ASIC has released Regulatory Guide 209 Credit licensing: Responsible lending conduct obligations (RG 209) to provide regulatory guidance for credit licensees about the responsible lending obligations in the National Consumer Credit Protection Act (National Credit Act).

The responsible lending conduct obligations will apply to non-ADIs and non-RFCs (and their credit representatives) from 1 July 2010.

They will apply to ADIs and RFCs (and their credit representatives) from 1 January 2011.

Other responsible lending obligations (including disclosure requirements, such as upfront disclosure of broker fees and charges) will apply to all licensees and credit representatives from 1 January 2011.

RG 209 is designed to help credit licensees and credit licence applicants to:

• develop arrangements and systems to meet their responsible lending obligations; and
• understand what ASIC expects when assessing whether licensees are complying with their responsible lending obligations.

The key responsible lending obligation is that credit licensees must not suggest, assist with or provide a credit product that is unsuitable for a consumer.

Before a credit licensee suggests, assists with, or provides a new credit contract or lease to a consumer, the credit licensee must:

• make reasonable inquiries of the consumer about their requirements and objectives in relation to the credit contract;
• take reasonable steps to verify the consumer’s financial situation;
• based upon these inquiries, assess whether the credit product is unsuitable for the consumer and only proceed if the credit product is not unsuitable; and
• give the consumer a copy of the assessment if requested.

A contract will be unsuitable if the consumer would be unable to repay it without substantial hardship or it will not meet the consumer’s requirements or objectives. The requirements also apply where the credit limit on an existing contract is being increased.

ASIC has released Consultation Paper 131 Proposed ASIC Market Integrity Rules – ASX and SFE Markets (CP 131) which proposes market integrity rules to apply to trading on ASX and SFE markets, based on the existing rules of these markets, while clarifying the supervisory responsibilities of ASIC and market operators.

The paper contains an outline of a proposed approach to dealing with breaches of the rules, including details of a Markets Disciplinary regime as similar as possible to the current ASX disciplinary tribunal, with penalties consistent with the current approach.

ASIC is seeking feedback on these market integrity rules proposals by 26 March 2010

I worked as an attorney in New York. Sometimes I’m asked about the various types of entities you can use when establishing a business in the United States. There are more options than in Australia. Here is a very high level overview. It describes some of the features that may determine the best choice of entity.

Delaware

Formation of business entities in the United States is largely at a state level and the most popular jurisdiction is Delaware. It has the most flexible, up-to-date and pro-business corporate laws. With a corporation, for example:

• the identity of shareholders does not need to be disclosed;
• shareholders do not need to be US citizens or even US resident (NOTE: even so, for certain classes of industries in the US there are foreign ownership restrictions);
• you can have sole director corporations;
• meetings and records can be held anywhere;
• directors can amend the by-laws (i.e. constitution) of the corporation without shareholder consent; and
• there are no minimum capital requirements.

The Delaware Court of Chancery is a specialist court for corporate law, with great expertise and precedents. There is also an efficient state administration of business entities, and there is no corporate income tax for corporations that do not transact business in the state.

Because it’s the most popular jurisdiction, I’ll focus on the Delaware laws in this summary.

Main types of business entities

The main types of business entities are shown in the diagram.

Offshore entities are sometimes also used as part of a structure to do business in the US.

Distinguishing features

The key differences between the different kinds of business organisation fall broadly into three categories:

• Taxation - how they’re taxed
• Liability - the liability of owners for liabilities and obligations of the entity
• Flexibility - the extent to which you can structure the entity to suit your own requirements

Let’s look at each of these a little further. Taxation

• Corporations generally have ‘double taxation’ - i.e., corporate income tax on earnings and then income tax on dividends in the hands of the recipient. Small business or ‘Subchapter S’ corporations are different. They have pass-through treatment of income (i.e., no double taxation), but there are restrictions: these corporations can only have a maximum of 75 shareholders, the shareholders must not be an LP, LLC, a corporation or non-resident alien, and there can only be one class of stock. Because of the foreign ownership restriction, the Subchapter S corporation usually won’t work for a foreign investor.
• LLCs are subject to ‘check the box’ regulations, under which you can choose pass-through or double taxation. If you fail to choose, the default option is pass-through.
• Partnerships (LPs, LLPs, LLLPs and general partnerships) are pass-through entities and are not separately liable for income tax.
• Statutory trusts can be set up to be taxed like a corporation or pass-through like a partnership (or taxed as a grantor trust).
• Offshore enities formed in low-tax or no-tax jurisdictions are sometimes used by businesses operating in the US (and elsewhere), mainly for tax reasons, but there can be many complications in obtaining those tax advantages.

Liability

• Corporations have limited liability of shareholders for the obligations and liabilities of the corporation. There are exceptions of course: what is known as ‘piercing of the corporate veil’.
• LLCs also have limited liability, like corporations: the members are not liable for the obligations and liabilities of the LLC. So they offer the advantages of pass-through income for tax purposes, unlike a corporation, while maintaining the benefits of limited liability.
• With an LLP, the partners are not personally liable for obligations and liabilities of the LLP. A general partnership can be converted to an LLP to achieve this result.
• LPs have limited partners and general partners. The limited partners are not personally liable for obligations and liabilities of the LP beyond their contribution (but can be if they participate in the control of the business); the general partners will be personally liable for the obligations and liabilities of the LP. In some states (including Delaware), an LP can convert to an LLLP, under which the general partner’s liability is also limited.
• General partnerships have unlimited liability of partners, who are each jointly and severally liable for the debts and obligations of the partnership.
• The beneficiaries of a statutory trust have the same limitation of personal liability as a shareholder of a corporation, and the property of the trust is not available to creditors of a beneficiary. The trust is a separate legal entity and can have perpetual existence, except as otherwise provided by the governing instrument of the trust (usually called the trust agreement). The liability of the trustee is determined by the governing instrument, so it can be more restricted than would otherwise apply at common law. The statutory trust can also indemnify the trustee, beneficial owner or anyone else from liability, where permitted by the governing instrument.
• A joint venture is a similar type of arrangement to a partnership, but the general concept of a JV is to avoid the joint and several liability of a partnership. The rights and liabilities of the joint venture parties are determined by the joint venture agreement, and so the joint venture agreement will normally allocate and limit respective liabilities.
• Sole proprietors, of course, have unlimited liability.

Flexibility

• The corporation is probably the least flexible form of business entity. There are a lot of statutory provisions about structure. For that reason it is the preferred form for public offerings of securities. The corporation must have a certificate of incorporation and by-laws, and be governed by a board unless it is classified as a ‘close corporation.’
• An LLC is more like a partnership in terms of its flexibility. But it can have a sole member, which is something a partnership can’t (by definition). Unlike a corporation, it doesn’t need to have a board (although some do), and profits don’t have to be distributed in proportion to ownership as occurs with a corporation. The governing document of an LLC is usually called its operating agreement or limited liability company agreement.
• A partnership will have a partnership agreement as its governing document. If it is an LP, LLP or LLLP, the agreement can limit the liability of partners. And a joint venture will have a joint venture agreement, which can limit the respective liabilities of the joint venturers.
• Statutory trusts are also very flexible. There are the basic concepts of trustee and beneficiary, but their respective rights and liabilities have a potentially wide range of variation, as set out in the trust agreement.

Multi-entity structures The best form for a business may involve multiple entities, and there is an endless variety of combinations. Often businesses are structured with separate entities for separate lines of business. Another common structure is to have a holding company at the top with the corporate group consolidated for tax purposes. Sometimes entities in the chain are located offshore. Delaware business entity laws online For more details, you can access the Delaware laws on business entities online.

• Corporations - Delaware General Corporation Law
• LLCs - Delaware Limited Liability Company Act
• LPs and LLLPs - Delaware Revised Uniform Limited Partnership Act
• LLPs and general partnerships - Delaware Revised Uniform Partnership Act
• Statutory trusts - Delaware Statutory Trust Act

Sometimes a problem is so big you can’t hide behind legal niceties.

This week saw Akio Toyoda, the President of Toyota, apologise to a US House Committee for the recall of 8.5million cars due to safety fears.

This is a truly revealing insight into a company’s culture.

See the video and story at BBC News.

Also at BBC news is Gordon Brown’s apology to the child migrants sent by the UK to former colonies.

And this note can’t end without a link to Tiger Woods’ apology.

The National Consumer Credit Protection Amendment Bill 2010 was passed by the Australian Parliament on 25 February 2010.

UPDATE: Assented to on 3 March 2010. Download here.

 The Corporations Amendment (Financial Market Supervision) Bill 2010 and the National Consumer Credit Protection Amendment Bill 2010 were passed by the House of Representatives on 23 February and introduced into the Senate on 24 February.

The Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009 [No. 2] and the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge—Fringe Benefits) Bill 2009 [No. 2]  were defeated by a majority vote in the Senate on 24 February. These bills meet the requirements for a simultaneous dissolution of both houses under s.57 of the Constitution.

The Senate Legal and Constitutional Affairs Legislation Committee has recommended that the Senate pass the Bankruptcy Legislation Amendment Bill 2009 in its present form.

One of the most contentious issues was the creditor’s petition threshold.

The Report states:

the committee considers it appropriate to increase the existing $2,000 threshold for a creditor’s petition to $10,000. The threshold should recognise significant changes in personal debt levels over the past 14 years, as well as the cost and complexity of bankruptcy proceedings (as compared with other available debt collection methods), and the magnitude of the consequences that bankruptcy has for a debtor. The committee adds that, in this day and age, it would be harsh and punitive to bankrupt an individual on the basis of a debt as low as $2,000. The committee accepts that $10,000 is an amount that appropriately balances the interests of all relevant parties.

The Senate Environment, Communications, Information Technology and the Arts Committee has recommended that the Do Not Call Register Legislation Amendment Bill 2009 be passed.

The Committee said that “On balance, the committee does not believe that the costs of complying with the bill will be excessive or prohibitive.” It considered that any concerns could be dealt with by ACMA.

ASIC has issued Class Order [CO 10/116] Group purchasing bodies – variation of Class Order [CO 08/1] to provide certainty about who will be eligible for relief and to introduce greater flexibility for compliance with the conditions of AFS licensing relief for the insurance industry and some group purchasing bodies.

Class Order [CO 08/1] provides conditional exemptions from the Australian financial services (AFS) licensing and managed investment scheme registration requirements for certain group purchasing bodies that arrange cover for third parties under insurance (excluding certain foreign insurance).

Regulatory Guide 195 Group purchasing bodies for insurance and risk products (RG 195), which sets out ASIC’s policy on the relief in [CO 08/1] has been revised to include more specific guidance and more ‘real life’ examples.

Group purchasing bodies may be eligible for the relief if they are independent or are acting incidentally to their not-for-profit activities. Conditions apply to the relief to ensure that the risks to people who receive financial services from group purchasing bodies are minimised.

The class order includes a breach reporting obligation which will come into effect from the first time that the group purchasing body acquires, renews or renegotiates the terms of the insurance cover on or after 30 June 2010 but in any event not later than 30 June 2011.

Group purchasing bodies arrange or hold cover under risk management products for others but do not issue risk management products or provide any financial product advice other than as a result of providing certain general information.

As group purchasing bodies generally do not just obtain cover for members on a one-off basis, they may be carrying on a financial services business and therefore require an AFS licence. Some group purchasing bodies may enter into arrangements that constitute a managed investment scheme that requires registration under the Corporations Act.

ASIC considers that requiring all group purchasing bodies to hold an AFS licence and comply with the management investment scheme registration requirements would impose a disproportionate cost burden on group purchasing bodies. The relief will ensure that eligible group purchasing bodies can continue to enter group purchasing arrangements for the benefit of their members or clients.

The class order will commence after it has been gazetted.

The COAG Reform Council has released its first report to the Council of Australian Governments (COAG) on performance against the National Partnership Agreement to Deliver a Seamless National Economy.

The National Partnership Agreement to Deliver a Seamless National Economy is an agreement by all Australian governments to deliver more consistent, better regulation across Australia, and reduce compliance costs on business, restrictions on competition, and distortions in the allocation of resources across the country.

The report by the COAG Reform Council is an assessment of the performance of the Commonwealth, State and Territory governments against the 2008–09 implementation milestones—across the 36 streams of business regulation and competition reform which all nine governments agreed to implement.

The CRC report:
• notes that overall, there has been good or satisfactory progress against 18 of the 27 deregulation priorities and four of the eight competition reforms;
• makes four recommendations aimed at making elements of the NP reform agenda more transparent, meaningful and measureable (which COAG has agreed to adopt); and
• incorporates in its progress assessment several National Reform Agenda priorities previously agreed by COAG in 2006 and 2007 (in relation to the trade measurement, rail safety, national construction code and energy competition reforms) that it considers have not been met and are relevant to some of the NP Implementation Plan milestones.