This part deals with:
(a) the definition of a “managed investment scheme” in the Act, commonly referred to by its prefix “MIS;
(b) the joint ownership arrangements of thoroughbred racehorses within the context of the regulatory regime; and
(c) the conditions of registration (as the owner or lessee) of a racehorse and the ARR that require the members of any arrangement between 2 or more owners or lessees to appoint:
(i) a manager; and
(ii) a licensed trainer;
to manage aspects of the arrangement on behalf of the members as a group.
Conclusion
The managed investments scheme regulatory regime is imbedded within the Act.
It is a set of compliance rules for unincorporated arrangements (schemes) involving collective investment established by a person (promoter) raising funds from investors which are then applied and managed by the operator of the scheme on behalf of the group.
The purpose of the rules is to ensure minimum standards of investor protection in relation to the establishment and operation of such schemes.
The determining criteria of a managed investment scheme can only be the legislated definition of a managed investment scheme complemented by the principles established by the case law, objectively applied.
The analysis of a scheme to determine if it satisfies or falls outside the scope of the definition requires that consideration be given to:
(a) all its key elements, including:
(i) legal structure;
(ii) the nature of the members interests [contributions and rights to benefits]; and
(iii) modus operandi [the realities of how it is designed to operate in practice];
(b) the scheme as being the entire operation [all the activities carried out in relation to the scheme as comprising the scheme’s operations]; and
(c) the necessary distinction between:
(i) the activities [and rights] of the individual members and those of the group; and
(ii) day-to-day “control in fact” and each of “the legal right to control” and “merely a right to participate in decision-making” [the existence of such rights in the members does not necessarily lead to the conclusion that the members have day-to-day “control in fact” over the operation of the scheme].
The fundamental distinction which underlies the whole of the definition is between:
(a) schemes where “all” the members have day-to-day control over the operation of the scheme by making “all” the decisions and implementing what is agreed; and
(b) schemes where the members contributions [of money or money’s worth] are either:
(i) pooled for use as the property of the scheme; or
(ii) not pooled but used in a common enterprise that constitutes the scheme;
with the day-to-day [routine, ordinary, everyday] activities of the scheme being managed or carried out by a person who is an operator of the scheme on behalf of the members collectively, (whether or not they have the right to be consulted or give directions).
The objective assessment in determining day-to-day control is necessarily prospective, viewed from the time when the arrangements are made.
The day-to-day control test is not about ownership or proprietorship, or the legal right to control of the scheme.
- The purpose of the day-to-day control test is to make an important distinction about the nature of the investment each member of the scheme is making.
- If the substance is that all the members have day-to-day “control in fact” over the operation of the scheme by making all the decisions and implementing what is agreed [actually managing or carrying out the routine, ordinary, everyday activities that comprise the scheme’s operations], then the scheme will not be a managed investment scheme.
- However, if the substance is that the members contributions are either pooled for use as the property of the scheme, or not pooled but used in a common enterprise that constitutes the scheme, to produce financial benefits, or benefits consisting of rights or interests in property, and the members collectively appoint a person to operate the scheme [with the authority to actually manage or carry-out the routine, ordinary, everyday activities that comprise the scheme’s operations] on behalf of the group, then the scheme will be a managed investment scheme (whether or not they have the right to be consulted or give directions).
- It is a negative test in the sense that for the arrangements to be a managed investment scheme they must be such that the members do not have day-to-day “control in fact” over the operation of the scheme, prospectively viewed from the time when the arrangements are made.
- to produce financial benefits, or benefits consisting of rights or interests in property, and the members collectively appoint a person to operate the scheme [with the authority to actually manage or carry-out the routine, ordinary, everyday activities that comprise the scheme’s operations] on behalf of the group, then the scheme will be a managed investment scheme (whether or not they have the right to be consulted or give directions).
The day-to-day control test includes consideration as to whether a person who provides management services in relation to the property is either:
(a) a mere “agent” who manages the property of each member individually or “investment professional” who simply provides advice to the members on enhancing the value of their own property without exercising control; or
(b) an “operator” of the scheme who manages “as a whole” the property of the group.
The management activities of a person who is the “promoter” or “operator” are not to be imputed to the members in determining whether the members have day-to-day control over the operation of the scheme.
If the key elements of a scheme satisfy the definition, then its establishment and operation will likely be subject to regulation, except if it qualifies as a “private” scheme. To qualify as a “private” scheme it must not require registration under section 601ED. In other words, it must not have more than 20 members and the person who established it must not be [a promoter] in the business of dealing in interests in such schemes.
Horse racing schemes
Horse racing schemes generally [by practical necessity and to comply with the ARR] are sufficiently uniform in their key elements to justify the conclusion that all arrangements made between 2 or more people who own or lease a thoroughbred horse for the purpose of using it for racing will, prima facie, satisfy the definition of a managed investment scheme.
The key elements that satisfy the definition are:
(a) the members contributions [of money or money’s worth] are either:
(i) pooled for use as the property of the scheme [typical of partnership or unit trust-based “investment” arrangements]; or
(ii) not pooled but used in a common enterprise that constitutes the scheme [typical of co-ownership contract-based “common enterprise” arrangements];
to produce financial benefits, or benefits consisting of rights or interests in property;
(b) the scheme is operated by a manager and a licensed trainer on behalf of the members collectively; and
(c) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or give directions).
The realities of horse racing schemes that are co-ownership contract-based “common enterprise” arrangements as they are designed to operate in practice are:
(a) the members contribute to the common enterprise that constitutes the scheme:
(i) the right to use their individual interests in the horse in the operation of the common enterprise; and
(ii) money [in the same proportions as the interests held] to pay operating expenses, including horse expenses;
to facilitate their interests being managed in common [the horse “as a whole”] for the benefit of the group;
(b) each member’s rights to benefits produced by the scheme include the rights to:
(i) participate as a member of the scheme in racing the horse “as a whole” for the benefit of the group [a benefit derived as the holder of rights or interests in property]; and
(ii) receive distributions of any income (net prize money) earned, in the same proportion as the interest held [a financial benefit produced by the scheme];
(c) each member’s interest in the property of the group [the horse “as a whole”] which is the subject of the scheme’s operations, not the scheme itself so far as that is different, from an operational perspective, is inseparable from the interests of the other members; and
(d) the right of the members to manage their interests individually is:
(i) subordinated to the rights of the members collectively and the authority of the manager and the trainer [with actual possession and control of the horse “as a whole”] to operate the scheme on behalf of the group; and
(ii) limited to voting on those matters specified in the relevant Owners Agreement or Training Agreement as requiring the members’ approval (by the requisite majority).
The manager and the trainer are both clearly “operators” of the scheme who:
(a) control and direct aspects of the scheme’s operations on behalf of the members collectively;
(b) manage “as a whole” the property of the group [the members’ individual interests in common – the horse “as a whole”]; and
(c) procure the services of other service providers such as veterinarians, farriers, jockeys, agisters and pre-trainers, etc.
Neither of them is a mere “agent” who manages the property of each member individually or “investment professional” who simply provides advice to the members on enhancing the value of their own property without exercising control.
Accordingly, day-to-day “control in fact” over the operation of the scheme devolves to the manager and the trainer, being the people who, as operators of the scheme, actually perform “… the acts which constitute the management of or the carrying out of the activities which constitute the scheme”.
Conversely, all the members do not have day-to-day “control in fact” over the operation of the scheme, prospectively viewed from the time when the arrangements are made. Practical necessity and the ARR require that the members:
(a) agree:
(i) to appoint a person (manager) to control and direct aspects of the scheme’s operations, including those relating to its legal structure and administration, dealings with racing officialdom, the trainer and other service providers, as required, on behalf of the group [in accordance with the ARR and the terms of the TOR COA or other agreement adopted by the members]; and
(ii) to the manager on behalf of the group appointing a licensed trainer, [including agreeing to the terms of the Trainer’s Training Agreement and Fees Notice], to take actual possession and control of the horse “as a whole” for the purpose of managing or carrying out those activities that collectively comprise the act of training a racehorse [in accordance with the ARR and the terms of the TOR STA or other agreement adopted by the parties]; and
delegate to them the authority to operate the scheme on behalf of the group; and
(b) surrender day-to-day control over their individual interests to the manager and the trainer so that those people can manage the members’ interests in common [the horse “as a whole”] for the benefit of the group, (whether or not they have the right to be consulted or give directions).
However, a scheme may not possess these characteristics alone. The fact that it may also possess other characteristics, including terms that provide for the members to:
(a) pay their contributions towards operating expenses directly* to the relevant service providers [proportionate direct invoicing and payment of fees and expenses];
(b) be paid their distributions of any income (prize money) directly* via the stakes payment system;
[*an alternative to the manager administering these arrangements via a designated scheme bank account] or
does not take it outside the scope of the definition.
The case law and the evidence clearly support the conclusion that the characteristics of a managed investment scheme are inherent in horse racing schemes as they are both designed to operate in practice and required to operate by the ARR. Consequently, there is no apparent basis upon which any person, including a licensed trainer, who is “a promoter” in the business of establishing or operating such schemes, could successfully argue [in any legal forum] that the resultant schemes are outside the scope of the definition. Any such argument would likely be a misrepresentation of the arrangements to avoid the legislative intention of the statutory provisions.
The need for all the members to exercise day-to-day control over the operation of the scheme by making all the decisions and implementing what is agreed would be impractical and a significant impediment to the operation of the scheme which is only overcome by the members:
(a) appointing a manager and a licensed trainer [with actual possession and control of the horse “as a whole”]; and
(b) delegating to them the authority to operate aspects of the scheme on behalf of the members collectively.