersMany issues can arise when holdinga meeting of the members of amanaged investment scheme. Heresenior associate Brit Ibanez highlightssome of the issues to consider whenpreparing for a meeting.THE ACT OR THE CONSTITUTION?The primary sources of rules about the conduct ofmeetings are the Corporations Act (Act) and thescheme’s constitution. Both sources should bechecked as the constitution may modify the Act.WHO CALLED THE MEETING?There are three ways to call a meeting of members:• the responsible entity (RE) can call a meeting• the members can ask the RE to call a meeting,or• the members can call a meeting themselves.If the RE is asked to call the meeting, then theRE must pay for the cost of the meeting and,importantly, can appoint the chair for the meeting.The position of chair can be crucial in contestedmeeting scenarios.ORDINARY, SPECIAL OREXTRAORDINARY RESOLUTION?The Act provides that members can call meetingsto vote on special or extraordinary resolutionsonly (unless the scheme is listed). It doesnot contemplate the members of a managedinvestment scheme calling a meeting to vote onordinary resolutions. However, the Act is silentabout the nature of the resolution if the RE callsthe meeting.WHAT SHOULD THE AUDITORRECEIVE?In a contested meeting scenario, there can bea huge volume of material. The RE must givethe auditor of the scheme and the auditor of thescheme compliance plan all the communicationsrelating to the meeting that the members of thescheme receive.PROXIESWill a third party be appointed to manage theproxy vote? Companies such as Boardroom, Linkand Computershare can be engaged to managescheme meetings. Alternatively, the RE mustmanage the proxy process. That process needsto be transparent and capable of validation. Forexample, a consistent rule should be applied toaccepting or denying proxies.VOTING AT THE MEETINGA special or extraordinary resolution must bedecided on a poll. However, any other resolutionput to the vote at a meeting of scheme membersmust be decided on a show of hands unless a pollis demanded.DEMANDING A POLLDoes the constitution restrict the demand of a pollon a resolution for the election of the chair or theadjournment of a meeting? These are the only tworesolutions where the Act specifically providesthat a constitution may provide that no poll maybe demanded. A poll may be demanded by:• at least five members present entitled tovote on the resolution• the members present with at least fivepercent of the votes that may be cast onthe resolution, or• the chair.Meetings of managed investment schemescan run smoothly, but can also create difficultquestions of law and procedure. We areexperienced in advising on all types of meetingsand can assist with any questions.Brit IbanezSenior Associate,Litigation &Risk ManagementNew customer duediligence requirementsFollowing the release of a discussion paper andconsideration of submissions, the AustralianTransaction Reports and Analysis Centre(AUSTRAC) has prepared draft Anti-MoneyLaundering and Counter-Terrorism Financing(AML/CTF) rules relating to customer due diligence(CDD). In this article associate Emma Stapletonanalyses the draft rules and the potentialimpact for fund managers.BENEFICIAL OWNERThe draft rules redefine beneficial owner to meanany individual who owns or controls (directly orindirectly) the customer. Control is broadly definedand captures, for example, arrangements andunderstandings whether or not they have legal orequitable force. This is far broader than the currentdefinition, which provides that a beneficial owneris an individual who owns more than 25 percent ofthe issued capital in the company.A reporting entity’s AML/CTF program must beamended to require a reporting entity to considerthe customer’s money laundering and terrorismfinancing(ML/TF) risk, including risks related to—• beneficial owners of the customer• whether the customer, or any beneficial ownerof the customer, is a politically exposed person• the source of funds and source of wealth ofthe customer and each beneficial owner of thecustomer• whether, on taking reasonable measures, thereporting entity will be able to adequatelyunderstand the business or occupation of thecustomer, and• the control structures of the customer.The draft rules require AML/CTF programsto be designed to enable the reporting entityto understand the nature of the business oroccupation of each customer and the controlstructures of non-individual customers.Further, the AML/CTF program must enable thereporting entity to identify significant changesin ML/TF risk arising from changes in the natureof the business, occupation, control structure,or beneficial ownership of any customer, inaddition to those risks previously required to beidentified. Additionally, appropriate systems andcontrols must be included to determine in whatcircumstances any beneficial owner informationshould be collected, updated or verified forongoing CDD purposes, and must undertakereasonable measures to keep, update and reviewthe documents, data or information.ENHANCED CUSTOMER DUEDILIGENCE PROGRAMThe draft rules bring about changes to theenhanced CDD program requirements. The draftrules modify the current range of measuresthe reporting entity must undertake when theenhanced CDD program is triggered to includereference to a customer’s beneficial owners.Further, the enhanced CDD program is triggeredwhen a designated service is provided to acustomer who is, or has a beneficial owner thatis, a foreign politically exposed person. Whenthis is the case, a more detailed analysis of thecustomer’s know-your-client information (KYC)and beneficial ownership information must beundertaken to identify the source of the customer’sand each beneficial owner’s wealth and funds, andsenior management approval must be sought withrespect to continuing the business relationship witha customer, or whether a transaction or serviceshould be processed or provided.SETTLORSUnder the draft rules, AML/CTF programs arerequired to include a procedure for collecting thefull name of the settlor of a trust as part of theminimum KYC information of a customer actingas trustee. This is required except where thematerial asset contribution to the trust by thesettlor is less than $10,000, or where the settloris deceased. This change is premised on the ideathat the identity of the settlor may indicate thetrue beneficial owner.Please contact us if you have any questions aboutthe draft rules and what this will mean for yourbusiness, in particular any potential changes thatmay be required to your AML/CTF program.Elliott StummGraduate,Funds Management4 5

HEDGE FUNDS –DISCLOSURE OREXPOSUREThe Australian Securities andInvestments Commission’s (ASIC’s)Regulatory Guide RG240 (RG240)introduces greater disclosureobligations for responsible entities(REs) of hedge funds and ‘fundsof hedge funds’ which means anincreased risk of non-compliance.In this article partner BrendanIvers explains that from 1 February2014 it is important to ensure thebenchmarks and principles containedin RG240 are met for both new andestablished funds.Application of RG240RG240 is directed at REs of hedge funds issuinga product disclosure statement (PDS). However,RG240 is encouraged to be a benchmark foroffers to wholesale investors, as well as issuers ofinvestment opportunities undertaking strategiesnormally associated with hedge funds.RG240 defines a hedge fund as a registeredmanaged investment scheme that—• is promoted by the RE as being a ‘hedgefund’, or• exhibits two or more hedge fundcharacteristics, such as a complex investmentstrategy or structure, the use of leverage, andthe use of short selling.Even if a hedge fund meets the definition of a‘simple managed investment scheme’, disclosureagainst the benchmarks and application of theprinciples in RG240 is expected.Timing for implementingimproved disclosureFrom 1 February this year, all new and existing REsneed to disclose against the benchmarks and applythe disclosure principles contained in RG240.For PDSs issued for existing funds, the relevantdisclosure information should be contained on awebsite referred to in the PDS. Alternatively, theexisting PDS may be supplemented so it reflectsthe new standards.Further, any material changes to the benchmark ordisclosure principle information should be explainedon an ongoing basis. The ongoing disclosureobligations of REs of hedge funds include—• continuous disclosure• periodic statements, and• notification of any material change to a matterthat would be required to be specified in a PDS.Brendan IversPartnerFunds ManagementStrict adherence to disclosure obligations isof critical importance to the introduction andcontinuation of investments.Benchmarks and disclosureprinciples for hedge fundsRG240 outlines benchmarks and disclosureprinciples which should be highlighted in PDSmaterial relating to hedge funds. ASIC considerseach benchmark and disclosure principle toaddress a key risk area that potential investorsought to understand before making aninvestment decision.For example, benchmarks are set in relation tothe disclosure of valuation of assets and theperiodic reporting of certain key information. Thedisclosure principles relate to matters such as thehedge fund’s investment strategy, investmentmanager, structure, liquidity, and leverage.Significance of RG240 foryour businessStrict adherence to disclosure obligations isof critical importance to the introduction andcontinuation of investments. Failing to discloseaccording to the standards exposes the fund tounnecessary regulatory and legal risk.Given the greater disclosure obligations placedon REs of hedge funds, it is important all REs ofhedge funds consider and seek advice, as it islikely these obligations will impact all hedgefunds, not just those requiring a PDS.67

Enhancing privacySubstantial changes to Australian privacy laws,which are due to commence in March 2014,will impact on any organisation which collects orholds personal information about an individual.This includes responsible entities and trusteesissuing offer documents and collecting personalinformation from applicants.Associate Allana Agnew sums up how theFederal Government’s new Privacy Amendment(Enhancing Privacy Protection) Act (Act) changesthe privacy laws and what steps organisationswill need to take to comply.SIGNIFICANT CHANGESHere’s a summary of the most significant changes:1. The current National Privacy Principles andInformation Privacy Principles are consolidatedinto a single set of Australian Privacy Principles(APPs), and apply equally to the private andpublic sectors.2. Organisations must take reasonable steps toimplement appropriate practices, proceduresand systems to comply with the APPs andhave adequate enquiry and complaint-handlingsystems in place. An organisation must havea policy for the management of personalinformation which includes how the entitycollects and holds personal information and,if the personal information is likely to bedisclosed to a foreign entity, the countrieswhere the foreign entities are located.3. Where possible, before collecting personalinformation about an individual, the individualmust be notified of a number of matters,such as—• the identity and contact details of theorganisation• if the personal information will becollected from someone other than theindividual, then the fact this informationwill be obtained from a third party and thecircumstances as to how that informationwill be (or has been) collected, and• the reason the personal information is beingcollected and the consequences to theindividual if the information is not collected.4. An Australian organisation which disclosespersonal information to a foreign recipientmust take reasonable steps to ensure theforeign recipient does not breach the APPs.The Australian organisation will be liable forany breach by the foreign recipient and its onlyrecourse is to sue under contract.5. Credit providers and fund managers will havegreater information available to allow for aproper assessment of credit worthiness andrisk as credit reporting agencies are permittedto record additional data about an individual.This includes account opening and closingdates; types of credit accounts opened;current limits on each active credit account;and repayment history information.6. The Information Commission has greaterenforcement powers and functions, such asthe power to accept enforceable undertakings;an ability to pursue civil penalties of up to$1.1 million for serious or repeated breaches;and the power to undertake privacyperformance assessments.NEXT STEPS FOR FUND MANAGERSHere are some important next steps for fundmanagers and any entity which collects personalinformation from individuals:• Review current privacy policies, notices andconsents dealing with collecting and usingpersonal information. If a privacy policy is not inplace, then a policy should be prepared togetherwith a standard notice to individuals setting outthe information prescribed in the APPs.• Appoint a Privacy Officer to review the privacypolicy and procedures and ensure compliancewith the Act. The Privacy Officer shouldreport to the board regularly and identify anydeficiencies in compliance and remedial actiontaken to rectify the deficiency. These recordswill be a useful resource if any assessment ofthe organisation’s compliance with the Act isundertaken by the Information Commissioner.• Review offer documents and accompanyingapplication forms to ensure investors aremade aware of the organisation’s privacypolicy about the collection, use, and holdingof personal information.McMahon Clarke can assist with the reviewof privacy policies and procedures to ensurecompliance with the amendments to the Act.Allana AgnewAssociate, Litigation &Risk ManagementWhen is scheme land not scheme property?A primary role of a responsible entity (RE) of a managed investment scheme is tokeep scheme property separate from the RE’s property and the property of otherschemes. However, this division can become blurred where property, apparentlyowned by the RE in its own right, is used by it for the benefit of the scheme.The Supreme Court of Victoria recently considered this issue when thelandowning RE is removed (Willmott Forests Ltd v Primary Securities Ltd). Herelitigation and risk management partner Kristy Dorney discusses the implications.FACTSWillmott Forests Ltd was the RE for a registeredforestry scheme. The scheme’s constitutionprovided Willmott would be engaged by investorsto plant, manage and harvest trees and lease theland to the investors. To that end, Willmott and theinvestors entered into a lease agreement for part ofthe land which was registered in Willmott’s name.Willmott also had use of land adjoining the leasedland which was also registered in Willmott’s namebut not leased to the investors or to the scheme.Willmott was removed as RE by resolution of theinvestors and replaced by Primary Securities Ltd(Primary). Liquidators subsequently appointed toWillmott argued the land was owned by Willmottin its own right and was not scheme property.RIGHTS, LIABILITIES ANDOBLIGATIONSThe court accepted the liquidator’s argumentsthat the land was the property of the RE andnot scheme property, and then considered theimplications for the scheme and Primary as thenew RE. The court noted Willmott had beenacting, with respect to the land, in a dual role asowner and RE. It found the rights, liabilities andobligations Willmott exercised in its capacity asRE passed to Primary by operation of the stautirynovation provisions of the Corporations Act (Act).It noted as follows:• When Willmott undertook work on the landpursuant to the project agreements, it wasdoing so in its capacity as RE.• Under the Act, when Primary replacedWillmott as RE, it took over the obligations ofWillmott under the various agreements and theconstitution. It also became entitled to exercisethe rights Willmott had previously exercised asRE to discharge those obligations. This includedthe right to access the land at any time.• Under the terms of the lease agreementsbetween Willmott and investors, Willmott wasobliged to give consent to assignments ofleases and not to unreasonably withhold thatconsent. This would enable Primary to continueto operate the scheme, including the transfer ofinterests of investors where required.The court was satisfied Willmott was bound tocontinue to allow the land to be used for thescheme for the balance of the life of the schemeand that Primary was entitled to exercise certainrights in relation to the land which had previouslybeen exercised by Willmott in its capacity as RE.CONCLUSIONThe Willmott case is an important reminder toREs to consider the appropriate structure for theirscheme, including whether the RE will hold title toscheme land in its capacity as RE or in its personalcapacity. The implications for the RE, if removedas RE for the scheme, can be far reaching as thiscase demonstrates.Kristy DorneyPartner, Litigation &Risk Management89

Are you an ordinaryresident?Failure to comply with the requirementin the Corporations Act for at least onedirector of a proprietary company, and atleast two directors of a public company,to ordinarily reside in Australia mayresult in a penalty notice or prosecutionby the Australian Securities andInvestments Commission (ASIC). LawyerKristy McCluskey warns directors to takecare when portraying themselves asbeing ordinarily resident in Australia.ORDINARY RESIDENCEThe term ‘ordinarily reside’ is not defined in theAct and ASIC has not provided any guidance onwhat criteria must be fulfilled for a director tosatisfy this requirement.While the concept of ‘ordinary residence’ hasbeen considered in numerous cases, it hasnot been considered in many cases relating tothe Corporations Act requirement. Where thisrequirement has been considered, the director’sfailure to reside in Australia was relatively obvious(eg having an American address for service) andthe court has not been required to delve anydeeper into the issue of residency requirements.Ordinary residence has mostly been consideredby the court for the purpose of revenue laws andbankruptcy. Accordingly, it is useful to considerthese lwas when attempting to establish whata director may need to demonstrate whenattempting to establish Australian residency.FOREIGN ACQUISITIONS ANDTAKEOVERS ACTThe application of the Foreign Acquisitions andTakeovers Act (FATA) to the question of residencyis particularly useful, given its relevance to foreigninvestment, commercial transactions and nationalpolicy, all of which play a role in the successfuldirectorship of Australian companies.FATA provisions deal, in part, with natural personswho are not Australian citizens, yet are ordinarilyresident in Australia at a particular time. Theperson is considered to be ordinarily resident if—• they have actually been in Australia during 200or more days in the prior 12 months, and• at the time in question, either—• the person is in Australia, and theircontinued presence in Australia is notsubject to any time limitation imposedby law, or• the person is not in Australia but,immediately before their most recentdeparture from Australia, their continuedpresence in Australia was not subject toany legal limitation.BANKRUPTCY ACTThe Bankruptcy Act (Bankruptcy Act) allows fora debtor to have their possessions forcibly takenin order to pay their debts or satisfy other claims,such as where a director is held personally liablefor the debts of their company. However, theperson must be personally present or ordinarilyresident in Australia. The Bankruptcy Act doesnot define the term ‘ordinarily resident but,unlike the Corporations Act, it has been reviewedextensively by the court. These cases have ledto the adoption of the following criteria whenestablishing residency:• The degree of permanence of the person’sresidence in Australia (rather than a placewhere the individual stays only casually).• Where the ordinary course of the person’s liferegularly occurs.• Whether the person has a dwelling in Australia.• If the person has left Australia, how long theyintend to spend outside Australia.• Whether there are employment arrangementscreating a link between the person and Australia.DUAL RESIDENCYIt is also useful to note that an individual can beordinarily resident in more than one country at thesame time. Some people regularly or customarilylive in more than one place, each of which has anelement of permanence about it and is not merelya place of casual or intermittent resort. This maybe especially applicable to a director whosecompany maintains business and internationalnetworks across several countries.CONCLUSIONIn summary, whether a director is ordinarilyresident is a matter of fact and degree. However,a director should give careful consideration to theabove factors when portraying themselves asbeing ordinarily resident in Australia.Kristy McCluskeyLawyer, Funds ManagementSnapshotMcMahon Clarkeagain rankedas leaders ininvestment fundsThe Chambers Asia-Pacific 2014Guide has again ranked McMahonClarke as a ‘leading firm’ ininvestment funds Australia-wide,and singled out partner BrendanIvers and consultant AndrewShearer-Smith as leaders inthat field.McMahon Clarke managingpartner Sean McMahon saysthis independent and objectiverecognition is an excellent result,particularly for a firm of our size,and reflects the quality andcomplexity of our work.Covering the entire Asia-Pacificregion and more than 30 specialistpractice areas, Chambers Asia-Pacific ranks the leading law firmsand lawyers across the region. Forthe current Asia-Pacific directory,researchers carried out thousandsof interviews with lawyers andclients. The qualities on which theindependent and objective rankingsare based include legal ability,professional conduct, client service,commercial awareness, diligence,and commitment to the client.IPD Australia– Asset marketseminarMcMahon Clarke and IPD Australiaare hosting an asset market updateseminar on 28 February 2014 at theBrisbane Hilton Hotel. Please contactus for further details.10

Snapshot (cont’d)Focus on capitalmarketsWe are delighted to announcethat Wayne Penning has joinedMcMahon Clarke as a partner tohead the firm’s Capital Marketsteam focusing on equity and debtraisings, private equity, and capitalmanagement strategies. We alsowelcome associate Andrew Williamsand lawyer Laura Steele to ourCapital Markets team.Wayne, together with partnerLangton Clarke (head of CorporateAdvisory) will spearhead the firm’scorporate and commercial practiceand will work closely with thefirm’s Real Estate and FundsManagement teams.Wayne and his team are wellrecognised throughout the corporatecommunity and offer strategic anddetailed knowledge of the heightenedregulatory, compliance and structuralchallenges in today’s marketplace.This will be an important asset toour clients moving forward.The addition of Wayne and his teamcomplements our well recognisedcorporate and commercial platformand further strengthens ourexperience in working with ourclients in mergers and acquisitions,capital raising and regulatoryissues generally.WaynePenningPartnerAndrewWilliamsAssociateLauraSteeleLawyerFunds managementteam expandsOur Funds Management teamcontinues to expand with theaddition of lawyer Kristy McCluskey,who offers strong corporateadvisory and private equityexperience, and graduate ElliottStumm. These new appointmentsconfirm our ongoing strategy todevelop exceptional people withdeep industry knowledge.KristyMcCluskeyLawyerElliottStummGraduate1262 Charlotte St Brisbane Q 4000 GPO Box 1279 Brisbane Q 4001 T 07 3831 8999 F 07 3831 1121 www.mcmahonclarke.com