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Eight things you might not know about unit registry

While Unit Registry (Transfer Agency) is a very common service in Australia, it has not been well understood historically by product issuers, service providers and even - by its own admission one time - the market regulator.

Perceptions abound that unit registry is many things:

  • A trading facility

  • A valuation service

  • In the case of Cash Management Trusts with allied services - a "banking service" (I love the apoplexy this statement induces in Legal and Compliance managers)

  • A unitholder's record of investment

  • A distribution channel

While many of these perceptions can be true (but not the banking services idea), the reality is that Unit Registry serves one primary legal function - the obligation of the trustee (or Responsible Entity) to keep a record of who owns the trust (or Registered Investment Scheme) at any point in time. This core and essential obligation transcends all others.

1. Myth: "Unit Registry is not Share Registry"

This is the first operational reality that I was faced with when I started out managing a unit registry team - and I was faced with some strong resistance to the migration of business practices from my share registry experiences in Europe and Australia.

The reality is that, in respect of any Registered (Investment) Scheme (as defined in the Corporations Act 2001), unit registry is share registry - in that the obligations in respect of member registers for public companies and registered schemes are governed by the same parts of the Act: "CORPORATIONS ACT 2001 - SECT 167A.

Who is covered by this Chapter:

(1) This Chapter covers:

(a) all companies; and

(b) all registered schemes.

(2) A registered scheme's responsible entity:

(a) must perform the obligations imposed under this Chapter in respect of the scheme; and (b) may exercise the powers given by this Chapter in respect of the scheme."

2. Myth: Unit Registers are confidential

Share registers and unit registers are actually public registers. There is an obligation to allow any member of the company, scheme or of the public to view the register on 7 days' notice - with the Corporations Act only differentiating non-members in allowing the company or RE to charge a fee - to the maximum stipulated by ASIC - to cover the cost of facilitating that viewing. There is no basis on which to refuse to allow a viewing permitted in law and any such refusal is an offence of strict liability (i.e. there is no requirement to prove intent to commit an offence - it is committed when the act of refusal occurs).

The information that is allowed required to be allowed to be viewed is:

  • For all registers: name(s) and address of the holder(s) - the registered address only, postal addresses are not required to provided and

  • For Registered Schemes (Section 169(6)A)

"(a) the date on which every issue of interests takes place; and

(b) the number of interests in each issue; and

(c) the interests held by each member; and

(d) the class of interests; and

(e) the amount paid, or agreed to be considered as paid, on the interests."

Issuers need to be mindful that:

  • They can only demand a reason for inspection from a person who requests a copy of the register (in writing or electronically) and not from a person who merely wishes to inspect the register

  • Any information that is divulged on a copy or in an inspection of the register and which is not required under the act to be disclosed may lead to a breach of other legislation - including Privacy legislation. An example would be where the copy of the register provided or viewed disclosed the member holder number.

3. Unit Registers must be maintained in Australia

It is not permissible for a unit register to be kept offshore. The register must be kept at the registered office of the RE, at the primary place of business of the RE, at another place where the work of maintaining the register is undertaken or at another place in this jurisdiction approved by ASIC.

The exact definition of "kept" could be subject to legal argument. However, in extrapolating Section 1300, which allows for inspection of the member register at a location other than where it is stored when it is "kept" on a computer, the implication is that computerised records must be kept at one of the locations identified above. In other words, the data must be stored on application and database servers that are physically located in Australia.

Thus, when the registers are stored in Australia and supervision of maintenance is undertaken in Australia and the records can be inspected in Australia - but some work to maintain the registers is done overseas - there is unlikely to be a breach of the obligation on location of registers.

Unit registry systems should contain a Public Register viewing facility in the same manner as share registries have always done - mindful that the register must be available for inspection in the relevant location on the days and at the hours on which the RE's public office is required to be open (Section 1300(2)).

4. Myth: Transfers must be "unitised".

Transfer requests from members must be entered onto the register as soon as practicable after being received at the registry. There is no requirement in law for a unit price to be applied to transfers as unit prices are only used for determining:

  • The ongoing value of units in a trust (NAV)

  • The price at which the RE will issue new units (Application)

  • The price at which the RE will but back and cancel existing units (Redemption)

As (a) transfers do not result in the issue of new units or cancellation of existing units and (b) the issuer is not a party to the transaction - as it is in applications and redemptions - the price at which the transfer transaction is of no concern to the issuer. Indeed, in the absence of an established secondary market for units in an investment scheme, the value and cost bases at which transfers are transacted will almost never coincide with the unit prices of a trust at the time at which the transaction is entered onto the register.

For these reasons, a registry should not refuse to register a transaction pending a unitisation cycle (e.g. when these are suspended at financial year end for final distribution calculations). The only reasons to refuse to register a transfer of units are:

  • The RE has cause to believe that the transfer request is fraudulent;

  • The RE has a direct lien over the interests; or,

  • The constitution of the scheme specifically prohibits the transfer of units - this is rare except in more alternative asset classes such as private equity.

5. Myth: Registries are responsible for holding locks on accounts

Responsible Entities should also be very careful when agreeing to record 3rd party liens against interests on the register. While many margin lenders (and registries) believe that this places a "lock" on the holding, nothing could be further from the truth. The registry cannot refuse a subsequent request from the holder to transfer the units and may even be in breach of privacy legislation if it decides to give the margin lender a "heads up" that the request has been received. Our traditional advice has been for registries to refuse all such requests to lock holdings and to suggest the margin lender take the securities into its own name.

In the event that you have agreed to a lock on a holding and have released the holding "in error", it is often the case that party holding the lien over the asset would seek to recover damages from the registry. Good legal advice would show that any such claims should be unsuccessful. A contract with the issuer is unlikely to have been created - unless the issuer received consideration for recording the lien - and any contract that had been created would be void to the extent that it required a party to contravene law.

6. You don't have a choice in the handling of application monies!

I have encountered a number of custom practices around the handling of application monies over the years. Some were downright wrong (and thankfully those products never made it to market) and others are derived from a misguided but well-intentioned approach to maximising unitholder outcomes. The case of Basis Capital Funds Management Ltd v BT Portfolio Services Ltd [2008] NSWSC 766 provides a great source of how a court would interpret the correct treatment of application monies.

The statement of legislation in Section 1017E of the Corporations Act is simple enough:

  • Monies received for a subscription for interests in a scheme must be lodged in a special account into which only application monies and interest on those monies (if any) are deposited - application monies cannot be lodged directly to the operating bank account of the trust

  • Those monies can only be taken out of that bank account to be returned to the person who paid the monies to the issuer or on the issue of the subscribed for interests -application monies cannot be "swept" until the interests are issued

  • Interest on the application bank account stands to the credit of the person on whose money it was earned - it does not stand to the credit of the broader investor group

  • Where interest is earned on an approved account and that interest is credited to that, it must be paid to the person on whose money it was earned or it must be applied in issuing additional interests to that person

  • However, interest earned on the account may be paid to the product provider if the product provider discloses its intention to keep the interest in its Product Disclosure Statement AND if the interest is diverted to another account (i.e. it cannot be paid into the account and then withdrawn)

Obviously, a number of REs will have taken legal advice and many will have received advice contrary to that above. In the absence of guidance from ASIC or more case law on this matter, there is a clear lack of singular market interpretation on this matter. Even regulatory guidance - unless it were very prescriptive - is unlikely to remove the divergence of opinions: the APRA/ASIC guide to Good Practice in Unit Pricing has not led to a standard treatment for valuation of unlisted assets, for example.

Particularly in the retail space, best practice is to have an applications bank account that does not earn interest, or where the interest is credited directly to the product provider and this is advertised in advance in the PDS. If interest cannot be directly diverted without being credited to the earning account, it is best not to use CMT accounts. CMT accounts should also never be used unless the capital is guaranteed.

Finally, the product provider should receive the interest directly. It can pay away the interest as it sees fit after it receives it, but the RE should not allow any "short cuts" that enable custodians or administrators to receive the interest directly.

7. You cannot simply use fund accounting accruals to invest application monies at the earliest possible time.

There is a common practice whereby application monies are swept into the trust operating bank account at the close of business on the date of receipt. To ensure that the unit price is not overvalued, a "contra" entry or accrual is recorded in the Portfolio Valuation. Generally, this is bad practice for a number of reasons - but it may be legally permissible if certain steps are taken:

  • The monies should not be moved unless the interests in respect of which the interests are being subscribed have been issued. In Basis Capital vs. BT, the argument was put forward that units had been issued on the date of application, as the subscribed amount had been entered on to the unit register and a confirmation ("thank you") letter issued. This argument showed a lack of knowledge of member registry on the part of Basis Capital's administrator and legal counsel. An application for units is never a transaction on a unit register - the issue of units that results from that application is THE transaction on the register. It is perhaps for this reason that so many unit registry applications are clunky - in mingling requests with transactions in the same table. The Basis Capital judgment clearly stated that units are not issued until the exact number of units is calculated and the units and member details are physically entered onto the member register.

  • While the "contra" accrual will counter the capital effect of the application monies, it will not counter the interest effect. Almost all trust operating bank accounts will accrue interest on the overnight balance - so that the application monies will earn interest that will be pooled with the other assets of the trust. This appears to be a clear breach of Section 1017E of the act. Arguments of "member equity" are misguided, in that the subscribers of the monies are not - until the units are issued - members of the scheme in respect of those units.

  • The concept of virtual units being issued at the time of application can be posited - but is only applicable if the PDS clearly states that this the first step and that the virtual units will issued and - in the event of liquidation - that the new members will only hold virtual units. REs will need to consider whether these units would rank pari passu with other units for distributions, capital returns, etc.

8. Myth: Unit Registry is complicated

Curiously, unit registry is not complicated. It is, in fact, very simple! ASX clearing and settlement of shares - understood by so many - is far more complicated.

The complexity of unit registry lies in the "localisation" of the product in so many organisations - inherently because they focus on all the other aspects other than the inherent legal transaction that is being performed. If a unit registry function is built "from the ground up" with a primary focus on the legal transaction, it is a very simple proposition. The "value add" can be applied very usefully after that first principle is addressed. Automation, service enhancement and member engagement are all more simply addressed once that primary principle is fully and correctly addressed.

Perhaps a regulatory guide on Good Practice in Keeping Unit Trust Registers is overdue?

Note: First published on LinkedIn on 23rd September 2015.

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