Suspension of Australian Financial Services Licensee - LM Investment Management Limited

Paul Brown, Partner, Sydney
Michael Mellon, Senior Associate, Sydney



ASIC suspended the Australian Financial Services Licence of LM Investment Management Limited for two years this week for being an externally managed vehicle (voluntary administrators were appointed in March 2013). The practical effect of the suspension will mean that LM Investment Management won’t continue managing its nine funds. ASIC is also investigating the complex structure of the business and their related party transactions with the principal, Peter Drake. So, we can expect to see some practical advice for funds managers on related party transactions, conflicts of interest and responsible entities’ duties once ASIC has completed its investigations and commenced any prosecutions.

Peter Drake is the CEO of LM Investment Management Limited and is well known within the funds management community. Mr Drake and his companies are extensively involved with the LM funds management business through complex related party arrangements.

The voluntary administrators have filed court documents which describe the role of the LM Investment Management Group companies – they acted as the responsible entity for the funds, as the trustee of sub-trusts, provided management services and distribution services for the funds. Related party transactions included $300 million in loans to Mr Drake and his associated companies.

These arrangements are so complex that the voluntary administrators requested more time to be able to properly analyse how the business operates and how these related party transactions work. ASIC is also investigating the funds management business’s operations.

Related party transactions do not always contravene the law and can be common in funds management structures. But complex arrangements will always test conflicts of interest principles and the duties of a responsible entity. Fund managers need to ensure that a number of areas of the law are properly considered when structuring funds management businesses. Once the structure has been decided the appropriate approvals need to be obtained, proper disclosures made to investors and the constant monitoring of conflicts to ensure that investors’ interests are taken into account.

ASIC’s interest in this group also shows us that the regulator will review arrangements at any time.

While we don’t have the full story now, we can be sure that there will be more to come from the LM Funds Management licence suspension. The immediate outcome is that the LM Funds Management Group of companies will not be managing the funds and it may mean the winding-up of each of the funds. The voluntary administrators will make recommendations in the next couple of months relating to the winding-up of the funds.

Long-term outcomes for LM Investment Management Limited will relate to ASIC’s investigations and subsequent prosecutions (if any). It will be interesting to see what comes of these investigations and ASIC’s analysis of these related party transactions. For fund managers, ASIC may give some practical insight into its views on related party transactions, conflicts of interest protocols and responsible entities’ duties.

Watch this space – this is only the first instalment.

Background

ASIC relied on s. 915B(3)(b) of the Corporations Act to suspend LM Investment Management Limited’s licence because the company is being externally administered by voluntary administrators. In making this decision ASIC did not allow the licensee to attend a hearing or make submissions (an option available to it under s.915C). The suspension was immediate. 

By suspending the licence, ASIC will allow the voluntary administrators to continue to provide financial services – including transferring the management of the funds to a new responsible entity (a likely outcome), investigating or preserving the funds’ assets or winding-up the funds.

ASIC has stated that it is continuing its inquiries in relation to the conduct of LM Investment Management and won’t make any further comment at this time.

Some details about LM Investment Funds Management Limited:

  • Nine funds under management (one an unregistered wholesale scheme)
  • $740 million under management
  • The funds invest in cash, foreign currency, direct real property, commercial loans secured by first or second mortgages, and listed shares
  • Some of the funds acted as feeder funds into other group funds
  • Operates from nine offices in eight countries
  • Head office is on the Gold Coast.