ASIC forewarned Govt of Shield, First Guardian MIS scenarios

The Australian Securities and Investments Commission (ASIC) had forewarned the Government of some of the issues surrounding the winding up of the Shield Master Fund and First Guardian Master Fund, a Parliamentary Committee has been told.

Responding to questions on notice from Senate Estimates, ASIC said it “has raised issues around the process of winding up ‘insolvent’ managed investment schemes over many years”.

In doing so, it referenced its submission to the Government’s 2023 Review of the Regulatory Framework for Managed Investment Schemes in which it stated: “Our experience is that, where the winding up of potentially insolvent schemes is performed by a responsible entity in external administration, the process tends to be lengthy, expensive and result in poor financial outcomes for scheme members, creditors and other parties interested in the winding up.

“The patchwork of overlapping but incomplete regimes results in complexity that necessitates frequent court applications. The cost of such applications reduces the pool of assets that can be returned to investors as a final distribution upon winding up, …

“Further complexity, expense and delay can arise in winding up some schemes where contributions are invested in assets that are difficult to realise, or scheme property is entangled in complex arrangements with entities related to the responsible entity (which may also be insolvent or distressed).”

It said that some of these issues have arisen with the winding up of Shield and First Guardian.

“One issue is the status of the underlying investors in the fund being wound up. Investors (e.g. unit holders) in a managed investment scheme are not directly equity holders or creditors of the company operating the managed investment scheme (i.e. the responsible entity).

“This is a direct consequence of the nature of managed investment schemes – clients are investing in the scheme (i.e. the trust fund), not the company operating the scheme.

“An added complexity in the Shield Master Fund and First Guardian Master Fund cases was that for most affected consumers the primary investor in the Shield Master Fund or First Guardian Master Fund was the trustee of the relevant APRA-regulated superannuation fund (or their custodian or nominee company), and the consumer was only an indirect investor in the underlying fund,” ASIC told the committee.

The regulator said that the status of unit holders in the liquidation of a company that is a responsible entity of a managed investment scheme is a complex question.

“We understand that there were some differences of views between various stakeholders in the Keystone/Shield Master Fund winding up process as to the status of the unit holders.