Who does this affect?

Issuers of financial products who may receive application money more than one month before the product issue date

What do you need to do?

Review your offering and issue processes and, if necessary, restructure these or seek ASIC relief

Author
Barry McWilliams  
Partner

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Barry McWilliams  
Partner
T +61 2 9296 2252

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Jim Boynton  
Partner
T +61 2 9296 2086

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Melbourne
John Malon  

Canberra
Stephen Jaggers  

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A recent landmark decision by the New South Wales Supreme Court raises serious practical issues for Australian and offshore funds and other financial product issuers who may receive application money in Australia more than one month prior to the issue date for the financial product.

In the case of Basis Capital Funds Management Limited v BT Portfolio Services Limited (2008) NSWSC 766, Mr Justice Austin determined that the financial product must be issued within one month from the receipt of the application money or the application money must be repaid unless it was impracticable to make the repayment because of matters such as an absence of sufficient details concerning the applicant.

Section 1017E(4)(e) of the Corporations Act allows an extension of the one month period only if it is not reasonably practicable to either issue the financial product or to return the money. If the financial product is not issued within one month but it is reasonably practicable to return the money, it must be returned. This determination is inconsistent with the practice adopted by some issuers who believed that a longer period was permitted for issuing a financial product if it was impracticable in the circumstances to issue the product within one month.

The decision has serious implications for marketing new funds where the marketing period may exceed one month, hedge funds which only issue on a monthly basis, funds where there is a delay in calculating the application price and even some issues by listed entities where longer than the minimum offer period is allowed which could result in applications being received more than one month prior to the issue date. Importantly the Court found that in this case the issue date was the date that application price and number of units were calculated and the unit register was updated.

ASIC had previously been reluctant to modify section 1017E to allow a period of longer than one month, possibly because of the flexibility which it was thought section 1017E(4)(e) conferred. A number of issuers will need to seek ASIC relief or structure the marketing of their products in a manner to avoid or reduce the risk of applications being received by the issuer more than one month prior to the proposed issue date.

Funds which have cyclical issue dates or significant delays in calculating the application price should consider amendments to their constitutions and product disclosure statements to provide for the issue of an interim product which later converts into the definitive product.

Appropriate structuring is critical as contravention of section 1017E is an offence.