SAMPLE EXAM QUESTION – FINANCE LAW

Question 2 (15 marks)

a) Whether the scheme is required to be registered or not? If yes, what the

registration process entails. (2 marks)

Yes, the scheme is required to be registered.

A managed investment scheme must be registered under S601EB if:

a. It has more than 20 members,
b. It was promoted by a person, or an associate of a person, who was, when the
scheme was promoted, in the business of promoting managed investment
scheme, or
c. A determination under S601ED (3) is in force in relation to the scheme and the
total number of members of the schemes to which the determination relates
exceeds 20.

There are three tiers of regulation of Managed Investment Schemes (MISs):

1. Unregulated
2. Unregistered
3. Registered

b) What would Balderdash’s role, duties and responsibilities be in relation to the

scheme? (3 marks)

Balderdash is the scheme operator that is referred to as a Responsible Entity (EN). In

relation to the scheme, the role is to operate the scheme and perform the functions
conferred on it by the scheme’s constitution and the Corporations Act 2001 S601FB
(1).

The duties of Responsibility Entity (CA S601FC) must:

 Act honestly
 Exercise the degree of care and diligence that a reasonable person would
exercise
 Act in the best interest of the members and, if there is a conflict between the
members’ interests and its own interest, give priority to the members’ interests.
 Treat the members who hold interests of the same class equally and members
who hold interest of different classes fairly

c) Would they be required to establish a Compliance Committee? If not why

not? (2 marks)

No, they are not required to establish a Compliance Committee, as more than half of
the directors of Balderdash are external directors.

Under the CA S601JA - General Requirements of Compliance Committee, the RE of a

registered scheme must establish a compliance committee if less than half of the
directors of the RE are external directors.
d) If they had to establish a committee, what are the responsibilities of the
committee in relation to reporting? (2 marks)

If they had to establish a committee, the responsibilities of the committee in relation

to reporting are:
a. To monitor to what extent the RE complies with the scheme’s compliance plan
and to report on its findings to the RE,
b. To report to the RE if any breach of the Corporations Act involving the
scheme, or any breach of the provisions included in the scheme’s constitution
in accordance with S601GA of which the committee becomes aware or
suspects.
c. To report to ASIC if the committee is of the view that the RE has not taken, or
does not propose to take, appropriate action to deal with a matter reported
under (b)

e) Advise the board of any specific requirements in relation to disclosure when a

fund is illiquid (2 marks)

When a fund is illiquid whereas the fund holds commercial properties that are not
readily able to be sold and converted to cash, then specific provisions covering
withdrawals from the scheme need to be provided for. However, when a fund is
liquid, that is has access to cash or can readily sell assets to obtain cash then
withdrawal processes are generally on demand.

f) The board has some queries in relation to the scheme constitution. Advise the
board as to the purpose of the constitution. Outline what the general content
requirements are for a constitution? Who approves the content of this
document? (4 marks)

The purpose of the constitution is a foundation document of MIS that forms an

enforceable contract between the RE and the members. It also outlines the rights and
responsibilities of the parties and cannot be amended without members’ approval once
the scheme is underway.

The general requirements of a constitution:

 The constitution of a registered scheme must be contained in a document that
is legally enforceable as between the members and the RE (S601GB).
 Constitution can be modified, or repealed and replaced with a new constitution
by a special resolution of the members of the scheme, or by the RE if the RE
reasonably considers the change will not adversely affect the members’ rights
(S601GC (1)).
 Original constitution must be lodged with ASIC.
 The RE must send a copy of the scheme’s constitution to a member of the
scheme within 7 days.

Lastly, only the directors signed and approved the content of this document.