Is Policy Objective to Facilitate Investment and Trade with Overseas Counterparties?

2.1                        International Obligations

 

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2.2.1       IOSCO

The International Organisation of Securities Commissions (‘IOSCO’) established in October 1994 a core set of principles governing the regulation of CIS or MIS’s[1].

As a general rule, these principles focus on outcomes rather than the appropriate structure or regulation for achieving those outcomes. The principles are known as the Principles for the Regulation of Collective Investment Schemes[2].

There are 10 Principles, namely:

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i.            Legal Form and Structure

ii.            Custodian, Depositary or Trustee

iii.            Eligibility to Act as an Operator

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iv.            Delegation

v.            Supervision

vi.            Conflicts of Interest

vii.            Asset Valuation & Pricing

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viii.            Investment and Borrowing Limitations

ix.            Investor Rights

x.            Marketing and Disclosure[3]

These core Principles have been supplemented by further IOSCO principles and statements, in particular:

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•          Principles for the Supervision of Operators of Collective Investment Schemes;

•          Regulatory Approaches to the Valuation and Pricing of Collective Investment Schemes;

•          Conflicts of Interests of CIS Operators; and

•          Delegation of Functions.

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In recognition that the Australia managed investments industry operates in a global environment, it is important that Australia’s regulatory regime and governance approach be judged according to international standards.

The literature suggests that the Australian MIS creates issues[4] as to the application of the IOSCO Principles in the context of the Corporations Act 2001 (Cth), particularly:

•          Chapter 5C, which contains the substantive laws governing the operation of managed investment schemes and scheme operators; and

•          Part 7.6, which sets out the licensing requirements for providers of financial services.

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The literature suggests that due to the particular structure the Australian regime does not conforms with international principles of governance. Where the Australian regime departs from the IOSCO Principles. This Thesis seeks to examine the legitimacy of this departure.

2.2.2       Mutual and Unilateral Recognition

 

The Wallis Inquiry, and the CLERP 6 provided the rationale for the Financial Services Reform Act 2001 (FSR Act). The FSR Act amended the Act, recommending provisions about the unilateral recognition of foreign regulated entities operating in Australia. However, the Act[5] does not provide for any unilateral recognition but rather mutual recognition.

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ASIC views its function as set out in the Regulatory Guides as the incumbent party to determine whether unilateral recognition may occur.

ASIC has issued the following regulatory guides:

1. Regulatory Guide 54, which outlines ASIC’s overall approach to cross border recognition; This is an example of the second sub-paragraph of the second paragraph of the introduction.
2. Regulatory Guide 177, Australian market licences: overseas operators (RG 177) for foreign markets operating in Australia;
3. Regulatory Guide 176, Licensing: Discretionary powers—wholesale foreign financial services providers (RG 176);
4. Regulatory Guide 178, Foreign collective investment schemes (RG 178); and
5. Regulatory Guide 72, Foreign securities prospectus relief (RG 72).

None of these are laws but rather regulatory guidance as to what the ASIC as an unelected body interpret as the law.

The effect of recognition is that the legal structures in Australia are accepted in the foreign country and that countries structures are accepted in Australia. This becomes important from the perspective of foreign indirect investment or direct investment using mutual recognition.

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The issues faced are four-fold;

1. If the legal structure is not accepted, then foreign funds are at a disadvantage and invariably look elsewhere to invest;
2. If the foreign structure has more discretion or is more competitive than the Australian structure, then the foreign structure has an advantage;
3. If the Australian structure is not competitive then generally the manager will use foreign structures; and
4. Assuming the legal structure is at a disadvantage then you have tax, cost and feasibility issues.

2.2.3       The disconnect

The main issue is the definitional issues surrounding the definition of a MIS in Australia as an equivalent to a CIS is contained in section 9[6]. The definition while comprehensive is laden with exclusions, we will limit this to the relevant provision as contained in subsection (d) which states that;

“managed investment scheme ” means:

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(a)  a scheme that has the following features:

(i)  people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);

(ii)  any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);

(iii)  the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or

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 (b)  a time-sharing scheme;

but does not include the following:

(d)  a body corporate (other than a body corporate that operates as a time-sharing scheme); (my highlighting)[7]

The clause is clear that a scheme consists of people (plural) who contribute money or money worth as consideration to acquire rights that have been defined as interest to benefits produced by the scheme. The contributions are to be pooled, used in common enterprise to produce financial benefits or rights or interests in the property for the members of the scheme and the members do not have day to day control over the operation of the scheme although they may be consulted. The main point of difference is that a body corporate which is defined as a company in Australia is excluded from the definition of a managed investment scheme.

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Once again section 9 defines a body corporate as;

“body corporate “:

(a)  includes a body corporate that is being wound up or has been dissolved; and

(b)  in this Chapter (except section 66A) and section 206E includes an unincorporated      registrable body[8].

Significantly thus anybody corporate that is includes both registered and unregistered body corporates will be excluded from the definition of a managed investment scheme. This is a major departure from the law in other IOSCO member countries such as the United Kingdom, Hong Kong and Singapore.

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These define a collective investment scheme as follows;

Section 235(1)[9] states that a collective investment scheme means any arrangements with respect to property of any description. This states that;

1. In this Part “collective investment scheme” means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
2. The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
3. The arrangements must also have either or both of the following characteristics—
   1. the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
   2. the property is managed as a whole by or on behalf of the operator of the scheme.
4. If arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.
5. he Treasury may by order provide that arrangements do not amount to a collective investment scheme—
   1. in specified circumstances; or
   2. if the arrangements fall within a specified category of arrangement[10].

The purpose or effect of the arrangements must be to enable the persons taking part in them to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

The participants must not have day-to-day control over the management of the property[11] and the arrangements must provide:

1. for the contributions of the participants and the profits or income to be pooled[12]; or
2. for the property to be managed as a whole by or on behalf of the operator of the scheme[13];
3. In addition, if either 1 or 2 or both are present there is a collective investment scheme.

In addition, section 236[14] grants recognition to an open-ended investment company as a collective investment that is inconsistent with the Australian definition. Ostensible if a scheme complies with the definition then it may be a collective investment scheme under the Act[15]. It is however the case in an open-ended investment company that the investment and property description[16] needs to be complied with. In Hong Kong under the Securities and Futures Ordinance (SFO)[17] states that a collective investment scheme is;

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“collective investment scheme” means—

(a) arrangements in respect of any property—

(i) under which the participating persons do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management;

(ii) under which—

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(A) the property is managed as a whole by or on behalf of the person operating the arrangements;

(B) the contributions of the participating persons and the profits or income from which payments are made to them are pooled; or

(C) the property is managed as a whole by or on behalf of the person operating the arrangements, and the contributions of the participating persons and the profits or income from which payments are made to them are pooled; and

(iii) the purpose or effect, or pretended purpose or effect, of which is to enable the participating persons, whether by acquiring any right, interest, title or benefit in the property or any part of the property or otherwise, to participate in or receive—

(A) profits, income or other returns represented to arise or to be likely to arise from the acquisition, holding, management or disposal of the property or any part of the property, or sums represented to be paid or to be likely to be paid out of any such profits, income or other returns; or

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(B) a payment or other returns arising from the acquisition, holding or disposal of, the exercise of any right in, the redemption of, or the expiry of, any right, interest, title or benefit in the property or any part of the property; or

(b) arrangements which are arrangements, or are of a class or description of arrangements, prescribed by notice under section 393 of this Ordinance as being regarded as collective investment schemes in accordance with the terms of the notice, but does not include—

(i) arrangements operated by a person otherwise than by way of business;

(ii) arrangements under which each of the participating persons is a corporation in the same group of companies as the person operating the arrangements;

(iii) arrangements under which each of the participating persons is a bona fide employee or former employee of a corporation in the same group of companies as the person operating the arrangements, or a spouse, widow, widower, minor child (natural or adopted) or minor step-child of such employee or former employee;

(iv) franchise arrangements under which the franchisor or franchisee earns profits or income by exploiting a right conferred by the arrangements to use a trade name or design or other intellectual property or the goodwill attached to it;

(v) arrangements under which money is taken by a solicitor from his client, or as a stakeholder, acting in his professional capacity in the ordinary course of his practice;

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(vi) arrangements made for the purposes of any fund or scheme maintained by the Commission, or by a recognized exchange company, recognized clearing house, recognized exchange controller or recognized investor compensation company under any provision of this Ordinance for the purpose of providing compensation in the event of default by an exchange participant or a clearing participant;

(vii) arrangements made by any credit union in accordance with the objects thereof;

(viii) arrangements made for the purposes of any chit-fund permitted to operate under the Chit-Fund Businesses (Prohibition) Ordinance (Cap. 262);

(ix) arrangements made for the purposes of the Exchange Fund established by the Exchange Fund Ordinance (Cap. 66);

(x) arrangements which are arrangements, or are of a class or description of arrangements, prescribed by notice under section 393 of this Ordinance as not being regarded as collective investment schemes in accordance with the terms of the notice;

While the definition is broadly states generally a CIS has four relevant elements:

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• it must involve an arrangement in respect of property;
• participants do not have day-to-day control over the management of the property even if they have the right to be consulted or to give directions about the management of the property;
• the property is managed as a whole by or on behalf of the person operating the arrangements, and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and
• the purpose of the arrangement is for participants to participate in or receive profits, income or other returns from the acquisition or management of the property.

This ties into the RG 178[18] where it states that;

Note: The term ‘managed investment scheme’ does not include corporations: see Appendix 1. This guide also deals with relief for corporations that are investment companies.

The issues surrounding the definition and ASIC interpretation is far reaching as generally the definition of a collective investment scheme internationally is inconsistent with Australia’s definition of a managed investment scheme, this infers that the ability for consistent interpretation is threatened.

In Singapore, the definition states that a collective investment scheme[19] is;

“collective investment scheme” means:

1. an arrangement in respect of any property:

1. under which:

1. the participants do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management; and
2. the property is managed as a whole by or on behalf of a manager;

2. under which the contributions of the participants and the profits or income from which payments are to be made to them are pooled; and
3. the purpose or effect, or purported purpose or effect, of which is to enable the participants (whether by acquiring any right, interest, title or benefit in the property or any part of the property or otherwise):

1. to participate in or receive profits, income, or other payments or returns arising from the acquisition, holding, management or disposal of, the exercise of, the redemption of, or the expiry of, any right, interest, title or benefit in the property or any part of the property; or
2. to receive sums paid out of such profits, income, or other payments or returns; or

2. an arrangement which is an arrangement, or is of a class or description of arrangements, specified by the Authority as a collective investment scheme by notice published in the Gazette,

but does not include:

1. an arrangement operated by a person otherwise than by way of business;
2. an arrangement under which each of the participants carries on a business other than investment business and enters into the arrangement solely incidental to that other business;
3. an arrangement under which each of the participants is a related corporation of the manager;
4. an arrangement made by or on behalf of an entity solely for the benefit of persons, each of whom is:

1. a bona fide director or equivalent person, a former director or equivalent person, a consultant, an adviser, an employee or a former employee of that entity or, where that entity is a corporation, a related corporation of that entity; or
2. a spouse, widow or widower, or a child, adopted child or step-child below the age of 18 years, of such director or equivalent person, former director or equivalent person, employee or former employee;

5. an arrangement made by or on behalf of 2 or more entities solely for the benefit of persons, each of whom is:

1. a bona fide director or equivalent person, a former director or equivalent person, a consultant, an adviser, an employee or a former employee of any of those entities or, where any of those entities is a corporation, a related corporation of the entity which is a corporation; or
2. a spouse, widow or widower, or a child, adopted child or step-child below the age of 18 years, of such director or equivalent person, former director or equivalent person, employee or former employee;

6. a franchise;
7. an arrangement under which money received by an advocate and solicitor from his client, whether as a stakeholder or otherwise, acting in his professional capacity in the ordinary course of his practice, or under which money is received by a statutory body as a stakeholder in the carrying out of its statutory functions;
8. an arrangement made by any co-operative society registered under the Co-operative Societies Act (Cap. 62) in accordance with the objects thereof solely for the benefit of its members;
9. an arrangement made for the purposes of any chit fund permitted to operate under the Chit Funds Act (Cap. 39);
10. an arrangement arising out of a life policy within the meaning of the Insurance Act (Cap. 142);
11. a closed-end fund constituted either as an entity or a trust;
12. an arrangement which is an arrangement, or is of a class or description of arrangements, specified by the Authority as not constituting a collective investment scheme by notice published in the Gazette.

The common thread as you will see is the fact that companies can be constituted subject to qualification as collective investment schemes in these and other jurisdictions. Australia stands alone in its interpretation of the distinction of a managed investment excluding a corporation per se from the definition. This is entrenched in the Act[20] in that a chapter has been created to ensure that a foreign recognition scheme is accepted in this jurisdiction. The problem is that once again a security is defined as a;

“securities ” means:

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1. a share in a body; or
2. a debenture of a body; or
3. an interest in a managed investment scheme; or
4. a legal or equitable right or interest in a security or interest covered by paragraph (a), (b) or (c); or
5. an option to acquire, by way of issue, an interest or right covered by paragraph (a), (b), (c) or (d).

The acceptance of a security as a recognised offer is entrenched thus exacerbating the issue. In terms of the Act an Australian investment company is excluded from the foreign system but investment companies from other jurisdictions can obtain registration in Australia as foreign collective investment schemes.

The problem is immediately obvious, what is not is the duty at international law where it intersects with the Australian domestic environment. The suggested solution was to create the Collective Investment Vehicle[21]. While the characteristics of the CIV are unknown the essence of the regime was to suggest that the CIV would be a corporate vehicle that is exempt from the definitional constraints.

The CIV would be used for cross-border passporting under the Asian passport and be different from the MIS at national law.

2.2.4       The ASIC regulatory Powers and separation of power

ASIC has been granted the power to make delegated legislation, the power extends to the power to modify provisions of the Act[22]. The power of modification exists as to specified classes of people, through the issuance ‘Class Orders’.

The power of ASIC does not amount to the ability to create black letter law, but it does vest ASIC with the power to rewrite parts of the Act[23]. Bottomley[24] notes that Corporate Regulators require discretions as to financial regulation as;

‘…financial and commercial context in which corporations operate is complex and fast-changing’, and statutory modifications via Class Orders are ‘beneficial to the flexible regulation of the corporate and finance sector…’[25].

The lawmaking power of ASIC is extreme in comparison to any other federal regulatory agencies or for that matter any international corporate regulatory agencies. A danger of the ASIC power is that it requires little or no specific executive guidance and according to Bottomley this may create,

‘…the appearance of a system in which the regulator can make rules of wide application that bypass the process of substantive public scrutiny and accountability that can be applied to statutory rules…[26]’.

Part of the issue is that ASIC does not have a legal requirement to consult any stakeholders prior to making a Class Order and a number of unique and controversial principles that provide discretion to ASIC.

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The principle underlying these proposals is that ‘legislative change should be done by and through Parliament’, largely because Parliament is ‘visible and publicly accountable’[27]. The ability of ASIC to modify the foreign collective scheme and equate that despite the definitional and structural differences is tantamount to exceeding the powers granted to the ASIC.

2.3     The gaps in the Literature

2.3.1       What is the real objective of the legislation

There are several literature sources that deal with the intention of the Act[28] and its context, the literature is silent as to the “real policy objectives”. These become important from the perspective of determining whether the rationale behind the acceptances of the CIS in direct conflict with the Act and the basis of modification by ASIC is policy, objective or legally driven.

The Act was amended from a private law, substantive rights model, to a system that regulates the corporate and fund vehicle, arranges those involved in its affairs through the prescription of processes and procedures by which decisions are made and a system in terms of which the procedural correctness is assured[29].

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The real policy objective has to be analysed as to understand what the legislation intent was in light of the then existing international obligations. The literature lacks any clarity as to the real policy objective in relation to the international objectives if any.

This infers that while Australia had agreed to several IOSCO principles, the policy objectives of the legislation seems to have broadly ignored these aspects[30].

2.3.2       Can Parliamentary Discretion be abdicated by the granting of discretion to a regulator to unilaterally accept foreign collective investment schemes?

The literature [31]deals with the rationale for Parliament to appoint ASIC to ‘issue subordinated legislation[32]’. The literature is silent as to the whether the legislative authority ought to be delegated to a regulator enabling the regulator discretionary rights to modify the enabling legislation.

Bottomley[33] notes that Corporate Regulators require discretions as to financial regulation as;

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‘…financial and commercial context in which corporations operate is complex and fast-changing’, and statutory modifications via Class Orders are ‘beneficial to the flexible regulation of the corporate and finance sector…’[34].

The lawmaking power of ASIC is extreme in comparison to any other federal regulatory agencies or for that matter any international corporate regulatory agencies. A danger of the ASIC[35] power is that it requires little or no specific executive guidance and according to Bottomley this may create,

‘…the appearance of a system in which the regulator can make rules of wide application that bypass the process of substantive public scrutiny and accountability that can be applied to statutory rules…[36]’.

Part of the issue is that ASIC does not have a legal requirement to consult any stakeholders prior to making a Class Order and a number of unique and controversial principles that provide discretion to ASIC.

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2.3.3       Can Parliament delegate responsibility to a non-elected body?

The gap in the literature here is the difference between the legal literature and the sociological or regulatory literature[37]. The issue is a doctrinal conflict[38].

Parker[39] states that;

“…Lawyers have sometimes been concerned that the doctrinal coherence or values inherent in law’s analytic framework can be threatened by the primacy of instrumental policy concerns in legislative regulation Legal scholars who study regulation, they suggest, are likely to be concerned with issues such as the openness, accountability, consistency and predictability of rules. These, of course, are values that are commonly associated with lawyers’ depictions of the rule of law. …[40]”

The question is thus if the wide discretionary power granted to ASIC based on the constitutional arrangement between the States, Territories and the Commonwealth complies with the separation of powers argument and whether this is what was intended by s 51(xxxvii) of the Constitution[41].

The literature is silent as to the extent of the power, the power granted to ASIC to modify the legislation is specifically controversial.

2.3.4       Is the MIS a creature of crisis legislation?

The 1998 Act, amendments removed the uncertainty of the participatory interest’s provisions but that not all the erstwhile recommendations had been adopted, this lead to a review undertaken by Mr Malcolm Turnbull commenced on August 2001.

The results of the review were presented to the Treasurer on 3 December 2001 and found that the Act was entirely working. The report recommended the review of the legislation as;

“…Given these factors, the Committee believes there is a need for further consideration of the regulatory arrangements for managed investments to ensure they are able to meet the consumer-protection objectives of the MIA[42]…”

The literature is silent on this aspect, interesting that all reviews since 2001 have identified that liberalisation is required, the gap relates to the reason behind the MIS structure and why that was varied from what was acceptable internationally.

2.3.5       Why are MIS’s inherently non-competitive?

The literature is clear that the MIS is viewed as non- competitive[43] internationally, the literature is silent as to the reasons why the MIS is non-competitive. The corollary arguments are why the CIS has not adopted or accepted the single responsible entity concept and the design of the MIS.

It is one of the themes of the thesis that the international CIS concept has an unfair cost, access and feasibility benefit when compared to the MIS.

The trend for Australian Fund Managers is to incorporate and use foreign CIS structures to be competitive instead of using the MIS by mutual recognition, this has a cost effect as the Fund Manager has to incorporate feeder funds in tax neutral jurisdictions[44].

The question that the literature does not address is why the MIS and the Australian Investment Management framework is not competitive and to what degree this is non-competitive.

2.3.6       What features of the MIS’s render it non-competitive?

The structure and safeguards of the MIS is in conflict with that of the CIS[45], the literature is silent as to the features that make the MIS non-competitive.

The core differences are the Legal Form, Structure, lack of Depositary, Separation of Responsible Entity and Operator, Issues relating to Conflicts of Interest, Asset Valuation & Pricing, Investment and Borrowing Limitations and Investor Rights.

The literature is silent on whether these features can be harmonised provide for consumer protection[46].

The literature is silent as to the comparison and application of a CIS within the international definition in Australia and how address the features that render it non-competitive[47].

2.3.7       What is the effect of the MIS’s perceived non-competitiveness?

The fact that the MIS is non-competitive is not relevant unless the effect thereof can be understood at both national and international level. If the effect is negligible then the research questions is moot[48].

The literature does not address the effect in any way, the only manner to judge this aspect as research question is to analyse the flow of funds by Direct Foreign Investment, UCITS and other fund structures into Australia.

The literature is silent as to this aspect and fails to address the effect, commentators have stated that the different rights, obligations, and governance models of Australian unit trusts could limit their acceptance in other markets[49].

2.3.8       How to remedy the inconsistency by harmonisation

CAMAC’s view[50] is that the regulatory regime for managed investment schemes should be aligned with that for companies. It has identified that there are inconsistencies between the MIS and CIS and that the Act does not permit the MIS to be competitive.

The ASIC power to modify the Act prevents the alinement of the MIS and CIS by the legislature and enhances the definitional issues.

The literature is silent whether such alignment, where appropriate, would achieve an overall deregulatory benefit of having similar legislative regimes for schemes and companies at both national and international level.

The literature is silent as to what other steps need to be taken in order to achieve a harmonised outcome.

Chapter 3 Research Questions

 

The following research questions have been identified;

3.1    Research Questions

3.1.1        Who asserts the regulatory power in the case of corporate legislation?

ASIC highlighted the need for delegated legislation in the regulation of corporations and financial services. This sector is;

‘…complex and subject to constant innovation…’[51]. 

During the Australian Law Reform Commission, submissions ASIC submitted, that without delegated legislation;

‘primary legislation would be unable to anticipate and respond in a timely way’[52]. Some Authors argue that ‘…one of the fundamental justifications for putting something into delegated legislation is that it is something that parliament need not be too concerned about but, rather, is something that the parliament can be relatively comfortable merely keeping a watchful eye over…[53]’.

The rule can be summarised as;

‘…important’ things—including the intrinsically ‘political’ things—are to be kept to the primary legislation. The delegated legislation is for the detail, for the machinery…[54]”

The research question is whether this is consistent with the Constitution and the strict obligation that Parliament is responsible for the creation of law, thus whether the rule in West Lakes Ltd v South Australia (1980) 25 SASR 389, ought to have persuasive power as to permitting ASIC the power to create legislative recognitions.

 

2.       Can Parliament delegate responsibility for law making to a non-elected body?

 

The issue is a doctrinal conflict. Parker[55] states that;

“…Lawyers have sometimes been concerned that the doctrinal coherence or values inherent in law’s analytic framework can be threatened by the primacy of instrumental policy concerns in legislative regulation Legal scholars who study regulation, they suggest, are likely to be concerned with issues such as the openness, accountability, consistency and predictability of rules. These, of course, are values that are commonly associated with lawyers’ depictions of the rule of law. …[56]”

The research Question is, whether the discretionary power granted to ASIC based on the constitutional arrangement between the States, Territories and the Commonwealth. If so does this comply with the separation of powers argument as was intended by s 51(xxxvii) of the Constitution[57]. Does the case law confirm the power of modification that ASIC has or is this a power that should be curbed?

3.       Does the executive abdicate its legislative responsibility by granting discretion to ASIC to unilaterally modify the Act?

 

Bottomley[58] notes that Corporate Regulators require discretions as to financial regulation as;

‘…financial and commercial context in which corporations operate is complex and fast-changing’, and statutory modifications via Class Orders are ‘beneficial to the flexible regulation of the corporate and finance sector…’[59].

The lawmaking power of ASIC is extreme in comparison to any other federal regulatory agencies or for that matter any international corporate regulatory agencies.

A danger of the ASIC power is that it requires little or no specific executive guidance and according to Bottomley this may create,

‘…the appearance of a system in which the regulator can make rules of wide application that bypass the process of substantive public scrutiny and accountability that can be applied to statutory rules…[60]’.

Part of the issue is that ASIC does not have a legal requirement to consult any stakeholders prior to making a Class Order and a number of unique and controversial principles that provide discretion to ASIC.

The research Question is, does the ability of ASIC to modify the legislation, and to, for argument sake, accept the foreign collective scheme in contravention of the specific definitions in the Act exceed the legislative powers? Does the power of modification as uniquely granted to ASIC erode the legislative safeguards?

3.1.4        What is the regulatory and policy objective in the case of the MIS?

The literature is littered with the intention of the Act[61] and its context, it is silent as to the “real policy objectives” of the creation of the MIS.

These become important from the perspective of determining whether the rationale behind the acceptances of the CIS in direct conflict with the Act and the basis of modification by ASIC is policy, objective or legally driven.

The Act was amended from a private law, substantive rights model, to a system that regulates the corporate and fund vehicle, arranges those involved in its affairs through the prescription of processes and procedures by which decisions are made and a system in terms of which the procedural correctness is assured[62].

The real policy objective has to be analysed as to understand what the legislation intent was in light of the then existing international obligations. The literature lacks any clarity as to the real policy objective in relation to the international objectives if any.

This infers that while Australia had agreed to several IOSCO principles, the policy objectives of the legislation seems to have broadly ignored these aspects[63].

Prior to the Wallis Inquiry, financial system regulators supervised by type of financial institution rather than regulatory function.

The research Questions are;

 

1. Is the sole policy objective to facilitate investment and trade with overseas counterparties?
2. Is the sole policy objective rooted in some form of financial xenophobia (e.g. for political reasons), if so, this may involve Australia in breaches of its international obligations; and
3. Is the sole policy objective to use the power of modification to recognise offshore investment companies and others operating in Australia as MISs (for the purposes of domestic regulation) but not inform the Australian public that they have circumvented the problem in this way, the government may be in breach of the ‘separation of powers’ doctrine so fundamental to Australia’s constitutional democracy.

3.1.5        Is the MIS feasible as a legal structure?

Once the questions as to the constitutional matters has been resolved the next area for the research question is whether the MIS as is feasible from both a national and international perspective.

The structure and safeguards of the MIS is in conflict with that of the CIS[64], the literature is silent as to the features that make the MIS non-competitive.

The core differences are the Legal Form, Structure, lack of Depositary, Separation of Responsible Entity and Operator, Issues relating to Conflicts of Interest, Asset Valuation & Pricing, Investment and Borrowing Limitations and Investor Rights.

The research Question is, the MIS structure feasible or does it suffer from some inherent disconnect that makes it non-competitive, what are the features of the MIS that create the conflict and what is the effect of the features at both national and international level?

3.1.6        Aligning or harmonising the national law?

CAMAC’s has identified that there are inconsistencies between the MIS and CIS and that the Act.

The ASIC power to modify the Act prevents the alinement of the MIS and CIS by the legislature and enhances the definitional issues.

The research Question is, whether such alignment, where appropriate, would achieve an overall deregulatory benefit of having similar legislative regimes for schemes and companies at both national and international level and what other steps need to be taken in order to achieve a harmonised outcome?

3.1.7        What the inconsistence between national and international law?

The MIS structure and design are viewed as inconsistent with a CIS[65] internationally, the MIS is also viewed a non-competitive. The corollary question is why the international CIS has not accepted the design of the MIS and adopted at least some of the features.

The trend for Australian Fund Managers is to incorporate and use foreign CIS structures to be competitive instead of using the MIS by mutual recognition, has a cost effect as the Fund Manager has to incorporate feeder funds in tax neutral jurisdictions[66].

The research Question is, does the design and structure of the MIS as mandated lead to conflict with Australia’s international obligations, does the differences relating to the Legal Form, Structure, lack of Depositary, Separation of Responsible Entity and Operator, Issues relating to Conflicts of Interest, Asset Valuation & Pricing, Investment and Borrowing Limitations and Investor Rights between an MIS and CIS create irreconcilable differences at international law? Does the acceptance in Australia of structures that conflict with national law obviate the IOSCO obligations? 

 

Chapter 4 Research Methodology

 

The research methodology will cover the following methodology:

1. The research methodology will be based on propositional positivism – this involves adopting a position of a controlled and structural approach in conducting the research by identifying the research topics, constructing appropriate hypotheses and by adopting a suitable research methodology.

Primarily we propose using logical positivism as the point of departure in looking at the situation as it is, by engaging in this we have identified the research questions, the next part involves the analysis in accordance of the following guiding rules;

1. Concentrate on description and explanation of the research questions;
2. Act as a detached and external observer;
3. Create a clear distinction between reason and feelings;
4. Aim to discover external reality relating to the answer to the research questions;
5. Strive to use rational, consistent, verbal, logical approach;
6. Seek to maintain clear distinction between facts and value judgments;
7. Differentiate between science and personal experience;
8. Utilise formalised statistical and mathematical methods.

In order to achieve the outcome and test the results of the research it will be necessary to obtain input from external sources and their view on the application of the rationale to the real world.

To test the hypothesis, we suggest that;

1. We compile a batch questionnaire which we seek responses from;
   1. The international investment company’s association;
   2. Fund Organisations;
   3. IOSCO;
   4. Treasury;
   5. ASIC; and
   6. Foreign regulators.

The batch questionnaire would contain closed answer questions graded on a Likert scale so that the information collected can be analysed on a quantative basis but also allowing for the participants to provide explanations for their answers.

2. We interview the following parties as to the reluctance to use the MIS;
   1. Past and present fund regulators;
   2. CAMAC;
   3. ALRC;
   4. IOSCO;
   5. Fund Managers.

The interviews would enable the collection of rich, descriptive data that would be more qualitative than quantative in nature.  Notes would be collected from the interviews and then the content examined for thematic content.  The results could be presented in a text format.

It is noted that collecting data using a closed questionnaire approach may not take into account various factors that may affect each participant’s answers to the questions.  It is therefore proposed that the questionnaires include both closed questions (using a Likert scale) and open questions so that the data is more balanced and the reasoning for the responses can be taken into account.

2. Comparative Law – the methodology will involve the analysis of the regulations, norms and laws in Australia and the US, UK, Singapore and Hong Kong. As the focus is public international law, I will be dealing with the conflict of the laws as it applies to an MIS on the one hand and CIS on the other.

In particular the considerations relate to the disparity of the laws between Australia and the US, UK, Singapore and Hong Kong as they apply to the CIS and MIS.

The conflict of laws will determine the efficiency of the financial system in each jurisdiction and importantly the impact that the MIS has on macroeconomic performance as reflected in indicators such as growth, inflation and income distribution.

In order to address the conflict of law questions and specifically the effect of the conflict the thesis will draw on the generally available legal analysis and material as contained in the initial proposal.

3. Interdisciplinary research between law and business – the only way to effectively gauge the effectiveness of the findings is to ensure that there is a macro economic benefit based on the outcomes proposed by the thesis.

[66] Dabner, Justin H., The Taxation of Investment Funds in Australia (February 8, 2002). Available online at< SSRN: https://ssrn.com/abstract=2701084> Accessed on 29^th October 2017

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