Respondent
...
Alternative Investment Management Association (AIMA)
Michael Gallagher, AIMA Australia
9 December 2024
Director
Beneficial Ownership and Transparency Unit
Market Conduct and Digital Division
Treasury
Langton Cres Parkes ACT 2600
Sent via email: beneficialownership@treasury.gov.au
Dear Director,
AIMA Australia Submission: Enhanced disclosure of ownership of listed entities
Treasury Consultation Paper
1. About AIMA
AIMA, the Alternative Investment Management Association, is the global representative of the alternative investment industry, with more than 2,000 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than $2.5 trillion in assets. AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides. In addition, AIMA has over 150 local based corporate members including managers and key service providers. For further information, please visit AIMA’s website, www.aima.org.
AIMA’s affiliate association, The Alterative Credit Council (ACC) deals specifically with non-bank and private credit.
As an industry body whose membership is predominantly that of private fund managers, we take a keen interest in the development and enhancement of this part of the industry as well as the asset management industry more broadly. It is with this perspective that AIMA
Australia (AIMA) make some recommendations for Treasury’s consideration in relation to the Treasury Laws Amendment Bill 2024:
Enhanced disclosure of ownership of listed entities (Consultation Paper).
2. Consultation Paper
The Consultation Paper seeks feedback on amendments to Australia’s beneficial ownership disclosure regime which will mandate disclosure of a broader universe of interests in widely held entities. In this submission, AIMA has focused on aspects most relevant to our members.
This submission has been prepared by members of AIMA’s Regulatory Committee. Generally, AIMA is supportive of the position taken by the Financial Services Council.
Set out below are the questions posed in the Consultation Paper, and AIMA’s responses.
AIMA has addressed questions 1, 3 and 6.
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3. Executive Summary
AIMA supports the Bill’s aim for increased transparency to “address tax avoidance and improve corporate transparency However, we are concerned that the present scope of the Exposure Draft may impose a significant administrative burden on fund managers which are at low risk of perpetrating tax avoidance. Whilst fund managers are not the primary targets of the Exposure Draft they may end up bearing significant expenses complying with it. AIMA would like to work with Treasury to find pragmatic and proportionate ways to strengthen the proposal.
4. Detailed Submission
Disclosure of information about ownership of listed entities – Derivative based interests
1. The draft Bill proposes the repeal of s609(6) and redefines ‘derivatives’ in s608A. What impact would the expanded definition of
relevant interests in s608A and 608B have on ownership transparency and regulatory burden?
1.1. What impact will the removal of this exclusion have?
AIMA response
AIMA opposes the inclusion of Cash-Settled Derivatives in this definition. Many fund managers rely on Cash-Settled Derivatives as a way to gain an economic exposure to securities while minimising their trading costs. Many of these derivative transactions are undertaken solely to track an index or other benchmark as efficiently as possible. Fund managers do not invest in Cash-Settled
Derivatives with an intention to exert influence over their underlying companies.
Fund Managers engage in very high volumes of these transactions which would mean they would be subject to a significant reporting burden under the Exposure Draft. AIMA contends that Australia’s beneficial ownership laws should not be amended to require the disclosure of Cash-Settled Derivatives in this manner.
The Explanatory Memorandum explains the limited circumstances in which it is technically possible for dealings in Cash-Settled
Derivatives to be used to influence the market. To the extent that these activities are not already within the scope of market manipulation prohibitions, it would be more efficient to specifically amend rules prohibiting market manipulation to address any intentionally manipulative conduct relating to the unwinding of Cash-Settled Derivatives directly.
These paragraphs of the Explanatory Memorandum assume the holder of the derivative has influence by virtue of being able to choose to unwind the derivative (for example, by exiting or not exercising an option), in which case the counterparty will, in normal market practice, unwind their own position (i.e., sell their hedge position). However, this is speculation only, and a fund manager in the bought position is not typically aware of how its counterparty hedges (or even if it hedges) each transaction.
A person in the short position, such as the writer of an equity derivative, may sit between a long- and a short-Cash-Settled Derivative, avoiding the need to hold the underlying security, (and they often are incentivised to do so, to ensure that such derivative positions do not impact the market as far as possible). In these instances, particularly where there is no ability for the long-position holder to influence voting rights on the shares (especially if it is unaware of the hedge its counterparty holds), it is unclear why these Cash-Settled
Derivative positions should contribute towards reporting thresholds.
International comparisons for Cash-Settled Derivatives
The Exposure Draft is designed to bring “Australia’s market transparency requirements into line with comparable jurisdictions.”
(Explanatory Memorandum paragraphs 1.31 and 1,35).
AIMA supports this aim and notes the similar regimes in the US and UK below.
In the US, after a lengthy consultation, the SEC recently decided to continue to exclude Cash-Settled Derivatives from beneficial ownership disclosure requirements. Under pre-existing US law, disclosure requirements remain where a Cash-Settled Derivative:
• “confers voting and/or investment power” (or a person otherwise acquires such power based on the purchase or sale of a
derivative security);
• “is used with the purpose or effect of divesting or preventing the vesting of beneficial ownership as part of a plan or scheme to
evade the reporting requirements”; or
• “grants a right to acquire an equity security” (i.e. a physically-settled derivative).1
Footnotes
1 SEC Modernization of Beneficial Ownership Reporting, Release Nos. 33-11253; 34-98704 (10 October 2023) at pages 107-115.
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We note our position in a submission to the US Securities and Exchange Commission (SEC) on a comparable regulation:
the Proposal seems to believe that a counterparty immediately goes to the market to hedge its derivative position in what
would be akin to one-to-one hedging. This assumption is incorrect and does not reflect market realities. A broker-dealer
counterparty will aggregate its exposure across all counterparties and hedge only its net position or may not hedge the
position at all. Unlike what the Proposal seems to contemplate, just because a position is hedged, does not mean that the
broker-dealer can then deliver the referenced securities one-for-one to the derivative holder or even attribute shares that it
may hold as a hedge, or the voting of any such shares, to any specific derivative transaction.
AIMA considers this approach reflects a proportionate compromise between transparency and avoiding unnecessary expenditure of cost and effort and recommends maintaining the current approach to the reporting of Cash-Settled Derivatives as it applies to low-risk entities such as fund managers.
We also note the approach taken in the UK, where disclosure is required for Cash-Settled Derivatives but there are express exemptions for:
• Non-voting shares;
• Traditional warrants;
• Convertible bonds;
• Cash-settled index options, futures and swaps, where the relevant issuer’s stock is a component stock (if they fail the
"substance" test);
• Index-tracking ETFs, where the relevant issuer's stock is a component stock (if they fail the "substance" test);
• Rights;
• Volatility/variance swaps; and
• Dividend swaps.
Physically settled derivatives
AIMA comment
The requirement for a party in the bought position of a physically settled derivative to distinguish “relatable derivative-based holding percentage” from “deemed physically settleable derivative-based holding percentage” in section 671B notices is problematic as that party would typically have no actual knowledge of their counterparty’s hedging position.
The Explanatory Memorandum contemplates a person in the bought position would become aware of their counterparty’s hedging position or holding in underlying securities by the counterparty filing a substantial holder notice. However, it is not clear how fund managers in the bought position would know whether the counterparty to their equity derivative was holding underlying securities as a hedge. This is particularly true where large companies file substantial holder notices on behalf of a group of related entities or associates.
Example 1.1 at paragraph 1.98 of the Explanatory Memorandum assumes the investor is tracking the interests of the investment bank via their substantial holding disclosure – however this is not always feasible and, generally, the counterparty will not wish to disclose their position to the buy side and may not have an aggregated relevant interest exceeding 5%. Further, even if the counterparty’s relevant interest was included in a substantial holder notice, its particular relevant interest and hedge position for a particular physically settled derivative is not likely to be discernible amongst the relevant interests of all the other entities and associates included in the notice. This is also the case for exchange-traded derivatives, where RG5.171 contemplates that the person in the bought position should essentially deem 100% of their economic exposure of the equity derivative as their “relatable derivative-based holding percentage” under the existing subsection 608(8).
3. The ability for ASIC to determine a specific number is intended to cover the situation whereby ASIC may need to remove certain
derivatives from consideration and thereby determine the value to be zero.
3.1. Is this approach preferable to enabling ASIC to exclude particular kinds of derivatives from the beneficial ownership disclosure
requirements? If not, what alternative approach would be better?
3.2. Should ASIC have additional flexibility in the way it prescribes, or allows parties to a derivative to determine, the number of
underlying securities a person is deemed to have an interest in?
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AIMA response
The Exposure Draft confers on ASIC a discretion to assign certain derivatives a value of zero. We understand that owners of derivatives assigned a value of zero would not be required to report their ownership. Respectfully, AIMA suggests that conferring power on ASIC to prescribe the reportable number of securities or the methods available to calculate the reportable number, creating a need to remove certain derivatives from consideration by assigning them a value of zero, will create unnecessary uncertainty for industry. It is important to ensure that there is certainty which can be embedded in fund manager system configurations, calculations and reporting processes.
It would be more practical if the legislation excludes particular kinds of derivatives from the requirements (or alternatively includes certain types).
For Cash-Settled Derivatives, AIMA recommends Australia’s current approach to the reporting of Cash-Settled Derivatives be maintained, which is broadly consistent with the approach taken in the UK and US. However, if this is not accepted, AIMA recommends the Exposure Draft should be amended to make it clear that where ASIC assigns a derivative a value of zero, the owner is not obliged to report their ownership.
6. The draft Bill proposes providing ASIC with the power to approve the form in which substantial holder notices are lodged,
removing a legislative obstacle to moving towards machine readable lodgements.
6.1. What processes would be involved in meeting a requirement that substantial holder notices be lodged in machine readable
format?
6.2. What impact would carrying-out these processes have on businesses?
6.3. What impact would requiring substantial holder notices to be lodged in machine readable format have on transparency of market
operations?
AIMA is supportive in-principle of providing ASIC with the power to approve the form in which substantial holder notices are lodged.
AIMA would like to be consulted on its format to ensure it can ve easily produced and replicated, noting that many fund managers would need to be able to systemise the production of reports due to the volume of transactions.
General Observations
Finally, AIMA makes the following observations:
• Expansion of definition of relevant interests –commercial platforms
Responsible Entities (RE) of managed investment schemes (MIS) and Corporate Directors of unlisted CCIV sub-
funds are recommended to be exempt to reporting where there is a chain of interposed trusts such as Investor
Directed Portfolio Services (IDPS), master trusts or other platforms. Reporting should be limited to natural persons
that have greater than 20% of direct holdings in MIS or subsequent platform. This should be expressly provided in
the legislation.
Tracing through a chain of trusts is a large administrative challenge. Using an approach undertaken under the
Income Tax Assessment Act 1997 (Cth), focus should be directed to natural persons. Specifically:
• a MIS may have over 20% of its units held in a chain of trusts (retail master trusts, IDPS or platforms) where
the RE will invest in own related investment;
• If the chain is with unrelated entities, listing all beneficiaries in chain would be materially burdensome as
only the ultimate beneficial owner should be shown on proposed register; and
• chains of trusts (master trusts or IDPS) may hold over 20% of an MIS, if investing through platforms it can
prove difficult to identify beneficial owner.
• Transition
Many fund managers would not be able to comply with the proposed 6-month transition period, due to the nature
of the system upgrades and changes to operational processes which would be required.
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• Costs to industry
There are significant costs associated with the proposed disclosure requirements both for the initial development
and installation of new reporting systems as well as ongoing reporting obligations. AIMA submits that prior to
expansion of existing beneficial ownership reporting requirements, Treasury undertakes an evidence-led process
to ensure the perceived benefits of such a scheme outweigh the likely costs to industry.
Conclusion
AIMA supports the objective of combatting financial crime. It is important to acknowledge that fund managers are low-risk entities: while they hold economic exposures to underlying equities, they are not at high-risk of perpetrating financial crimes. If fund managers funds are required to comply with the proposed regime, this may have the effect of distracting regulators by making higher-risk entities’ disclosures harder to locate and assess.
AIMA would like to work with Treasury to find pragmatic and proportionate ways to strengthen the Exposure Draft. AIMA appreciates contributing to this consultation and looks forward to continued engagement with Treasury regarding the Exposure Draft as well as broader policy discussions regarding a possible beneficial ownership register. We would welcome the opportunity to meet with you or your team to discuss this submission, explore these issues in more detail and find ways to work together to achieve these goals.
The AIMA contacts in respect of this Submission are:
Michael Gallagher
Managing Director
Head of AIMA Australia
AIMA email: mgallagher@aima.org
Yours faithfully
Michael Gallagher, Managing Director, AIMA Australia National Group
