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The 7 Key Things to think about when setting up a new Fund

Managed investment schemes, also called Funds or Trusts, are a popular investment structure in Australia (and the rest of the world, where they are often called ‘collective investment vehicles’).

If you are thinking about setting up your own Fund, the following are the 7 key items you need to think about and understand before you proceed:

1. What structure to use?

All funds have a collective element to them – usually the pooling of money or investments. However, several different structures can be used for a fund, including:

  • A unit trust – this is the most common fund;

  • A bare trust – also called an absolute entitlement trust;

  • A corporate collective investment vehicle – new legislation introduced from 1 July 2022 now allows these types of structures;

  • A wholesale or retail fund.

The structure you use will be determined by:

  • Whether you are targeting only wholesale investors, or also retail;

  • Whether you are hoping to attract offshore investors, or only Australian-resident investors;

  • Tax considerations;

  • The investment strategy of the fund (based in Australia, or with overseas investors).

Once you have obtained relevant tax and legal advice, and settled on your structure, you will then need to determine licensing questions.

2. What licence and trustee entity to use?

If you are setting up a retail fund – also called a managed investment scheme (MIS) – you will need an Australian Financial Services Licence (AFSL) that allows you to operate a wholesale MIS or a retail registered MIS. Retail MISs are one of the heaviest regulated structures in the Australian market. They are expensive to run – and you will need certainty that you will achieve a critical amount of funds under management to make them worthwhile.

Most entrants into setting up a new fund will establish (or at least start with) a wholesale fund. A wholesale fund is much quicker, and cheaper, to set up. It enables you to get some track record in terms of your investment strategy and to build funds under management. Once you’ve done this for a few years, it is then always possible to consider moving into the retail space.

After settling on the structure you want to use, your next key consideration is licensing and trustee.

Will you:

  • Use your own trustee entity, or outsource it to a third party trustee provider; or

  • Use or obtain your own AFSL or seek to ‘piggy-back’ off another entity’s AFSL (this is called being appointed a Corporate Authorised Representative (CAR)).

Outsourcing to a third party trustee and being appointed a CAR can have its advantages in that you can get to market more quickly, and it frees you up to focus on your core capabilities – that is, obtaining funds under management and running the investment strategy – without being as distracted by the ongoing operational and compliance requirements of the trustee and the AFSL. Although the AFSL will impose compliance obligations on you.

Either way – you should consider the costs. The costs of outsourcing to a third party trustee / AFSL provider v the costs of setting up your own trustee company and obtaining your own AFSL.

You can also mix and match – that is, set up your own trustee company and have it appointed as a CAR.

You will also need to make sure that you have the correct AFSL authorisations (whether you are obtaining your own, or outsourcing). For a fund this will typically require the ability to issue units out of the MIS, operate the MIS and invest (or deal) in the underlying investments. You will likely also need, at a minimum, general financial product advice to advice on the issuance of the units when you are distributing the fund to raise capital.

3. Next steps for setting up your Fund

Once you have settled on the structure and decided on trustee and AFSL requirements, you will need to set the fund up. This requires:

  • Appropriate legal documentation:

    • For a wholesale fund, this will typically be:

      • Trust Deed;

      • Investment Management Agreement;

      • Fund Administration Agreement (including fund registry, fund accounting, fund tax reporting);

      • Information Memorandum or Term Sheet and pitch deck. The market would normally expect an Information Memorandum. However, if your initial offer is only to ‘family and friends’ you can consider just using a Term Sheet and pitch deck.

      • Compliance protocols (compliance manual, compliance officer / committee, compliance procedures) – if you have outsourced to a trustee / AFSL provider, the compliance protocols may be provided by your outsourced provider.

      • Due diligence documents for the Information Memorandum / Term Sheet

      • Due diligence process and investment committee for running the underlying investment strategy of the fund.

    • For a retail MIS, the legal documentation will include:

      • Constitution;

      • Investment Management Agreement;

      • Product Disclosure Statement (PDS);

      • Target Market Determination;

      • Compliance Manual and compliance committee;

      • Due Diligence documents for the PDS;

      • Compliance policies (such as conflicts of interest; complaints handling, dispute resolution)

      • Process for conducting due diligence on 3rd party service providers.

  • Professional Indemnity insurance (sometimes this is provided by the outsourced trustee / AFSL holder – but increasingly, given the difficult and costly in obtaining PI insurance for financial services, you will need to obtain your own). Make sure you take the cost of the PI insurance into account when you are first calculating how much it will cost to run a fund.

  • Financial capital requirements under your AFSL – if you have your own AFSL, you will need to meet these yourself. If you have outsourced, the outsourced provider will meet the financial capital requirements.

  • Fund administration, fund accounting, fund registry, tax reporting – these services are usually outsourced. There are various providers for these services in the Australian market, so it is important to obtain a quote so you know how much it will cost you to operate the fund.

4. Distribution and Marketing

For you fund to succeed, you must ensure that you will be able to market your fund to your target investors. Your distribution network and the way you market it. It is therefore critical to understand before you even establish your fund.

What kind of marketing strategies will you use? Will you:

  • Go through the independent financial advisor network? If so, do you have the requisite connectivity with financial advisors, especially if your fund is wholesale. If your fund is retail, you will likely need a research report – and you will need 3 years track record in the fund before the research houses will give you a report;

  • Use online, digital marketing. If so, have you developed or retained an online digital marketing expert? (62 Consulting can help you); and/or

  • Use individuals to distribute.

When you are marketing or distributing your fund, it is critical to ensure that all your marketing documents are up to date, and accurate and that there is no misleading or deceptive conduct.

5. AML/KYC requirements

As a fund (whether retail or wholesale), you will need to register with AUSTRAC (Australian Transaction Reports and Analysis Centre) for AML/CTF (Anti-Money Laundering and Counter-Terrorism Financing). This registration is instrumental in ensuring that the Fund’s operations align with national and international standards aimed at preventing illicit financial activities, such as money laundering and terrorism financing.

A wholesale fund can be susceptible to being exploited for malicious financial activities. Hence, adherence to AML/CTF regulations is not only a legal imperative but also a strategic necessity to safeguard the trust’s reputation and investor confidence. Registration with AUSTRAC mandates the implementation of robust AML/CTF procedures and controls to identify, mitigate, and manage the risks of money laundering and terrorism financing.

AML/CTF compliance also includes periodic external reviews and assurance testing and legal signoff of the AML/CTF policy and procedures.

It necessitates the trust to conduct thorough customer and employee due diligence, maintain records, and report suspicious activities to AUSTRAC promptly.

AUSTRAC registration is a pivotal component in the operational and compliance framework of a fund.

6. Running the Fund

Once you have established the Fund, you will then need to operate or run the fund daily. This will require the following:

  • An investment committee with an appropriate investment charter to ensure the fund is investing in accordance with its investment strategy;

  • Regular (often monthly) compliance protocols – either attesting to your outsourced provider that you are compliant with regulations, or if you have your own AFSL, checking compliance with regulations;

  • Liaising with fund administrator and custodian to ensure accurate recording of units that have been issued and investments that have been acquired, together with redemptions, distributions and/or corporate actions (if relevant to the underlying investment);

  • Record-keeping – the fund needs to make sure it complies with the regulatory record-keeping requirements. Typically, this requires records to be kept for 7 years.

  • Investor reporting – record keeping is also crucial to ensure accurate and timely regular investor reporting to your investors.

  • Ongoing adequate resources to run the Fund – this includes financial, technological, and human resources. You will need to confirm that your resources are adequate at least once a year.

  • Risk Management Framework – you will need to consider and clearly identify the key risks to your fund and the fund/investment manager – financial and operational. You will then need to ensure that you have an appropriate risk management framework in place that mitigates and manages your key financial and operational business risks. Your compliance plan will be a cornerstone of your risk management framework as it will help you comply with your key regulatory requirements. However, there will also be operational and financial risks that you need to ensure are properly managed.

  • Cybersecurity – cybersecurity is really part of your risk management framework. However, ASIC is particularly focused on the steps funds and companies are taking to ensure the security of their IT, systems and, in particular, data security. So, it deserves its own mention. This is really an area that any new fund needs to focus on carefully so that you protect:

    • The personal information of your investors and employees; and

    • The funds under management and the investments you have – and are not targeted by fraudulent redemptions or transfers which can result in your fund becoming insolvent.

7. What if things go wrong?

Thing invariably go wrong – so it’s best to be prepared for when they do. There are some obvious warning signs when things are going wrong. These include:

  • Customer complaints; and

  • Incidents arising in the operation of the fund.

Therefore, both of these should be carefully and regularly monitored.

Customer complaints should be managed by the fund, or the investment manager, promptly and in accordance with a policy. (For a retail fund, ASIC now regulates the how these complaints need to be managed. And, if at the end the investor is still unhappy, they can go to the Australian Financial Complaints Authority (AFCA) to have their complaint heard and arbitrated – at no cost to the investor).

Incidents need to be resolved as quickly as possible, and monitored to ensure they are not systemic.

Both customer complaints and incidents can sometimes end up as a breach of the Corporations Act or of the relevant AFSL (either your own or your outsourced provider). In both cases, a report must be lodged with ASIC within 30 days. You therefore need to make sure you have appropriate procedures to identify breaches and to report them in a timely manner. Critical is also to fix the breach and to take steps that it does not recur.

62 Consulting, and its sister company, ABML Legal, can help you navigate all the steps outlined above. See our offering at 62C Funds Services - 62 Consulting and Financial Services Law | ABML Legal | Australia (


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