ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849

Wholesale equity scheme is the central defined concept. It means a trust operated under an unregistered managed investment scheme where (a) the scheme is not registered; (b) all trust property other than incidental property consists of investment products; (c) at all times the value of quoted investment products does not exceed 20% of the trustee’s reasonable estimate of the market value of the trust property; and (d) no interests in the scheme have been issued to a person as a retail client. This definition ensures the exemption is confined to professionally oriented equity-focused schemes with limited exposure to liquid quoted securities. The 20% quoted-securities cap is a hard numerical limit; a trustee relying on the exemption must continuously monitor market values and re-estimate.

Incidental property means cash, deposits or current accounts with an Australian ADI, or interests in a cash management trust, but only if held for no more than three months pending acquisition of investment products, or expenditure or distribution to members. This is a narrow temporal and purpose limitation: the property must be genuinely transitory. Holding cash for longer than three months, or for non-incidental purposes, would cause the trust property to include non-investment-product assets and thus disqualify the scheme.

Eligible trustee means a body corporate that does not control any entity that is an issuer of an investment product held by the body corporate. Control is defined by section 50AA of the Act (ability to cast, or control the casting of, more than half the votes at a general meeting or to appoint or remove a majority of directors). The restriction prevents a trustee from relying on the exemption where it holds investment products issued by an entity it controls, which would otherwise create potential conflicts of interest and concentrated risk.

Investment product is defined in section 4 by reference to several paragraphs of the Act. It includes securities, options to acquire securities by transfer, managed investment products, foreign passport fund products, and options to acquire certain financial products. Importantly, the definition excludes direct real property, commodities, derivatives (unless they fall under the listed paragraphs), and other non-security investments. The scheme must hold only investment products (plus incidental property) to qualify.

Wholesale equity financial services are the two services exempted: dealing in investment products (other than issuing to retail clients) that form part of the trust property, and providing custodial or depository services in relation to those products. The exemption does not cover other financial services such as providing financial product advice or making a market.

Exempt liability means a liability arising from any act or omission relating to a wholesale equity financial service for which the trustee may be indemnified from trust property. The manager’s deed poll indemnity need not cover exempt liabilities, meaning beneficiaries bear the risk where the trustee has a contractual or equitable right of indemnity from the trust.

Relevant financial conditions are conditions 13 (base level financial requirements), 21 (financial requirements for holding client money or property), 22 (financial requirements for licensee transacting with clients) and 28 (audit opinion on financial requirements) of PF 209. The trustee must comply with conditions 13(a) and (b) (solvency and positive net assets) but not the full set.

Manager is a related body corporate of the trustee that holds an AFSL with the required authorisations and conditions. Related body corporate has the meaning given by section 50 of the Act (usually a holding company, subsidiary, or sibling under common control). The manager must be able to provide all the wholesale equity financial services itself, even if the trustee is the entity actually performing them.

Trust property is defined expansively to include contributions, borrowed money, property acquired with contributions, and income derived from any of these. This is the base on which the 20% quoted-securities test is measured.

The primary class affected is trustees of wholesale equity schemes that are bodies corporate. These trustees can avoid the cost and regulatory burden of holding their own AFSL, provided they satisfy the eligibility conditions and their related manager holds an appropriate licence. The exemption is particularly relevant for wholly owned trustee entities that operate alongside a licensed manager within a corporate group - common structures in unlisted property trusts, venture capital trusts, and certain managed funds offered only to wholesale investors.

Managers must hold an AFSL that authorises all the wholesale equity financial services the trustee provides. The manager must accept conditions on its licence that effectively make it vicariously liable for the trustee’s conduct. The manager must treat the trustee’s assets, liabilities, cash inflows and outflows as its own for the purpose of financial-requirements conditions on its licence. This consolidates the group’s regulatory capital obligations onto the manager, which may increase the manager’s required net tangible assets or cash needs under its own licence conditions. The manager must also execute a deed poll containing enforceable, unlimited and irrevocable covenants to indemnify each beneficiary for any liability (other than an exempt liability) arising from the trustee’s provision of wholesale equity financial services. This exposes the manager to direct claims from beneficiaries without the usual corporate veil protection.

Beneficiaries of wholesale equity schemes gain the protection of the manager’s deed poll indemnity, which is enforceable directly against the manager. They also benefit from the trustee being subject to financial conditions (solvency, positive net assets, cash needs, audit) and custodial standards (sections 912AAC and 912AAD) even though the trustee is not a licensee. However, beneficiaries bear the risk of exempt liabilities - those for which the trustee can be indemnified from trust property - because the manager’s indemnity does not cover those.

Retail clients are explicitly excluded. The scheme must not have any interests issued to retail clients. If a retail client acquires an interest (including by transfer from a wholesale client after issue), the scheme ceases to be a wholesale equity scheme and the exemption is lost. Section 7(2) requires the trustee to take all reasonable steps to ensure no interests are acquired by a retail client. This obligation is ongoing and imposes a practical burden on the trustee to monitor the secondary market and any transfers.

ASIC retains oversight through the licensing of the manager, the requirement for the trustee to notify ASIC of material non-compliance within 10 business days, and the power under section 8 to give a written notice excluding a particular person from relying on the exemption. This allows ASIC to withdraw the exemption without amending the entire instrument.

Third parties such as auditors must prepare audit opinions on the trustee’s compliance with financial requirements, lodged no later than three months after the end of the trustee’s financial year.

Trustee’s duties: The trustee must comply with conditions 13(a) and (b) of PF 209 - essentially a solvency requirement and a positive net assets requirement - for as long as it relies on the exemption. It must also comply with a notional version of section 912AC of the Act (as notionally inserted by ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648), excluding subsections (4) to (7) which set out net tangible assets requirements. This means the trustee must meet cash needs requirements and audit requirements but not the net tangible assets test. The trustee must also comply with sections 912AAC and 912AAD of the Act (as notionally inserted by CO 13/1410), which set custodial standards covering holding of assets, reporting, and protection of client property.

The trustee must take all reasonable steps to ensure that no interests in the scheme are acquired by a retail client. This is an active duty requiring ongoing monitoring of the investor base and controls on transfer of interests.

Manager’s duties: The manager must hold an AFSL authorising all wholesale equity financial services the trustee provides. The licence must contain conditions requiring the manager to: (A) comply with the Act as far as possible as if the trustee were the manager’s representative; (B) have a deed poll with enforceable, unlimited and irrevocable covenants indemnifying beneficiaries for non-exempt liabilities; and (C) treat the trustee’s assets, liabilities, cash inflows and outflows as the manager’s own for the purpose of relevant financial conditions on the manager’s licence. The manager must also comply with notional sections 912AA and 912AC (if applicable to it) as if the trustee’s figures were included.

Notification duty: If the trustee or manager becomes aware or should reasonably have become aware of matters giving reason to believe that the trustee has failed to comply with section 7 conditions (other than in an immaterial respect), 10 business days must not elapse without full particulars being provided to ASIC in writing. This is a strict timeline with no materiality threshold for the notification trigger itself - only the failure must be material. The knowledge test extends to what the trustee or manager would have known if it had undertaken reasonable enquiries.

Rights: The trustee has a right to rely on the exemption as long as conditions are met and ASIC has not given a section 8 exclusion notice. The exemption is automatic; no application is required. The trustee also has a note reference to paragraph 911A(2)(b) of the Act, which provides an alternative exemption for issuing interests in an unregistered scheme without an AFSL in certain circumstances - this may overlap with the dealing component.

The manager has the right to rely on the deed poll arrangement to structure its liability, but the covenants must be irrevocable and unlimited.

ASIC’s right: Absolute discretion under section 8 to exclude a person from the exemption by written notice, without cause stated. This creates uncertainty for any relying party.

The instrument does not create its own monetary penalties or criminal offences. Instead, non-compliance with conditions means the exemption is not available, with the consequence that the trustee’s provision of financial services without an AFSL becomes a contravention of subsection 911A(1) of the Act. That contravention can attract civil penalties under section 1317E of the Act (maximum civil penalty for a body corporate is the greater of: (a) 50,000 penalty units; (b) if the court can determine the benefit derived and detriment avoided - three times that amount; or (c) 10% of annual turnover capped at 2.5 million penalty units). Criminal prosecution is also possible under section 1311.

The key enforcement mechanism is the 10 business day notification requirement in section 6(b). If the trustee or manager becomes aware of a material failure to comply with section 7 conditions and does not notify ASIC within 10 business days, the entire exemption is unavailable from that point. This creates a bright-line forfeiture rule: the exemption ceases to apply, and the trustee becomes an unlicensed provider for any financial services provided after the 10-day period. The obligation is on both the trustee and manager, so ignorance by one does not protect the other.

Section 8 gives ASIC a unilateral power to exclude a person from the exemption by written notice. There are no grounds specified, no hearing requirement, and no appeal mechanism in the instrument itself. Judicial review under the Administrative Decisions (Judicial Review) Act 1977 may be available but carries cost and uncertainty. This power can be exercised without prior breach, which is a significant compliance risk for trustees: the exemption can be revoked at any time, requiring the trustee to either obtain its own AFSL or cease providing services.

Transitional provision section 9(1) continues the old class order for a trustee who relied on it immediately before repeal, but only until the end of the trustee’s financial year in which repeal occurred. If the trustee then switches to the new exemption, it must lodge a final report under the old class order about the period before the switch. Non-compliance with that condition also means the new exemption is unavailable.

Enforcement by beneficiaries: The manager’s deed poll gives beneficiaries a direct right of action for breach of covenant. This is a private enforcement mechanism that bypasses ASIC. The deed poll must be irrevocable, so the manager cannot unilaterally terminate it while the exemption is relied upon.

The instrument operates under paragraph 926A(2)(a) of the Corporations Act, which allows ASIC to exempt a person or class of persons from the requirement to hold an AFSL. It does not exempt from any other provisions of the Act, such as the managed investment scheme registration provisions (Part 5C.1) or the fundraising provisions (Chapter 6D) where they apply. The scheme itself must be unregistered (a condition of the definition of wholesale equity scheme), so the trustee cannot rely on this exemption if the scheme should be registered under section 601ED.

Paragraph 911A(2)(b) of the Act provides a separate exemption for issuing interests in an unregistered managed investment scheme without an AFSL if the issue does not require disclosure under Part 7.9. The instrument notes this at section 5 note 1. A trustee may use both exemptions in tandem: the section 5 exemption for dealing and custodial services, and paragraph 911A(2)(b) for issuing interests. However, the section 5 exemption covers dealing (which includes issuing to wholesale clients) so the overlap is partial.

ASIC Corporations (Miscellaneous Technical Relief) Instrument 2015/1115 provides relief from subsections 911A(1) and 911B(1) to persons providing financial services on behalf of a person who does not need an AFSL because of a section 926A exemption. This means that employees or agents of the trustee can provide services without their own licences, relying on the trustee’s exemption. This is noted in section 5 note 2 and section 9 note.

ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647 and ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648 notionally insert sections 912AA and 912AC into the Act for certain licensees. The instrument at paragraph 7(1)(b) and the note to subparagraph 6(a)(ii) cross-reference these notional provisions, requiring the trustee and manager to comply with them as if they were applicable. The 2023/649 amendment updated these references.

ASIC Class Order [CO 13/1410] notionally inserts sections 912AAC and 912AAD - custodial standards - which the trustee must comply with as if it were a licensee authorised to provide a custodial or depository service. These sections cover the holding of client money and property, reporting, and annual compliance audits.

PF 209 (ASIC Pro Forma 209) sets out standard licence conditions. The trustee must comply with conditions 13(a) and (b) (solvency and positive net assets). The note to section 7 clarifies that these base-level financial requirements are distinct from the custodial-specific requirements.

Section 989B (balance sheet for responsible entities) is relevant only for the audit lodgement timing. The instrument overrides section 989B timing: the audit opinion under notional section 912AC must be lodged within three months of the trustee’s financial year end, not the timeframe that would otherwise apply under section 989B.

Corporations Act section 50AA defines control for the purpose of the eligible trustee definition. A trustee that controls an issuer of an investment product it holds cannot be an eligible trustee.

Corporations Act sections 912AA and 912AC are notionally inserted by other instruments and apply to the manager as if the trustee’s figures were included. This interaction means the manager’s financial-requirements compliance is directly affected by the trustee’s balance sheet.

The instrument was originally made on 27 September 2017 (registered FRLI on 26 September 2018 due to a registration delay, but commenced on 27 September 2017 as stated in the instrument history). It has been amended three times.

Amendment 2018/697 (registered 13 September 2018, commenced 18 September 2018) amended section 4 (definitions). The specific change is not detailed in the endnotes beyond “am. 2018/697”, but the note in endnote 2 shows section 4 was amended. This likely updated the definition of investment product to include the new paragraphs (ca), (cb), (d), (e), and (f) that appear in the current version - covering foreign passport fund products and options on certain financial products. The timing suggests it aligned with amendments to the Act’s definitions.

Amendment 2023/649 (registered 31 August 2023, commenced 1 September 2023) made two changes: (1) amended the note in subparagraph 6(a)(ii) to add cross-references to notional sections 912AA and 912AC as notionally inserted by Instruments 2023/647 and 2023/648; and (2) amended paragraph 7(1)(b) to replace previous financial-requirements conditions with compliance with the notional version of section 912AC (the custodial financial requirements instrument). The note to subsection 7(1) was also amended accordingly. This amendment reflects ASIC’s consolidation of financial-requirements regimes for custodial/depository service providers into the notional provisions rather than relying on PF 209 conditions.

Section 2 was repealed by operation of section 48D of the Legislation Act 2003 (automatic repeal of commencement provisions). This is a standard machinery amendment.

The instrument is a compilation (No. 2) as at 1 September 2023. There is no indication of any pending further amendments. The transitional provision in section 9 ensures continuity for trustees moving from [CO 07/74] to this instrument.

The instrument text itself does not cite any litigation. As a legislative instrument providing a class exemption, it is unlikely to have been the subject of direct litigation. The underlying legal framework - the requirement to hold an AFSL and the consequences of failing to hold one - has been litigated extensively, but no cases specifically interpreting this instrument are referenced. The instrument largely relies on concepts defined in the Act (control, wholesale client, financial product) that have been judicially considered. For example, the meaning of “retail client” under section 761G has been litigated in many contexts, and the test for whether an interest is issued to a retail client would draw on that case law. The definition of “managed investment scheme” in section 9 has also been the subject of significant judicial analysis, which indirectly affects the scope of “wholesale equity scheme” because the underlying trust must be operated under a managed investment scheme. The 20% quoted-securities test is a factual one and could theoretically be contested in a dispute over whether a scheme qualifies for the exemption. However, the instrument’s central mechanism - a class exemption with specific conditions - is designed to be self-executing and not require ASIC approval, so litigation would more likely arise from ASIC enforcement action against a trustee who claimed the exemption but did not meet conditions, or from a beneficiary suing the manager under the deed poll. The deed poll indemnity itself could generate private litigation if a manager resists paying on the basis the liability is exempt. No such cases are identified in the source.

Given the instrument’s role as a safe harbour for structured wholesale funds, any litigation would likely be commercial and private rather than administrative. The lack of litigation history suggests either the conditions are well understood and complied with, or that disputes are settled without reported judgments.

The 20% quoted-securities cap is continuous. The definition requires that “at all times” the value of quoted investment products does not exceed 20% of the trustee’s reasonable estimate of market value. A temporary spike above 20% (even due to market movements, not new purchases) could cause the scheme to cease being a wholesale equity scheme, cutting off the exemption retrospectively if not rectified promptly. The trustee must constantly monitor and re-estimate. A conservative buffer is prudent.

Incidental property time limit is three months maximum. Holding cash or cash equivalents for more than three months for any reason - even a delayed acquisition - risks disqualifying the entire trust property composition because the property is no longer “incidental”. There is no discretion to extend. The three months runs from receipt of funds, not from commencement of the scheme.

Eligible trustee cannot control an issuer of any investment product it holds. This is not limited to controllers of listed companies; it applies to any issuer of any investment product. A trustee that holds a bond issued by a subsidiary it controls would be disqualified. The definition of control in section 50AA is broad - ability to control the casting of votes or appoint directors - and may extend to de facto control arrangements.

The manager must treat the trustee’s assets and liabilities as its own for financial-requirements purposes. This can significantly increase the manager’s required regulatory capital. If the trustee makes a large acquisition or incurs a liability, the manager’s net tangible assets or cash needs calculations are directly affected. The manager cannot ring-fence the trustee’s risks.

Deed poll must be in place before the exemption is relied upon. Subparagraph 6(a)(ii)(B) requires the manager’s licence to contain a condition that the manager “have in place” a deed poll. The exemption in section 5 is available only where “all of” the section 6 conditions apply. If the manager does not have the deed poll, the exemption fails.

The deed poll indemnity does not cover exempt liabilities. An exempt liability is one for which the trustee may be indemnified from trust property. This is a circular carve-out: if the trust has assets that permit indemnity, those assets are the first port of call; the manager is only liable for the residual. But what if the trust property is insufficient? The definition of exempt liability refers to a liability “for which the trustee may be indemnified” - not “for which the trustee has actually been indemnified”. A liability that is theoretically indemnifiable from trust property is exempt, even if the trust property is insufficient. The manager could argue that any liability arising from the trustee’s provision of services is indemnifiable from the trust under the trust deed, and thus exempt. Careful drafting of the trust deed is needed to limit what constitutes an “exempt liability” or to ensure the trust deed does not provide an indemnity for the services in question.

10 business day notification window is tight. Material non-compliance with section 7 conditions triggers a requirement to provide full particulars to ASIC within 10 business days. The knowledge test includes constructive knowledge (“should reasonably have become aware”). If internal reporting is slow, the window can close before the board knows of the issue. The result is automatic forfeiture of the exemption. There is no cure period.

ASIC can exclude any person by written notice for any reason (or no reason). Section 8 does not require a breach. A trustee relying on the exemption faces the risk of a sudden loss of the exemption without warning. There is no right of review in the instrument. This is a powerful regulatory lever.

Retail client acquisition is fatal if it occurs at any time. The definition of wholesale equity scheme requires that “no interests in the scheme have been issued to a person as a retail client”. This focuses on issuance, not transfer. However, section 7(2) requires the trustee to take reasonable steps to ensure no interests are “acquired by a person as a retail client”. Acquisition by transfer is not issuance, but a transfer to a retail client could still cause the scheme to fail the definition because the scheme would then have a retail client as a member. This may be a drafting gap or a deliberate wider obligation. The instrument says “acquired”, not “issued”. A secondary market transfer to a retail client would breach the condition.

Transitional trap: financial year mismatch. If the old class order repeal did not occur at the end of the trustee’s financial year, the old class order continues until that financial year ends. But if the trustee wishes to switch to the new instrument mid-year, it can, but subject to an additional condition to lodge a report under the old class order covering the period before the switch. Missing that report lodgement means the new exemption is unavailable.

A trustee wishing to rely on this exemption should take a structured approach.

Step 1: Verify the scheme fits the definition of wholesale equity scheme. Confirm the trust is operated under a managed investment scheme; the scheme is not registered; all trust property (except incidental property) consists of investment products as defined; the value of quoted investment products is and will remain at or below 20% of the trustee’s reasonable estimate of total trust property market value; and no interests have been issued to retail clients. Establish a monitoring process for the quoted-securities percentage, with daily or weekly re-estimation and a corrective action plan if the percentage approaches the limit.

Step 2: Confirm the trustee is an eligible trustee. Ensure the trustee is a body corporate and does not control any entity that is an issuer of any investment product held by the trustee. Review all holdings against the trustee’s control structure. If the trustee controls an issuer whose securities are held, either divest those securities or restructure the control relationship. Conduct an annual control assessment under section 50AA.

Step 3: Ensure a related body corporate (the manager) holds an AFSL that authorises all wholesale equity financial services the trustee will provide. The manager’s licence must be in force and current. The manager must apply to ASIC for licence variations to include the conditions required by subparagraph 6(a)(ii). The conditions must explicitly require the manager to comply with the Act as if the trustee were the manager’s representative; maintain a deed poll with covenants as described; and treat the trustee’s assets and liabilities as the manager’s own for financial-requirements purposes. Obtain written confirmation from ASIC that the licence contains these conditions before the trustee provides any services in reliance.

Step 4: Draft and execute the deed poll. The deed poll must be enforceable, unlimited, irrevocable, and for the benefit of each person to whom the trustee provides a wholesale equity financial service. It must indemnify the beneficiary in relation to any liability (other than exempt liability) arising from the trustee’s provision of the service. The deed poll should be separate from any trust deed or management agreement. Provide a copy to each beneficiary and maintain a register of beneficiaries.

Step 5: Trustee compliance program. The trustee must comply with conditions 13(a) and (b) of PF 209: maintain solvency and positive net assets at all times. Comply with the notional version of section 912AC (cash needs and audit requirements, but not net tangible assets). Comply with notional sections 912AAC and 912AAD (custodial standards). Prepare and lodge an audit opinion within three months after the end of each financial year, covering compliance with these financial requirements. Maintain continuous solvency monitoring and net asset calculations.

Step 6: Implement retail client controls. The trustee must take all reasonable steps to ensure no interests in the scheme are acquired by a retail client. This includes: requiring each applicant to complete a wholesale client certificate under section 761GA; imposing transfer restrictions so that interests cannot be transferred to a person who would be a retail client; conducting periodic reviews of the investor register; and including contractual prohibitions in the scheme constitution. If a transfer to a retail client is detected, consider whether the scheme can continue without relying on the exemption.

Step 7: Establish internal notification protocols. If any person in the trustee or manager organisation becomes aware of a failure to comply with section 7 conditions that is more than immaterial, the particulars must be provided to ASIC in writing within 10 business days. Set up an escalation procedure with a compliance officer responsible for assessing materiality and drafting the notification. The 10-day period runs from the time of awareness, not from the date of the failure.

Step 8: Transition from old class order. If relying on [CO 07/74] when it was repealed, continue to comply with the old class order until the end of the financial year (if transitional applies) or switch to the new instrument. If switching mid-year, prepare and lodge a report under the old class order for the period before the switch within three months of the period end. Ensure this report is lodged with ASIC.

Step 9: Monitor ASIC exclusion notices. Check periodically whether ASIC has issued a notice under section 8 excluding the trustee. If a notice is received, immediately cease relying on the exemption and obtain the trustee’s own AFSL or wind down services.

Step 10: Document all compliance. Maintain records of: scheme asset composition and quoted-securities percentage calculations; trustee control assessments; manager licence conditions and ASIC correspondence; deed poll execution and beneficiary register; financial condition compliance calculations and audit opinions; retail client checks; breach notifications; and old class order transition reports. These records will be essential if ASIC ever questions reliance on the exemption.