Responsible entity or Trustee – The second article in a series about setting up a managed fund in Australia.
The information process
You are considering to embark on what is a long and regulation heavy journey. Running a fund comes with much bragging rights and ability to position yourself as the go-to investment manager in your specific space. Before you skip down the yellow brick road of success, you will have to pay the regulatory pied piper. As well as providing information on the broad nature of funds management we aim to provide clear and concise specific information that will assist you in how to select which Trustee or Responsible Entity you should deal with.
We are keen to have you fully understand and assess the financial, regulatory and other impacts of what you are considering. Where possible, we will provide opposing side of information to assist you in weighing up the best option for your investment strategy and capital raising goals.
In-house versus external RE/Trustee
A common issue faced by managers is the decision to undertake the RE/trustee function in house, or to outsource these roles to an independent third party.
For offshore managers, the majority of managers choose to outsource this function for a number of reasons:
- The Australian regulatory environment – offshore managers may not be familiar with Australian laws.
- The added complexity of applying for a specific AFSL to be a RE. A manager cannot rely upon an AFSL exemption if they wish to be their own RE.
- The significant cost involved in establishing and servicing an Australian office and RE function e.g. ongoing monitoring and technology costs.
- The potential onerous capitalisation requirements, currently up to a maximum of $5 million (which is anticipated to rise to $7.5 million).
- Tax and legal considerations, for example Managed Investment Trust (MIT) compliant trusts.
Local managers may also experience some of these same challenges, and often choose to outsource the RE/trustee function.
There are also common commercial considerations that may influence the decision to outsource the RE/trustee function, which may include:
- The benefits of partnering with a well-established and reputable external RE/trustee. Many managers see significant value in aligning themselves with the name and brand of a reputable external RE/trustee in order to attract investors, and give them confidence that a professional RE/trustee is protecting their interests.
- The cost benefits of outsourcing a stringent and arduous compliance function. Fees for external RE/trustees are typically calculated on FUM, subject to a minimum fee per annum.
The role of the RE/Trustee
An RE is responsible for the operation of the MIS with specific duties imposed on it under the Act. These duties include to act honestly and in the best interest of investors, treat members equally and fairly and exercise care and diligence.
1. Responsible Entity: Fund establishment
- Due diligence on all service providers and appointment of all service providers including but not limited to the investment manager, custodian and the investment administrator.
- Drafting scheme documents such as the constitution, investment management agreement, custody agreement, investment administration agreement, including a compliance plan for the scheme.
- Establishment of the scheme and registration with ASIC.
- Issuing scheme disclosure documents (Product Disclosure Statements or Information Memorandums). b. Ongoing scheme management
- Lodgement of ASIC documents (financial reports, scheme statements etc.)
- Maintenance of RE license requirements.
- Management of ASIC requirements.
- Monitoring agents including custodians and fund administrators.
- Establishment of a compliance committee to meet Corporations Act requirements.
- Maintenance of ongoing compliance.
- Annual review of offer documents and the compliance plan to ensure continued compliance with the law, scheme constitution and transaction documentation.
- Modification of scheme documentation to reflect commercial arrangements.
As trustee of an unregistered scheme (trust), the trustee has a fiduciary duty to act in the best interests of the scheme’s beneficiaries at all times. The trustee performs the following functions to ensure the scheme is being managed appropriately:
- As legal owner of the assets, executes all relevant contracts.
- Monitors the compliance of the investment manager.
- Holds the assets of the trust either directly or through a custodian.
- Administers the trust’s bank accounts.
- Processes corporate actions and other transactions.
- Maintains the asset/investment register.
- Provides safekeeping of legal documents (eg. share certificates, note certificates) and original transaction documents.
- Signs the trust’s financial statements and tax return.
Costs involved in establishing a MIS
The cost of establishing and maintaining a MIS is a key consideration. Some costs to consider include:
- Legal fees
- Tax and audit fees
- Custody fees
- Administration fees
- RE/trustee fees
- Management fees
- ASIC/stamp duty fees e.g. fund registration, annual scheme statements
- Compliance committee costs (where relevant)
Not all RE/Trustees are made equal
Along with licensing services, your RE/Trustee service provider should ideally provide a complementary suite of services that all funds should consider essential for success.
We propose that all funds should consider the following services when comparing RE/Trustees:
- Unit Pricing
The above services costs money. These costs can be charged to the fund and don’t come out of the investment managers pocket. Most HNWI and institutional investors appreciate the transparency that comes with the above services and a fund operating without them could fall into being non-compliant in many cases.
Our proposed criteria when examining RE/Trustees
Administration – This should be a comprehensive service of registry and ancillary services including Registry Management, Dividend and Distribution Payments, AGM Services, Investor Reporting, Enquiry Management and Corporate Actions.
Price range – Price often includes a set up cost, per application cost and it is recommended to either use an Administrator service in conjunction with a Unit Pricing Service Provider or where one is owned by the other.
See Unit Pricing for full pricing
Custodian – Acts as agent for the RE/Trustee, not the investment manager. Custodians role is to legally hold, safeguard and administer a range of assets including property, mortgages, private equity, infrastructure and debt. Assets are held and managed in accordance with the custody agreement and any regulatory obligations.
Custodians are also obliged to act on all properly authorised instructions, to help to manage and safeguard the investment portfolio to the highest standards. Most HNWI and institutions will only invest when a well-known custodian service provider is involved.
Unit Pricing – Unit pricing occurs, at the very least, at entry and exit of the fund. Typically, it occurs either monthly or quarterly. The service of administration and unit pricing are often completed by the same service provider or can be split. Unit pricing services should provide an exceptional level of independent accounting and taxation to a diverse range of clients, from start-ups through to established industry heavyweights. By providing a comprehensive suite of services having a unit pricing company enables investment managers to focus on their core capabilities: investment selection and the sourcing of capital. Some of the tasks completed by a unit pricing company include:
- Bank reconciliations;
- Independent NAV pricing and valuation – monthly or estimated daily and/or estimated weekly basis (if required);
- Management and Performance Fee calculations;
- Preparation and lodgement of Business and Instalment Activity Statements (BAS / IAS);
- Calculation of periodic and year end distributions and provision of statements to clients confirming income distribution;
- Provision of month-end reports such as Statement of Financial Performance;
- Statement of Financial Position;
- Performance Attribution;
- Unrealised Gains and Losses etc.; and
- Preparation of interim and annual financial statements, including coordination and assistance with the annual audit.
- Minimum $40,000 per annum and
- 0.009% per annum on Assets Under Management up to $50 million; plus
- 0.005% per annum on Assets Under Management in excess of $50-200 million;
- 0.0025% per annum on Assets Under Management in excess of $200 million;
Distribution – Many RE/Trustees offer distribution services. Offering doesn’t equal success in raising capital or even the quality of the distribution channels. There is a significant strangle-hold in the Australian financial industry where the big four banks control both the creation and distribution of new investment products.
Getting on an Approved Product List while important in the long run, can take years and is no guarantee of a constant flow of capital.
The surest way to ensure your fund raises much needed capital is to have ‘seed’ funds of at least 5-10M. This allows the fund to cover some costs and build momentum to attract new investors.
The next most powerful ally, that you as the investment manager can have, is a RE/Trustee with extensive networks, with proven reserves of active investment capital looking for a home. See our Information Sheet on Family Offices for more information. Direct to investors is the Holy Grail in distribution and working with an RE/Trustee with systems and channels to connect your investment fund to could be the difference between a 50M and a 500M fund.
At the end of it all, the best way to know if you should have a registered or unregistered scheme is to talk to a Responsible Entity willing to give you the time of day. It will save you time and money.
- Some RE/Trustees provide a flat access fee while others will charge a percentage of capital raised. Typically, this is negotiable.