From 1 July 2022, a new form of investment vehicle will be available for collective investments in Australia – the Corporate Collective Investment Vehicle. This is a significant development for funds managers wishing to establish investment vehicles, and is also useful for investors to be aware of the features of the new vehicles, to assess potential rewards and risks.
What is a Corporate Collective Investment Vehicle?
A CCIV is an entirely new type of Australian company used for collective investment. Investors pool their funds in a CCIV and these are managed by a professional fund manager.
The director of the CCIV is a public company with an Australian Financial Services Licence (AFSL) authorising it to operate the business and conduct the affairs of the CCIV (the corporate director).
Harmonising Australia with global funds landscape
The concept is over 10 years in the making. An exposure draft on the core chapter was circulated in 2017, and numerous revisions and consultations have taken place since.
To date, Australian funds management have been conducted through a trust-based managed investment scheme (MIS); perceived by offshore investors to be inappropriate for large-scale funds management.
It is hoped that the introduction of the CCIV in Australia will harmonise Australia with the global investment world and bring the Australian legislative landscape for funds, such as the European Union (Undertakings for the Collective Investment in Transferable Securities (UCITS)), United Kingdom (Open-Ended Investment Company (OEIC)), Hong Kong (Open-ended Fund Company (OFC)) and Singapore (Variable Capital Company (VCC)).
It is designed to maximise the effectiveness of certain government initiatives aiming to increase access to overseas markets, such as the Asia Region Funds Passport (ARFP). The ARFP is an international trade arrangement to facilitate cross-border trade in funds management between member economies, such as Japan, the Republic of Korea, New Zealand and Thailand.
Put another way, the CCIV introduces investment vehicles which the rest of the world are familiar with. These vehicles must paradoxically satisfy "single corporate form" tests, while operating sub-funds tested as having own independent balance sheets. This is achieved by way of statutory "deeming" tests, allowing each sub-fund to be assessed independently of other sub-funds. At some point, those deeming provisions will need to be assessed within insolvency situations (inevitably some CCIV will fail in negative asset value markets, while others, based on the experiences the managed investment scheme sector provides, will fail because of mismatched fee and income or value structures).
It is worth noting that the Government initially considered whether a limited partnership collective investment vehicle, which is the form often adopted overseas, would be adopted concurrently. This has not yet occurred. It is unclear whether the absence of the limited partnership CIV will limit the intended aim of the legislation.
The features of a Corporate Collective Investment Vehicle
A CCIV has the following features:
- Voluntary registration: It is registered as a CCIV under the Corporations Act, being a voluntary election.
- Corporate Director: A single corporate director, and no other officers or employees.
- Sub-fund: At least one sub-fund, which must have at least one member.
- Share capital: Share capital, with a variable capital structure that provides flexibility for the issue, redemption or repurchase of its shares.
- Constitution: A constitution, which is enforceable as a statutory contract between: the CCIV and each member; the CCIV and the corporate director; the corporate director and each member; and a member and each other member.
- Members’ Register: A register of members, including the details of securities held by each member and which sub-fund of the CCIV each security is referable.
- Asset allocation: All assets of a CCIV must be allocated to a sub-fund. This may occur through the automatic application of the allocation rules, or through an allocation determination made by the corporate director. A single asset cannot be allocated to more than one sub-fund. The corporate director must convert a single item of property that would otherwise be part of the assets of multiple sub-funds into money or other fungible property that can be allocated separately.
- Liability allocation: All liabilities of a CCIV must be allocated to a sub-fund. If a liability does not relate solely to the business of a sub-fund, the corporate director must make an allocation determination in respect of the liability.
- Assets / liabilities register: A register must be established to identify the assets/liabilities of each sub-fund.
- Naming requirement: The CCIV must adhere to special naming requirements – including requiring the expression “Corporate Collective Investment Vehicle” or the abbreviation “CCIV” at the end of its name, rather than “Limited” etc.
Each security issued by a CCIV must be referable to a sub-fund. The initial sub-fund (or sub-funds) of the CCIV are registered by ASIC as part of the registration of the CCIV. Further sub-funds may be registered by a standalone process.
The sub-funds must be segregated from each other. However, a CCIV is generally permitted to engage in cross-investment between sub-funds of the CCIV.
The sub-fund has its own “Australian Registered Fund Number”, but not its own legal personality. This means that a sub-fund cannot enter contracts, sue or be sued in its own name, and cannot acquire or dispose of assets or liabilities in its own name. Only the CCIV itself has the power to do so, and must identify the relevant sub-funds when doing so.
Interestingly, even though a sub-fund cannot acquire or dispose of assets or liabilities, it appears member and third-party rights and obligations may accrue against the assets and liabilities of the sub-fund. This differs from the approach in the United Kingdom, and it will be interesting to see how this is works in practice.
Retail vs wholesale CCIVs
The CCIV regulatory framework distinguishes between retail and wholesale CCIVs.
A CCIV will be a wholesale CCIV, unless it satisfied the “retail CCIV test” or it notifies ASIC that it is a retail CCIV.
A CCIV meets the “retail CCIV test” if it has at least one member who is a "protected retail client", a "protected client under a custodial arrangement" or a "protected member of a passport fund".
- It is expected that "protected retail clients" and "protected clients under a custodial arrangement" are less sophisticated clients who may not have the knowledge, resources or expertise to protect their own interests. However, a person will not be such a protected retail client if they are associated with the CCIV.
- A "protected passport fund member" relates to an Australian passport fund, provided the person became a member: (a) after the sub-fund became an Australian passport fund; or (b) on the expectation it would become such a fund. The requirements of an Australian passport fund include that the Australian passport fund operator or its related parties must have assets under management with a total value of at least US$500 million (see Memorandum of Cooperation on the Establishment and Implementation of the Asia Region Funds Passport”).
- Only sub-funds of retail CCIVs are eligible to become Australian passport funds, and so they must remain a retail CCIV.
Retail CCIVs are subject to additional regulatory protections for retail investors. For example, a retail CCIV must have a compliance plan and a compliance plan auditor (similar to the requirements for a compliance plan of a registered scheme). The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV’s constitution.
Wholesale CCIVs are subject to a more limited regulatory framework, reflecting a higher degree of investor sophistication among wholesale investors.
Corporate governance for Corporate Collective Investment Vehicles
As a company, a CCIV will generally be subject to the ordinary company rules under the Corporations Act, unless otherwise specified.
Natural person officers of the corporate director of a CCIV may be authorised to carry some activities, such as entering contracts on behalf of the CCIV in certain circumstances.
The officers and employees of the corporate director owe obligations to the corporate director in their capacity as officers and employees of a public company. The directors of a corporate director have additional duties, such as a duty to disclosure their material personal interests in relation to the affairs of the CCIV to the other directors of the corporate director.
At least half of the directors of the corporate director of a retail CCIV must be external directors. External directors are presumed to bring a degree of detached supervision that is expected to enhance the standard of corporate governance of corporate directors of retail CCIVs.
Shares and debentures
A CCIV may issue shares and debentures, provided that each security is referable to only one sub-fund. The CCIV may also issue ordinary shares that are liable to be redeemed. Unlike for ordinary companies, redemptions do not need to be paid out of profit, but the sub-fund to which the shares are referable must be solvent immediately before the redemption and not insolvent immediately after the redemption.
Another person may hold money and property on the CCIV’s behalf (such as a custodian engaged by the CCIV), subject to any regulations. If another person holds the CCIV’s money and property, that person is taken to hold the money and property of the CCIV on trust for the CCIV.
The general tax treatment of CCIVs and their members is designed to align with the existing tax treatment of attribution managed investment trusts (AMITs) and their members. If a CCIV sub-fund meets the AMIT eligibility criteria, it will be taxed as an AMIT under the attribution flow-through tax regime.
The taxation of CCIVs is an area that is likely to receive further guidance from the Australian Taxation Office.
A CCIV itself cannot be wound up.
A sub-fund may be subject to external administration. A liquidator of a sub-fund only has the power to perform a function to the extent it relates to a sub-fund that is being wound up. The corporate director continues to make allocation determinations for the sub-funds that are not being wound up.
Sub-funds may be rearranged within a CCIV or transferred between CCIVs. The Court will have additional powers to make orders, including in relation to the assets and liabilities of a sub-fund.
Receivers may be appointed to the property of each sub-fund separately. Receivers will have special powers to challenge allocation determinations before the Court.