The Importance of a Compliance Committee (and Taking Detailed, Accurate Minutes)
Compliance committees perform a central function to the operation of Australian registered schemes. They are designed to ensure such schemes are compliant with Australian corporations law and the compliance plans that are made under that law.
In a time when the Australian Securities & Investments Commission (ASIC) is cracking down on companies and schemes for failing to fulfill their legal obligations, compliance is becoming more important than ever before. It has led to the creation of the ‘compliance committee’, a group whose role it is to ensure rigid adherence to corporate law.
If you run a registered managed investment scheme, you’ll need to have a robust understanding of the below. We’ll outline in detail what exactly is a compliance committee, its importance and also why taking minutes is a critical aspect of the committee’s job.
First, what is an Australian registered scheme?
An Australian registered managed investment scheme (or, simply, a registered scheme) is a scheme registered with ASIC under the Corporations Act. It is whereby people contribute money to acquire specific rights and benefits that the scheme produces.
For example, people may place money into the scheme which then invests in certain companies. Contributions made to the scheme must be ‘pooled’ or used in a ‘common enterprise’ to produce benefits to scheme members. Any profits made by the scheme are distributed to its members.
What is a compliance committee?
A compliance committee is a committee that acts as the reporting body between the board and the area of a registered scheme’s business that performs its compliance function. It is regulated under Chapter 5C of the Corporations Act 2001 (Cth).
The board appoints members on the Compliance Committee. A majority must be ‘external members’, a comprehensive definition of which you can find here.
The role of a compliance committee is to make sure that that the activities of the responsible entity (RE) of the registered scheme are compliant with the scheme’s ‘compliance plan’.
A compliance plan is a comprehensive plan setting out measures that an RE needs to apply when operating to ensure compliance with the Corporations Act. This is a document that needs to be lodged with ASIC, and signed by all directors of the RE.
What do compliance committees actually do?
The compliance committee is a central player in a registered scheme’s work.
ASIC suggests in Regulatory Guide (RG) 132 that compliance committee should meet at least quarterly. They comment that, if they meet less frequently, they would not be able to fulfil their function.
The functions of a compliance committee include:
- Monitoring the RE’s compliance with the compliance plan, and reporting findings to the directors when necessary;
- Reporting to the Board any breaches of the Corporations Act that involves the Scheme or the applicable Constitution when it suspects or becomes aware of such a breach;
- Reporting to ASIC if the RE hasn’t taken or doesn’t propose to take appropriate action to deal with it;
- Make an assessment every year whether the compliance plan is adequate (unless they decide otherwise); and
- Report on the compliance plan’s adequacy and recommend amendments when it considers desirable and necessary.
Duties of members
Members of a compliance committee have strict legal duties contained in section 601JD of the Corporations Act. A contravention of these duties may attract a civil penalty and prosecution by ASIC.
Compliance members must:
- Act honestly
- Exercise care and diligence that a reasonable person would exercise in their position
- Not use their position, or information they gained as a committee member, to cause detriment to other members, or gain and improper advantage for themselves or someone else
- Take all reasonable steps to help ASIC conduct ‘surveillance checks’ (which is where ASIC checks to see if an RE of a registered scheme s complying with the Act, its constitution and its compliance plan).
ASIC has recognised the significant importance of the compliance committee, and expect that members appointed to the Committee are diligent. In RG 132, they state:
Given the important role that the compliance committee plays as a gatekeeper in monitoring the responsible entity’s compliance with its obligations, we consider it is important that compliance committee members have enough experience, qualifications and competence to carry out their duties and functions.
ASIC recommends in RG 132 that REs appoint committee members who have:
- relevant tertiary qualifications (for example, in finance or law);
- years’ of work experience in undertaking compliance activities and investigations; and
- an understanding of the applicable regulatory requirements and how they apply.
ASIC also says that REs should “take action” when it discovers that a compliance committee member is not properly performing their duties under the Act, or where it is inappropriate for such member to sit.
The ‘qualified privilege’ of compliance committee members
Compliance committee members are in a unique position because the Corporations Act grants them what is called ‘qualified privilege’ in certain circumstances.
This means that compliance committee members are protected in many cases from liability in defamation when making statements concerning the registered scheme’s operation (when that statement is made by or on behalf of the committee or committee member, to ASIC or to the RE)
In plain English, it means that members of the compliance committee won’t be found liable in defamation (in other words, libel or slander) in some circumstances, when they make a statement concerning the registered scheme to ASIC or the RE.
Compliance committee members should obtain professional legal advice to understand what they are allowed and not allowed to state, and the extent to which qualified privilege will protect them.
When are compliance committees required?
Compliance committees are required to be established by Chapter 5C of the Corporations Act, but only if less than half of the directors of the RE are “external directors”.
An external director has an extensive definition in the Act, but it includes a director of the RE who is not, or has not been in the last two years:
- employed by the RE or a related body corporate;
- a senior manager of a related body corporate; and
- substantially involved in business dealings or in a professional capacity with the RE or related body corporate.
External directors also include directors of the RE who are not a member of a partnership that is, or has been in previous 2 years, substantially involved in business dealings (or in a professional capacity) with the RE or a related body corporate.
They can also include directors who don’t have a material interest, are not a relative of someone who has a material interest, in the RE or related body corporate.
Why are compliance committees so important?
Compliance committees are integral to the operation of a registered scheme because they act as an added layer of protection from liability. ASIC themselves have described them in RG 132 as a ‘gatekeeper’ in monitoring an RE’s compliance.
If a scheme does not have a compliance committee, ASIC have explicitly stated that they will look at external directors more closely. In RG 132, ASIC say that:
If the registered scheme does not have a compliance committee, we will look for the external directors to be particularly vigilant and actively engaged with compliance issues.
However, it is important to understand that – even without a compliance committee – responsibility will still fall on directors and the board. ASIC commented in RG 132 that:
Regardless of whether the responsible entity has a compliance committee, the board remains ultimately responsible for ensuring that the responsible entity complies with its obligations. The compliance committee can operate, in part, as an intermediary between the operational compliance unit and board of directors in relation to compliance monitoring, assessment and reporting.
As such, boards of REs will increasingly come to rely on compliance committees for advice in order to ensure that their managed investments scheme operations are compliant with corporations legislation.
Minutes, minutes, minutes
Taking detailed, accurate minutes in the compliance committee is essential to having transparent operations. Section 601JH(2) of the Corporations Act requires the committee to keep minutes of its meetings and records of its reports and recommendations.
These minutes are critical because:
- They can be used as evidence if an RE is prosecuted by ASIC or are otherwise sued;
- They provide a plan of action for the committee to address important issues and keep records of the decisions that are made;
- They record the ‘next steps’, and who is responsible for post-meeting action; and
- They record who agreed to what, which may need to be referred to later on.
ASIC also stresses the importance of taking minutes, stating in RG 132 that:
The compliance committee should keep records to demonstrate that it is appropriately monitoring compliance with the compliance plan. Appropriate records would include meeting agendas, minutes, reports received by the compliance committee and reports made by the compliance committee to the board.
Some concluding words
Compliance committees are integral to the operation of Australian registered schemes and act as a ‘gatekeeper’ for responsible entities when it comes to complying with the Corporations Act and their compliance plans.
ASIC have become very active in this highly technical area, so it’s important to understand what your obligations are and how you must comply with them.
The team at 2account are here to help. We’re completely across all relevant areas of the Act that you need to know and can ensure that your compliance committee is on track to fulfilling their obligations and keeping your registered scheme on the path to success.