Regulatory Requirements for Compliance Plans
Significance of Compliance Plans to the Registration of Schemes
Under section 601EB(1) of the Act, ASIC must register a managed investment scheme within the prescribed timeframe, unless it appears to ASIC that certain requirements of the Act as specified in that provision have not been met, including whether the scheme’s compliance plan meets the requirements of Part 5C.4 of the Act. Consequently, ASIC will review a scheme’s compliance plan before approving a scheme’s application for registration. ASIC Regulatory Guide RG 132 Managed investments: Compliance plans identifies the following approach which ASIC has stated it will adopt when reviewing the compliance plans of schemes prior to registration:
RG 132.14: We will actively assess compliance plans when we are deciding whether or not to register a scheme under s 601EB(1). We will consider, in the context of the type of scheme, whether the responsible entity has designed measures which adequately address the risks of not complying with its obligations. For example, a responsible entity must continuously monitor, review and audit the outcomes of its compliance activities. We will therefore assess whether the responsible entity’s arrangements for doing this are adequate.
RG 132 provides guidance to responsible entities on how to prepare a compliance plan and in particular, on the structured and systematic process which needs to be undertaken when developing such plans. Consequently, when reviewing a compliance plan for registration purposes, it is likely that ASIC considers matters outlined in RG 132 such as:
- the responsible entity’s obligations under the Act and the scheme’s constitution;
- the risks to ongoing compliance, given such matters as the nature of the scheme, its operating environment, its size, and the nature of its assets;
- the likelihood and potential impact of failing to achieve the outcomes intended by the Act and the scheme’s constitution;
- the appropriateness of the focus adopted in the compliance plan and the compliance measures in terms of stated outcomes; and
- the specific requirements of Part 5C.4 of the Act.
ASIC has the authority to withhold the scheme’s registration, until such time as any deficiencies in the compliance plan which it may have identified during the registration process are rectified by the responsible entity.
Section 601HE(1) of the Act enables the responsible entity to make changes to the compliance plan, to facilitate the updating of the compliance plan as circumstances change, or in the case that particular measures are found to be ineffective. Under section 601HE(2), ASIC may also require that the responsible entity make changes to the compliance plan in certain circumstances. Where modifications to the compliance plan are made or a compliance plan is repealed and replaced, the auditor ascertains that it is lodged with ASIC in accordance with the requirements of section 601HE(3).
Contents of the Compliance Plan
Section 601HA of the Act requires each registered scheme to have in place a compliance plan which sets out “adequate measures” that the responsible entity is to apply in operating the scheme to ensure compliance with the Act and the scheme’s constitution.
Specific matters which are identified in section 601HA that are to be included in compliance plans include arrangements for:
- the identification and custody of scheme property;
- the operation and functions of the scheme’s compliance committee, where required;
- the valuation of scheme property;
- ensuring the compliance plan is audited as required by section 601HG;
- ensuring adequate records are kept of the scheme’s operations; and
- compliance with other matters prescribed in the regulations.
RG 132 outlines considerations which a responsible entity is to take into account when preparing compliance plans in order to satisfy the requirements of section 601HA. RG 132 also emphasises that compliance plans for each scheme are to include compliance measures which provide clear links with the requirements of the Act and the scheme’s constitution. Such measures are to be set out in the compliance plan with sufficient clarity and detail to enable the responsible entity’s directors and where required, the compliance committee, as well as the compliance plan auditor to assess whether the responsible entity has complied with the compliance plan and the requirements of section 601HA.
RG 45 Mortgage schemes—improving disclosure for retail investors (September 2008) and RG 46 Unlisted property schemes—improving disclosure for retail investors (September 2008) expects compliance plans of the relevant schemes to contain adequate procedures to ensure disclosure against the benchmarks specified in the regulatory guides. The Act imposes various obligations on the responsible entity and its officers to ensure that the requirements of section 601HA are met. These obligations include:
- Section 601FC(1)(g) – which specifically requires the responsible entity of a registered scheme to ensure that the scheme’s compliance plan meets the requirements of section 601HA.
- Section 601FC(1)(h) – which requires the responsible entity to comply with the scheme’s compliance plan.
- Section 601JA(1) – which obliges the responsible entity to establish a compliance committee, if less than half of the directors of the responsible entity are external directors. Such a committee is inter alia required to monitor compliance with the compliance plan and assess the adequacy of the compliance plan in accordance with section 601JC(1).
- Notwithstanding the above, section 601FD(1)(f) places the onus on the officers of the responsible entity to take all steps that a reasonable person would take to ensure that the responsible entity complies with the compliance plan.
RG 132 expects the responsible entity, when preparing a compliance plan for the first time and continuously thereafter, to undertake a due diligence process to consider its responsibilities under the Act and the scheme’s constitution, identify risks of non-compliance and establish measures to address those risks. ASIC has benchmarked compliance plans for schemes within various industries and provided examples of better compliance plans for those schemes in the following regulatory guides:
- RG 116 Commentary on compliance plans: Agricultural industry schemes (April 2004).
- RG 117 Commentary on compliance plans: Financial asset schemes (April 2004)
- RG 118 Commentary on compliance plans: Contributory mortgage schemes (April 2004)
- RG 119 Commentary on compliance plans: Pooled mortgage schemes (April 2004).
- RG 120 Commentary on compliance plans: Property schemes (April 2004).
RG 132 sets out ASIC’s expectations of responsible entities when preparing compliance plans for registered schemes to meet the requirements of the Act. As identified in RG 132, the responsible entity is expected to continuously monitor the outcomes of its compliance activities in order to satisfy the requirements of section 601HA. To enable such monitoring and assessment to occur, the responsible entity is expected to establish and maintain compliance reporting structures to prevent, and where necessary to identify and respond to breaches of its compliance plan, and to promote what ASIC has described as a “culture of compliance”.
With regard to the above, ASIC has indicated that it expects such compliance structures to include clear procedures for recording and reporting on compliance, a complaints handling system, systems to identify, investigate and rectify recurring and systemic problems, and appropriately trained staff. The responsible entity is also expected to have adequate compliance measures in place for monitoring and maintaining an adequate level of control over any activities which it may outsource to external service providers.
See RG 139 Approval and oversight of external dispute resolution schemes.